If you run a one-person business, the SEP IRA and Solo 401(k) are two of the most common retirement plan choices. Both can work. The better choice depends on your income, whether you want Roth contributions, whether you have employees, and whether you care about the backdoor Roth IRA.
For 2026, SEP IRA contributions are limited to the lesser of 25% of compensation or $72,000. A Solo 401(k) also uses the 2026 defined contribution annual additions limit of $72,000, but it adds an employee deferral feature that can make it more powerful at lower self-employment income levels.
If you also have a W-2 job, start with Solo 401(k) Contribution Calculator 2026 for Freelancers With a W-2 Job.
Quick Comparison
| Feature | SEP IRA | Solo 401(k) |
|---|---|---|
| Best for | Simple employer contributions | Maximizing contributions with flexible buckets |
| 2026 maximum | Lesser of 25% of compensation or $72,000 | Employee deferral plus employer contribution, subject to limits |
| Catch-up contributions | No | Yes, if plan allows |
| Roth employee deferrals | No traditional employee deferral bucket | Often available, depending on provider |
| Backdoor Roth impact | Counts in IRA pro-rata rule | Usually does not count if money stays in 401(k) |
| Loan option | No | Sometimes, if plan allows |
| Administration | Usually simpler | More paperwork, especially as assets grow |
Why the Solo 401(k) Can Win at Lower Income
A SEP IRA is funded by employer contributions. For a sole proprietor, the practical contribution rate is roughly 20% of adjusted net self-employment earnings.
A Solo 401(k) has two buckets:
- employee deferral
- employer profit-sharing contribution
That employee deferral can make a large difference.
Example: You are under 50 and have $35,000 of net self-employment income. A SEP IRA might allow only a percentage-based contribution. A Solo 401(k) may allow a much larger employee deferral, limited by your eligible compensation and the 2026 employee deferral cap.
This is why Solo 401(k)s are often attractive for side-hustle income, consultants, and freelancers who want to save aggressively.
Where the SEP IRA Wins
A SEP IRA is usually easier to open and maintain. Many brokerages offer a basic SEP IRA with minimal setup. There is no separate employee deferral election, and there may be less plan administration.
SEP IRAs can be a good fit when:
- you want simplicity
- you have high self-employment income
- you do not need Roth contributions
- you do not use the backdoor Roth IRA
- you do not want to manage a 401(k) plan document
The Backdoor Roth Problem
SEP IRA balances count in the IRA pro-rata rule. This can make a backdoor Roth IRA much less clean.
Example: You have $100,000 in a SEP IRA and make a $7,500 nondeductible traditional IRA contribution for a backdoor Roth. The IRS looks at the combined traditional, SEP, and SIMPLE IRA pool. Most of the conversion may be taxable.
A Solo 401(k) generally does not count in that IRA pro-rata pool while the money remains in the plan. That can make the Solo 401(k) more attractive for high earners who want annual backdoor Roth IRA contributions.
Roth Options
A SEP IRA can now have Roth treatment under newer law if the institution and plan arrangement support it, but availability has been uneven. A Solo 401(k) from a flexible provider is more likely to support Roth employee deferrals.
If your goal is Roth accumulation, a Solo 401(k) is usually the first plan to investigate. If your plan also permits after-tax contributions and Roth conversions, the mega backdoor Roth may be possible, though many Solo 401(k) providers do not support all required features.
Employees Change Everything
The phrase “Solo 401(k)” matters. It is generally for a business owner with no employees other than a spouse. If you hire eligible employees, the plan may need to cover them and comply with more rules.
SEP IRAs also have employee coverage rules. If your business grows beyond a true one-person operation, get professional guidance before assuming you can contribute only for yourself.
Bottom Line
For a one-person LLC in 2026, a SEP IRA is often simpler, while a Solo 401(k) is often more flexible and more powerful. The Solo 401(k) is especially compelling if you want employee deferrals, Roth options, catch-up contributions, or a cleaner path for backdoor Roth IRA contributions.
The SEP IRA still makes sense for business owners who want a low-maintenance plan and do not need those extra features.