When your solo business starts making real money, the retirement-plan shortlist is two names long: the Solo 401(k) and the SEP IRA. Every provider’s comparison chart makes them look like siblings. They behave completely differently.
Here’s the one-line version of each, then the comparison I wish someone had handed me five years ago.
- Solo 401(k): you contribute as the employee and the employer. More room at normal incomes, Roth deferrals allowed, and one form to file once the plan gets big.
- SEP IRA: the employer side only. Twenty minutes to open, one page, zero annual filings - and a ceiling that arrives sooner than you’d think.
A confession before the math: I did this research while my wife was pregnant with our first, and I kept expecting the baby to show up in the decision. She never did. Baby or no baby, the same plan wins - the choice follows how your business pays you. The baby is why the account matters more - solo means nobody auto-enrolls you in anything, and the benefits packet is yours to rebuild.
The Comparison That Matters
Who puts money in, and how much
The SEP takes employer contributions only: 25% of W-2 wages if you run an S corp, or roughly 20% of net self-employment income as a sole proprietor, capped at $72,000 in 2026. There’s no employee deferral and no catch-up. The plan has one valve.
The Solo 401(k) has the same employer valve - identical percentage, same $72,000 combined cap - plus a second one: an employee deferral of $24,500 in 2026, with an extra $8,000 at 50 and over ($11,250 for ages 60 to 63).
The employer halves are identical; the Solo 401(k) stacks $24,500 on top.
The Roth column
The Solo 401(k) lets you split deferrals between traditional and Roth. I keep about a quarter of mine in Roth every year - with income that swings, the lean years are the cheap years to prepay tax, and I don’t want every dollar of retirement income taxed at whatever the rates are in 2050.
The SEP has no Roth option. Contributions are pre-tax, full stop. You can convert SEP money to a Roth IRA after the fact, but that’s a manual move with a manual tax bill.
One detail that decided friends of mine: a SEP IRA is an IRA, so its balance follows you into the pro-rata rule and quietly fouls the backdoor Roth IRA. Solo 401(k) balances don’t count in that test. If you’re a high earner doing backdoor Roths now or later, the SEP is actively working against you.
Setup and admin
The SEP is the simplest retirement vehicle in the tax code: one form (the 5305-SEP), minutes to open, and you can open and fund it up to your tax deadline, extensions included. There is no annual filing. There is essentially no admin.
The Solo 401(k) asks more: an EIN, plan documents, an hour or two of paperwork. And once plan assets pass $250,000 at year-end, you file Form 5500-EZ every year after that. It’s an afternoon, or a line item if a provider or tax pro handles it, but it exists.
One rule that matters for where my business is headed: contractors don’t count for either plan. The day you make a W-2 hire, everything changes - a SEP has to cover eligible employees, and a Solo 401(k) stops being solo. I’m growing past just-me this year, deliberately on the contractor side of that line for as long as it makes sense.
Investments and who holds them
Both plans invest in whatever the custodian offers - which sounds like the boring column until you read the vendor story below. The custodian’s willingness to keep the business turned out to matter more than the investment menu.
The Table That Decided It
This is roughly the table I built for myself, minus five tabs of provider research:
| Solo 401(k) | SEP IRA | |
|---|---|---|
| Employee deferral (2026) | $24,500 (+$8,000 at 50+) | None |
| Employer contribution | 25% of W-2 wages / ~20% of net SE income | Same |
| Total cap (2026) | $72,000, plus catch-ups | $72,000 |
| Roth option | Yes, on deferrals | No |
| Setup | EIN + plan documents, an hour or two | One form, minutes |
| Annual filing | Form 5500-EZ once assets top $250k | None |
| Funding deadline | Plan exists by Dec 31 (sole props get some retroactive room under SECURE 2.0) | Tax deadline, extensions included |
The Math at a Normal Income
At $100,000 of net self-employment income, a sole proprietor contributes:
- SEP IRA: about $18,500
- Solo 401(k): about $43,000 - the same $18,500 employer side plus the $24,500 deferral
Run it as an S corp paying $100,000 in W-2 wages and it’s $25,000 against $49,500.
That $24,500 gap is the decision. At a combined federal-plus-California marginal rate in the low 30s, it’s roughly $8,000 a year of tax deferred - money that stays invested instead of going to Sacramento and Washington in April. To see the gap at your income and entity, the calculator runs both maximums.
The gap closes as income climbs. Both plans cap at $72,000: the SEP needs roughly $380,000 of sole-prop profit to get there, the Solo 401(k) around $250,000. Under that line, the 401(k) shelters more at every income. Above it, they tie, and the SEP’s simplicity starts winning on points.
My own setup, for calibration: I max the employee deferral every year, keep about a quarter of it in Roth, and max the employer percentage my S-corp wages allow. My total lands well under the $72,000 ceiling - the cap isn’t my constraint. The deferral headroom is the entire reason this plan exists for me. For an S-corp owner who doesn’t need the money right away, it’s the best legal tax shelter I’ve found.
When the SEP Wins
For a lot of solopreneurs, this is the right plan:
- You want twenty minutes and zero filings. That’s a legitimate preference, not a failure of ambition.
- Your income is high and stable enough that both plans cap out. A tie goes to the simpler plan.
- Your cash flow is a coin flip. The SEP lets you fund the account after the year ends, once you know what the year actually paid - deadline-day decisions with the real number in hand.
- You have no interest in Roth. If every dollar you shelter will be spent in a lower-tax retirement, the SEP’s simplicity costs you nothing.
It lost on every line I personally cared about. It wins on lines that matter to plenty of people I know.
The Vendor Story Nobody Puts in the Chart
I opened my Solo 401(k) at Vanguard, because setup was genuinely easy and my old employer 401(k)s were already there. One roof, low costs, a company I trusted with decade-old money. For years, zero complaints.
Then in 2024, Vanguard exited the individual 401(k) business and sold the plans to Ascensus, a retirement-plan administrator. The transition was the worst financial-vendor experience of my five years solo: weeks where I couldn’t access my own funds, customer support that might as well have been a disconnected number, and every automated contribution I’d set up quietly broken. The exact moment the money needed watching most, the lights were off.
Two years on, Ascensus has fixed most of it, and I’m sizing up whether to move the plan before the balance grows further - moving gets no easier with time.
None of that means avoid Vanguard, or avoid Ascensus. It means you’re choosing a plan and a custodian you may hold for decades - and custodians exit businesses. If you’re opening a Solo 401(k) today, Fidelity and Schwab both open individual 401(k)s directly, Roth option included. Ask who services the plan in year five, not just who opens it fastest.
How I’d Decide Today
- W-2 hires on the roadmap? Resolve coverage rules first - the first employee changes both plans more than any column in the table.
- Want Roth money in retirement? Solo 401(k). The SEP has no answer.
- Profiting under roughly $250k? The Solo 401(k) shelters meaningfully more - about double at $100k.
- Above the crossover, or allergic to paperwork? SEP IRA, happily, and skip the guilt.
- Either way, automate the plumbing. The employee deferral and the employer match only happen if S-corp payroll runs them every month - mine go through Collective, which has handled the back office for five years. That’s a referral link, and also just the truth.
And if this post is why you’re suddenly sheltering an extra $24,500 a year - here’s what those dollars become by 18 if you route a slice of them to the kids instead.
A quiet note: I’m a parent taking notes, not a financial advisor or tax professional. The 2026 limits here shift yearly, the sole-prop math is approximate, and the Ascensus experience is one customer’s. Some links above are affiliate or referral links (including Collective). Run your own numbers, and let a qualified pro handle the corners.