Solo 401(k) vs SEP-IRA: Which Lets a High-Earning Owner Shelter More
Both plans cap at $72,000 in 2026, but the Solo 401(k) lets a self-employed owner reach that max on far less income. At any net profit below about $252,000, the Solo 401(k) shelters more, by exactly the $24,500 employee deferral.
You are a one-person business with a good year behind you, and you want to push as much income as possible into a retirement account before the IRS takes its share. The two plans built for owners like you, the Solo 401(k) and the SEP-IRA, share the same 2026 ceiling. They do not get you there the same way. This article shows the math at each income level and names the income where the choice stops mattering.
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Compare nowThe one difference that matters
The one difference that matters is the employee deferral. A Solo 401(k) lets you wear two hats, employee and employer, so you contribute a salary deferral plus a profit-sharing amount. A SEP-IRA only has the employer profit-sharing piece. That extra deferral is why the Solo 401(k) shelters more at the same income.
A SEP-IRA gives the owner one lever: an employer contribution worth up to 25 percent of compensation. A Solo 401(k) gives the same employer lever plus a second one, the employee salary deferral. Because you are both the boss and the only employee, you get to pull both.
That single feature, the deferral, is the whole story. Both plans share the same $72,000 overall cap and the same roughly 20 percent profit-sharing math. The Solo 401(k) simply starts you $24,500 closer to the ceiling.
The 2026 numbers you need
The 2026 numbers you need are these: both plans cap at $72,000 total. The Solo 401(k) employee deferral is $24,500 (plus catch-up if you are 50 or older). The SEP-IRA allows 25 percent of compensation, about 20 percent for an owner. Both use a $360,000 compensation cap, per IRS Notice 2025-67.
Here are the figures that drive every calculation in this article, all from IRS Notice 2025-67 for the 2026 tax year.
| 2026 figure | Solo 401(k) | SEP-IRA |
|---|---|---|
| Overall contribution cap | $72,000 | $72,000 |
| Employee deferral | $24,500 | None |
| Catch-up, age 50 to 59 | $8,000 | None |
| Catch-up, age 60 to 63 | $11,250 | None |
| Compensation cap | $360,000 | $360,000 |
The SEP-IRA has no employee deferral and no catch-up, because the owner contributes only as the employer. Catch-up amounts can lift a Solo 401(k) above $72,000 for older owners, but the rest of this article uses the under-50 numbers to keep the comparison clean.
Key takeaways
- Both plans cap at $72,000 in 2026 for owners under 50.
- Below about $252,000 of net profit, the Solo 401(k) shelters more, by the $24,500 deferral.
- A Solo 401(k) hits the $72,000 cap near $252,000 of profit; a SEP-IRA needs far more.
- The two only tie once both are pinned at the $72,000 ceiling.
How each is calculated for an owner
How each is calculated for an owner starts with net self-employment earnings: net profit minus half of your self-employment tax. Both plans apply about 20 percent to that figure for the profit-sharing piece (25 percent grossed down). The Solo 401(k) then adds the $24,500 deferral on top, up to the shared $72,000 cap.
The phrase "25 percent of compensation" trips up most owners, because a sole proprietor does not have a clean salary. The IRS makes you reduce your own number twice.
So the recipe for each plan is:
- SEP-IRA: about 20 percent of net self-employment earnings, capped at $72,000.
- Solo 401(k): the same roughly 20 percent profit-sharing amount, plus the $24,500 employee deferral, with the total capped at $72,000.
The profit-sharing piece is identical. The deferral is the gap.
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Read the reportWhich shelters more by income
Which shelters more by income is easy to see: at every level shown, the Solo 401(k) bar sits $24,500 higher, because that deferral stacks on top of the shared profit-sharing math. The two plans only converge once both reach the $72,000 cap, which the Solo 401(k) does around $252,000 of net profit.
The dark bars show the maximum SEP-IRA contribution. The gold bars show the maximum Solo 401(k) contribution. The gap is the employee deferral until the Solo 401(k) pins against the $72,000 ceiling.
| Net profit | SEP-IRA max | Solo 401(k) max | Solo advantage |
|---|---|---|---|
| $50,000 | $9,294 | $33,794 | $24,500 |
| $100,000 | $18,587 | $43,087 | $24,500 |
| $150,000 | $27,881 | $52,381 | $24,500 |
| $200,000 | $37,177 | $61,677 | $24,500 |
| $300,000 | $56,909 | $72,000 | $15,091 |
Notice the pattern. The Solo advantage holds at a flat $24,500 all the way up, then shrinks once the Solo 401(k) hits the cap. The SEP-IRA does not catch up until its own profit-sharing math finally reaches $72,000, which takes net profit in the high six figures, near the $360,000 compensation cap.
Who should pick which
Who should pick which comes down to one question: do you want the extra $24,500 of room. If yes, and you have no employees, the Solo 401(k) is the stronger sheltering tool at almost every income. The SEP-IRA wins on simplicity and on flexibility if you ever hire staff, since it has no separate filing.
For a true solo operator chasing the largest deduction, the Solo 401(k) is hard to beat. It shelters more at every income below roughly $252,000 of net profit, and it ties the SEP-IRA above that because both sit at the cap. The SEP-IRA earns its keep in two cases: you value its bare-bones simplicity (no Form 5500 until assets are large), or you have employees and do not want the testing a 401(k) can require. Want your own number? Run the Solo 401(k) vs SEP-IRA calculator.
Frequently asked questions
Which shelters more, a Solo 401(k) or a SEP-IRA?
At any net profit below roughly $252,000, the Solo 401(k) shelters more, by the $24,500 employee deferral, because it adds that deferral to the same profit-sharing math the SEP-IRA uses. Both cap at $72,000 in 2026.
How much can a self-employed person contribute to a Solo 401(k) in 2026?
Up to $72,000 for owners under 50, made of a $24,500 employee deferral plus an employer profit-sharing contribution of about 20 percent of net self-employment earnings. Catch-up contributions of $8,000 (age 50 to 59) or $11,250 (age 60 to 63) can push the total higher.
What is the 2026 SEP-IRA contribution limit?
The 2026 SEP-IRA limit is 25 percent of compensation up to $72,000. For a self-employed owner the effective rate is about 20 percent of net self-employment earnings, and the compensation cap is $360,000. There is no employee deferral or catch-up.