How much more can a Solo 401(k) shelter than a SEP IRA?

Deadlines and rules to confirm

• SEP IRA: set it up and fund it by your tax return due date, including extensions. A SEP takes no deferral from you and has no catch-up.
• Solo 401(k): a sole proprietor with no employees can adopt a new plan after year end. First-year deferrals are due by the return due date without extensions. Employer contributions are due by the return due date, including extensions. Deadlines can change with new law.
• Form 5500-EZ is a yearly report to the IRS. It is filed when plan assets are over $250,000 at year end. IRS pages word the $250,000 line differently, so confirm it.
• Roth: some plans let you put part of the deferral, catch-up or employer part in as Roth. Ask your plan provider. A Roth amount gives no deduction today.
• The higher catch-up for ages 60 to 63 depends on your provider's plan document. Confirm that it is offered.
• This page assumes you have no eligible employees and no other plan at this business. Other 401(k) deferrals from a day job share the same employee deferral limit ($24,500 for 2026). Confirm this with a tax professional.
• Money in either plan is meant for retirement. Taking it out early usually costs extra tax. See IRS Publication 560 and ask your plan provider.

Tax terms in plain words

SEP IRA

A retirement account where your business puts in money for you. You deduct it. It has no deferral from you and no catch-up.

Solo 401(k)

A 401(k) for an owner with no employees. You put in money as the employee and as the business, and you deduct what is not Roth.

S-corp

A business taxed so the owner is paid a W-2 salary. Plan limits are based on that salary.

Net profit

What your business earned after expenses, as shown on Schedule C.

Self-employment tax

Social Security and Medicare tax you pay as your own employer: 12.4% up to a yearly wage base plus 2.9%, on 92.35% of net profit. A further 0.9% Medicare tax applies above $200,000 of that.

Half of self-employment tax

You deduct half of it from income. It also lowers the pay your plan limits are based on.

Plan pay

Net profit minus that half deduction. For an S-corp owner, it is your W-2 salary. The employer part is a share of this.

Employee deferral

The part of your own pay you choose to put in a 401(k). A SEP IRA has none.

Employer contribution

The part your business adds. For a sole proprietor it works out to 20% of plan pay. For an S-corp owner it is 25% of W-2 pay.

Catch-up

An extra amount a 401(k) allows from age 50, and more at ages 60 to 63. A SEP IRA has no catch-up.

Annual additions limit

The most that can go into a plan for one person in a year, not counting catch-up.

Tax rate on your next dollar

The rate on the last dollar of income. The tax it could save is the amount deducted times this rate.

20% pass-through deduction (QBI)

A deduction for some business income. A plan contribution lowers the income it is based on.

Roth

Money put in after tax. It gets no deduction today.

How this estimates

1. Plan pay. A sole proprietor starts with net profit and subtracts half of self-employment tax. An S-corp owner uses W-2 salary.
2. SEP IRA. 20% of plan pay for a sole proprietor, or 25% of W-2 pay for an S-corp owner, up to the yearly limit. The 20% is the IRS reduced rate: 25% applied to pay after your own contribution.
3. Solo 401(k). Your deferral is the most the plan allows, up to your pay. The employer part uses the same rate as the SEP, trimmed so the deferral plus the employer part is not more than your pay and the total stays within the yearly limit. Catch-up is added if your age allows and pay is left over. This follows the IRS deduction worksheet in Publication 560.
4. The extra is the Solo 401(k) total minus the SEP IRA total.
5. The tax it could save is the deductible amount times your federal rate (80% of it if you take the pass-through deduction) plus your state rate. Roth money is not deducted.
6. The income table repeats these steps at other incomes. The chart draws the same steps every $5,000.
7. The growth illustration adds the extra at the end of each year at the return you enter. It is not a forecast.
8. Biggest effects: the tax rate moves 10 points either way, and income moves 20% either way. The larger swing is listed first.

Not modeled: employees, a spouse as a second participant, other plans, the Roth catch-up rule for high W-2 earners (a note shows when it may apply to an S-corp owner), plan fees, a defined benefit plan, and tax in retirement. Only 2026 limits are built in.

Sources and date checked

Limits and rules checked on 2026-10-17. Check the IRS pages for anything newer.

• IRS Notice 2025-67: 2026 limits for the deferral, catch-up, annual additions and pay cap.
• IRS Publication 560: SEP rules, the reduced rate for the self-employed and the deduction worksheet.
• IRS one-participant 401(k) plans: who can use a Solo 401(k), employer contribution rules and Form 5500-EZ.
• IRS page on calculating your own contribution and deduction: the steps and a worked example.
• IRS 401(k) and profit-sharing contribution limits: the 2026 annual additions and pay cap.
• IRS Topic 751: Social Security and Medicare rates and the 2026 wage base.

The 24% federal rate, 0% state rate, 5% growth and 10 years are typical values, not IRS figures. Edit them.

Not tax or investment advice

This page compares the most each plan allows. It does not say what you should save or how to invest it. Rules and limits change every year and your case may differ. Confirm with a tax professional or your plan provider before you choose a plan.