Solo 401(k) or SEP-IRA? The 2026 numbers, and the deadline that decides it

This is the largest tax lever available to most self-employed people, and it is routinely under-used because the two main options look similar from the outside. They cap out at the same number. They both reduce income tax and neither reduces self-employment tax.

The difference is how much income you need to reach the cap — and one date.

The 2026 limits

	Solo 401(k)	SEP-IRA
Employee deferral	$24,500	none
Catch-up, age 50–59 and 64+	+$8,000	none
Catch-up, age 60–63	+$11,250	none
Employer contribution	~20% of net SE income	~20% of net SE income
Total cap, under 50	$72,000	$72,000
Total cap, age 50+	$80,000	$72,000
Total cap, age 60–63	$83,250	$72,000

The headline caps look identical under 50. They are not remotely equivalent in practice.

Why the solo 401(k) usually wins

A SEP-IRA has one contribution: the employer one, roughly 20% of your net self-employment income. That is the whole mechanism.

A solo 401(k) has two. You are both the employee and the employer, so you contribute in both capacities: up to $24,500 as an employee deferral plus roughly 20% as the employer.

The consequence at ordinary freelance income levels is large.

On $60,000 of net profit:

• SEP-IRA: about 20% of net earnings, roughly $11,000
• Solo 401(k): $24,500 deferral + roughly $11,000 employer, capped by earned income — in practice around $35,000

On $150,000 of net profit:

• SEP-IRA: roughly $28,000
• Solo 401(k): $24,500 + roughly $28,000 = around $52,500

The two only converge once your income is high enough that 20% alone reaches $72,000 — somewhere north of $350,000 of net profit. Below that, the solo 401(k) shelters substantially more, and the gap is widest exactly where most freelancers sit.

The deadline that flips the decision

Here is the part that matters more than any of the above.

A solo 401(k) must be established by December 31. The plan has to exist before the year ends. Employee deferrals must generally be made by then too.

A SEP-IRA can be opened and funded right up to your filing deadline, including extensions — as late as October of the following year.

That difference is the whole reason SEP-IRAs still exist for freelancers. It means you can finish a year, do your taxes in March, discover you owe more than expected, and then open a SEP-IRA and fund it to reduce the tax on a year that has already ended.

You cannot do that with a solo 401(k). If December 31 passed without a plan in place, the door is shut for that year.

So the practical rule is:

• Planning ahead, before year end — open a solo 401(k). It shelters far more.
• Already into the new year and looking for a deduction — a SEP-IRA is your only option, and it is a good one.

If it is currently the second half of the year and you do not have a plan, opening a solo 401(k) before December is probably the single highest-value administrative task on your list.

What neither of them does

Neither reduces self-employment tax. Self-employment tax is calculated on your net profit before retirement contributions. Put $30,000 into a solo 401(k) and you still owe the full 15.3% on your profit.

They reduce income tax only. That is still substantial — at a 24% marginal rate, a $30,000 contribution saves roughly $7,200 — but it is not the 38%-ish combined saving people sometimes assume.

Both reduce your QBI deduction. Retirement contributions lower your qualified business income, which lowers the 20% QBI deduction. So the true saving is a little less than marginal rate × contribution. Still very much worth doing; just not quite as much as the back-of-envelope suggests.

The other options, briefly

Traditional or Roth IRA. A few thousand dollars a year. Fine as a supplement, irrelevant as a strategy at freelance income levels.

SIMPLE IRA. Lower limits than either option above, and mainly of interest if you have employees. For a solo operator there is rarely a reason to choose it.

Defined benefit / cash balance plan. For high, stable incomes — think $300,000+ consistently — these can shelter far more than $72,000. They are expensive to administer, require an actuary, and commit you to funding them in future years. Genuinely powerful, genuinely not a starting point.

The employee thing

Both plans are named for solo operators for a reason.

A solo 401(k) is only available if you have no employees other than yourself and a spouse. Hire someone eligible and the plan has to convert to a regular 401(k), with all the testing and compliance that implies.

A SEP-IRA with employees requires you to contribute the same percentage of compensation for every eligible employee as you do for yourself. Contribute 20% for yourself and you contribute 20% for them. That gets expensive quickly, and it is the main reason growing businesses move away from SEPs.

Roth solo 401(k)

Worth knowing this exists. The employee deferral portion of a solo 401(k) can usually be made as Roth — after-tax now, tax-free in retirement.

It gives you no deduction this year, so it will not help your current tax bill. But in a year where your income is unusually low, paying tax now at a low rate to avoid it later at a higher one can be the better trade. Not the default, but worth a thought in a lean year.

Working out what you can afford

Contributions are limited by your net self-employment income, which is your profit after the deductible half of self-employment tax — not your gross revenue and not your profit before that adjustment.

Work out your real net profit and what you owe on it first. The calculator below does that, and gives you the self-employment tax figure the retirement limit is calculated from.