Self-employed Americans can save significantly more for retirement than W-2 employees through SEP-IRA or Solo 401(k). The choice between them affects contribution limits, Roth access, and administrative complexity.
2026 contribution limits compared
| SEP-IRA | Solo 401(k) | |
|---|---|---|
| Employee contribution | N/A (employer only) | $23,500 (+ $7,500 catch-up if 50+) |
| Employer contribution | 25% of net SE income | 25% of compensation |
| Total annual limit (2026) | $70,000 | $70,000 |
| Roth option | No | Yes (Roth Solo 401k) |
| Loan provision | No | Up to 50% of balance or $50k |
| Setup complexity | Very simple | Moderate |
| Paperwork (over $250k) | None | Form 5500-EZ required |
When Solo 401(k) wins
At lower income levels, Solo 401(k) allows higher contributions. Example: net self-employment income of $60,000.
- SEP-IRA max: $60,000 × 25% × 0.9235 = ~$13,848
- Solo 401(k): $23,500 employee + $13,848 employer = $37,348
The Solo 401(k) allows nearly 3x more contributions at $60,000 net income because of the employee contribution component. This difference grows larger at lower income levels.
When SEP-IRA wins
High earners who want simplicity and already max the $70,000 total limit either way. One-person shops with variable income who want minimal administrative burden. Businesses that may add employees (SEP is simpler to administer with employees).
A 28-year-old freelancer earning $80,000 net who opens a Roth Solo 401(k): contributes $23,500 after-tax, growing completely tax-free. Over 35 years at 7% returns: $247,000 in tax-free wealth from one year's employee contribution. No SEP-IRA offers this.
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