If you’re self-employed or own a small business, choosing the right retirement plan can be an important part of your overall savings strategy. If you’re self-employed or run a small business, a SEP IRA or solo 401(k) can help you save for retirement in a tax-advantaged way. Understanding the differences between the plans can help you choose the one that best fits your needs. Here’s a look at how each plan works and which one might make more sense for you.
What is a solo 401(k)?
A solo 401(k), also known as a self-employed 401(k), was introduced in the 2000s and is designed for self-employed workers and business owners without common law employees, other than a spouse. It offers many of the same benefits as a traditional workplace retirement plan.
Solo 401(k) eligibility requirements
If you’re self-employed or an owner-only business and have no employees besides a spouse, you’re generally eligible to open a solo 401(k), regardless of your age or line of work. The plan may also cover your spouse if they’re an employee of the business. If your business grows and you add employees, you’ll likely need to move to another retirement plan option.
Solo 401(k) contribution limits
In 2026 as an employee, the solo 401(k) contribution limit is $24,500, plus an additional $8,000 in catch-up contributions if you’re age 50–59 or 64 and older, or an extra $11,250 if you’re age 60–63 and your plan allows it.
But you can contribute as an employer too, up to 25% of your compensation. Combined employee and employer contributions can total as much as $72,000 for those under age 50, with higher limits available for eligible catch-up contributors.
Advantages of solo 401(k)s
- Catch-up contributions: Individuals age 50 and older can make additional catch-up contributions, allowing for accelerated savings as retirement approaches.
- Employee contributions: Eligible business owners can contribute a portion of their compensation as employees, potentially increasing retirement savings opportunities.
- Contribution flexibility: Employer contributions are optional each year, allowing you to increase or reduce savings as business conditions change, up to plan limits.
- Tax breaks: Contributions are generally tax-deductible if your business is not incorporated, potentially reducing your taxable income and tax liability for the year. If your business is incorporated, you can count the contributions as a business expense.
- Accessibility of loans: Plans can be structured so that account holders can borrow against their solo 401(k) to fund anything from business expenses to real estate.
Disadvantages of solo 401(k)s
- Limited to owner-only businesses: You’re only eligible for a solo 401(k) if you have no employees besides a spouse.
- Strict withdrawal rules: As with other retirement plans, there are penalties for taking out funds before age 59½ if you don’t qualify for an exception.
- Form 5500 filing requirements: Solo 401(k) plans generally require additional reporting once plan assets reach certain thresholds, which can add administrative responsibilities for account owners.
- Extra setup required: The financial firm you work with to house your account may mandate you get an Employer Identification Number (EIN) and fill out other paperwork.
- Learning curve: You may want to enlist a professional to help you understand the rules around contribution limits, distribution rules, and eligibility requirements.
Required minimum distributions (RMDs): Like other traditional retirement plans, RMDs apply, meaning if you’re retired, you must withdraw funds from your solo 401(k) starting at age 73, which may increase your taxable income. (If you have a Roth solo 401(k) , however, there are no RMDs during your lifetime. More on Roth solo 401(k)s below.)
What is a SEP IRA?
A SEP IRA, or Simplified Employee Pension plan, is a tax-deferred retirement savings option for self-employed people and small business owners that has been around since the 1970s. Contributions are primarily funded by the company owners, and those contributions are generally tax-deductible to the business.
SEP IRA eligibility requirements
While technically any size company can set up and offer SEP IRAs to its employees, these plans are geared toward businesses with a limited number of staffers. That’s because the business must contribute to all eligible employees’ accounts if making a contribution that year, and that can get expensive with more workers. Sole proprietors, consultants, and others earning income through self-employment are also eligible for a SEP IRA.
SEP IRA contribution limits
For 2026, a SEP IRA allows employer contributions of 0% to 25% of an employee’s compensation. The SEP IRA contribution limit is $72,000. Employer contribution amounts can vary from year to year. However, if contributions are made, all eligible employees must receive the same percentage of compensation.
Advantages of SEP IRAs
- Contributions: There’s no mandate to contribute every year, which provides a level of flexibility for those growing their business.
- Attraction and retention tool: Because the employer primarily contributes to employees’ accounts, this can be an appealing incentive to bring in new hires and to keep talent with the business.
- Tax deductible: Employers get a dollar-for-dollar deduction as a business expense.
