Solo 401(k) & SEP-IRA: Self-Employed Tax Shelters

Working for yourself costs you the employer match. It hands you something bigger in exchange: the ability to contribute as both the employee and the employer, into an account with limits several times an ordinary 401(k)'s.

Last verified 2026-07-26

You are both parties, so you contribute twice

In a Solo 401(k) you wear two hats. As the employee you make an elective deferral, capped at a flat dollar amount — $24,500 for 2026 under age 50 — the same limit any employee has. As the employer you then make a profit-sharing contribution on top, which works out to roughly 20% of net self-employment earnings for an unincorporated owner.

A SEP-IRA has only the employer half — no flat deferral, just the percentage — which is why the plans diverge so sharply by income. At $60,000 of profit a SEP allows around $12,000, while a Solo 401(k) allows the full deferral plus profit sharing on top. At high income the gap closes, since both run into the same overall annual-additions ceiling.

Neither can exceed your earned income. A year with $15,000 of net profit cannot support a maximum deferral no matter which plan you hold — the limits are ceilings, not entitlements.

The detail that decides it for high earners

There's a second consideration that has nothing to do with contribution limits and often settles the choice anyway.

A backdoor Roth conversion is taxed pro-rata across all your traditional IRA balances. A SEP-IRA is an IRA, so its balance counts in that calculation and can make conversions expensive or impractical. A Solo 401(k) is not an IRA, so it sits outside the calculation entirely.

For a high earner who wants both a large self-employed shelter and a working backdoor Roth, that alone points at the Solo 401(k). It also supports Roth employee deferrals, so you can choose the tax treatment of the deferral half — an option a SEP has never offered.