What a SEP-IRA is

SEP stands for Simplified Employee Pension. It is a tax-advantaged retirement plan that a business can set up for its owner and employees. For self-employed people with no staff, you are both the employer and the only employee. The contribution is made entirely by the employer (you, to yourself).

The SEP-IRA lives inside the normal IRA framework. Once funds are contributed, they behave like a Traditional IRA: pre-tax contributions, tax-deferred growth, ordinary-income tax on withdrawals, 10% penalty before age 59.5 with the usual exceptions. Rollovers to a Traditional IRA are straightforward.

The limits

For 2026, the SEP-IRA contribution cap is the lesser of 25% of net self-employment income or approximately $70,000 [VERIFY].

The "25%" figure requires a real footnote. For sole proprietors and single-member LLCs filing on Schedule C, you must first deduct the employer half of self-employment tax, and then the contribution itself is computed off the reduced number. The effective maximum works out to roughly 20% of raw net SE income. For an S-corp owner paying themselves a W-2 salary, the 25% figure applies cleanly to the W-2 wage.

When SEP wins over Solo 401(k)

• You want zero paperwork. No Form 5500, ever, no matter how large the balance grows. The Solo 401(k) requires a Form 5500-EZ once assets exceed $250K [VERIFY].
• You are late. Opening a SEP after December 31 is fine. A Solo 401(k) must be established by December 31 of the tax year it covers.
• High self-employment income. Above roughly $250K of net SE income, the 25% cap in the SEP tends to bind at the same $70K as the Solo 401(k), and the Solo 401(k) loses its low-income advantage.
• You have employees. If you hire W-2 staff, a SEP still works (you just must contribute the same percentage for eligible employees). A Solo 401(k) cannot accept a non-spouse employee.

When Solo 401(k) wins

• You want a Roth bucket. Solo 401(k) supports Roth at most major providers. SEP-IRA Roth support is technically legal post-SECURE 2.0 but almost nobody offers it in practice [VERIFY].
• Moderate income and you want to max out. The $23,500 elective deferral stacks on top of the 25% employer piece. SEP-IRA is 25%-only.
• You want plan loans. Solo 401(k) allows participant loans up to 50% of balance or $50,000 [VERIFY]. No loans from a SEP.
• You plan to do a backdoor Roth. SEP-IRA balances count toward the pro-rata rule on Traditional IRA conversions. Solo 401(k) balances do not. For high earners who lose direct Roth eligibility, this tips the math toward the Solo 401(k).

Worked example

Freelancer with $80,000 net self-employment income in 2026 [VERIFY figures]:

Now bump the income to $350,000. The SEP-IRA hits the $70,000 cap. The Solo 401(k) also hits $70,000 (because the employer cap is the same). At this income, the SEP wins on simplicity alone. Same contribution, no Form 5500, no plan-document fuss.

Providers

Fidelity, Vanguard, and Schwab all offer free SEP-IRAs. Ten minutes to open online. Full access to the brokerage's lineup of stocks, ETFs, mutual funds, and spot Bitcoin ETFs. For self-custody crypto inside a SEP, the same self-directed universe that supports Solo 401(k)s (Alto, Rocket Dollar, and similar) will also set up a self-directed SEP [VERIFY]. Same higher-fee tradeoff.

Can you have both?

Technically yes, you can have a SEP-IRA and a Solo 401(k) for the same business. Practically, most people just pick one, because the combined employer-side contribution across both plans is still capped at $70,000 in 2026 [VERIFY]. The only real reason to run both at once is transition: rolling an existing SEP into a new Solo 401(k) over time.

A more common structure is one of each for different businesses. A teacher with a side tutoring LLC can have a SEP for the tutoring income and still participate in the school district's 403(b) and 457(b) plans for the W-2 job. Different employers, separate contribution buckets.

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