Self-employed individuals and sole proprietors have access to retirement plans that can shelter significantly more income than the plans available to W-2 employees. A solo 401(k) combines employee salary deferrals (the same $23,500 limit as any 401(k)) with employer profit-sharing contributions, allowing total annual contributions up to $70,000 for 2026. A SEP-IRA is simpler to administer but limited to employer contributions only - no employee deferral component - capping contributions at 25% of net self-employment income (effectively about 20% of gross SE income after the SE deduction). The choice between them depends on income level and whether you want a Roth option or loan access.
Solo 401(k) total limit: $70,000 ($77,500 with catch-up if age 50+). Consists of: employee deferral up to $23,500 ($31,000 age 50+) PLUS employer profit-sharing contribution up to 25% of W-2 wages (or ~20% of net SE income for self-employed), subject to the combined $70,000 cap.
SEP-IRA limit: Lesser of $70,000 or 25% of compensation. For self-employed, the effective rate is approximately 20% of net self-employment income (because the contribution is made after subtracting both half of SE tax and the SEP contribution itself from SE income).
Which is larger? At lower income levels, the solo 401(k) wins because the employee deferral component allows contributions larger than 20-25% of income. At very high income levels (above ~$280,000 of SE income), both plans max out at $70,000 and the difference disappears.
The Roth option: solo 401(k) plans can include a Roth designation, allowing the employee deferral portion to be contributed on an after-tax basis and grow tax-free. SEP-IRAs cannot have Roth contributions.
Loan provision: solo 401(k) plans may allow participant loans of up to 50% of the vested balance or $50,000, whichever is less. SEP-IRAs do not permit loans.
The employee deferral advantage at lower incomes: a self-employed person with $60,000 of net SE income can contribute roughly $12,000 to a SEP-IRA (20% x $60,000). The same person with a solo 401(k) can contribute $23,500 as employee deferral plus ~$11,000 as employer match, potentially reaching $34,500 total - nearly triple the SEP contribution.
For self-employed individuals with very high income who want to shelter more than $70,000 per year, a defined benefit pension plan can provide contributions of $200,000+ annually depending on age and income. The contribution is actuarially determined based on target retirement benefit, age, and income. Older high-income self-employed professionals (doctors, consultants, attorneys) who start a defined benefit plan late in their careers can sometimes shelter nearly all of their SE income for several years. A combination of a defined benefit plan plus a solo 401(k) is possible and used by some high earners.