- Tax-deferred growth: Like other IRAs, earnings within a SEP IRA potentially grow tax-deferred until withdrawn in retirement.
Disadvantages of SEP IRAs
- No loans: SEP IRA accounts don’t allow participants to borrow against their balance.
- No catch-up contributions: Unlike other retirement plans, including the solo 401(k), those age 50 and over can’t contribute additional funds to their SEP IRA.
- Employees generally can’t contribute: In most SEP IRAs, contributions are made by the employer rather than employees. While certain older Salary Reduction Simplified Employee Pension (SARSEP) arrangements permit employee salary deferrals, new SARSEP plans can no longer be established.
- Equal compensation percentage required: The percentage employers contribute to their own plan can’t be more than the percentage they contribute to others.
- Required minimum distributions (RMDs): As with a traditional solo 401(k), you must take RMDs from a traditional SEP IRA starting at age 73.
Solo 401(k) vs. SEP IRA
These retirement plans share some characteristics, but they’re distinct in many ways too.
Similarities between solo 401(k)s and SEP IRAs
- With a wide range of investment vehicles available, including mutual funds, stocks, bonds, ETFs, and CDs, they both offer flexible investment options.
- The traditional version of both plans require RMDs.
- There are taxes and early withdrawal penalties for withdrawing from either before age 59½, unless an exception applies.
- Contributions to either traditional plan can potentially grow tax-deferred.
- Both plans now permit Roth contributions under SECURE 2.0, although support for Roth SEP IRA contributions varies by provider.
- The maximum that may be contributed to either plan in a single year is $72,000 (not counting catch-up contributions).
- They’re both available for sole proprietors.
Differences between solo 401(k)s and SEP IRAs
- SEP IRAs don’t permit loans; solo 401(k)s may allow participants to borrow against their retirement savings.
- Only SEP IRAs are available for businesses with common law employees.
- With SEP IRAs, employers must contribute the same percentage of compensation to each employee’s plan. A solo 401(k) allows each spouse to make different employee salary deferrals, though employer contributions must generally be made at the same percentage of compensation.
- Catch-up contributions for those age 50 and older are only available for solo 401(k) participants.
Should you open a solo 401(k) or a SEP IRA?
For sole proprietors, choosing between the solo 401(k) and the SEP IRA can come down to whether you want to potentially put away more in retirement savings. For instance, someone approaching retirement may be able to save more in a solo 401(k) because it allows for catch-up contributions for people age 50 and over. SEP IRAs don’t.
Another consideration: People who want the ability to borrow from their account may prefer a solo 401(k). Solo 401(k)s often come with more administrative requirements and may not be the best option if you plan to hire employees in the future.
How to open a solo 401(k)
If you decide a solo 401(k) is for you, follow these steps to open one by December 31 of the tax year.
1. Confirm eligibility and features: Ensure you’re self-employed or own a business without common law employees, and compare plan features such as Roth contribution options and loan availability.
2. Decide where you want to open your account: Look into a few different firms that offer solo 401(k)s to learn whether they offer strong customer service, access to investments you’re interested in, and a user-friendly experience. Also check whether they charge any fees or require a minimum contribution. (There are no account fees or minimums to open a self-employed 401(k) with Fidelity.)
3. Gather required documents: The institution you choose will let you know what information is required, but it’s generally your:
- Social Security number (or tax ID)
- Business name and business type
- Employer Identification Number (EIN), if applicable
- Business address and contact information
- Information on any existing retirement plans
4. Calculate your contribution limit: Determine how much you can contribute based on your income and business structure.
5. Choose your tax strategy: Select traditional contributions, Roth contributions, or both. Note that a Roth is required for making catch-up contributions in 2026 if you’re a W-2 employee age 50 or older who earned more than $150,000 in 2025.
6. Complete the online application: Provide your personal and business information and fill out the adoption agreement.
7. Fund and manage the account: Make contributions, choose investments, and regularly check in on your account.
How to open a SEP IRA
Employers can open a SEP IRA by the due date of their business tax return for the year. Fidelity has no minimums or account fees for SEP IRA accounts.
1. Confirm eligibility: Determine that a SEP IRA fits your business, typically a self-employed individual or small business.
2. Choose a provider for the plan and participant accounts: A SEP IRA involves both the SEP plan established by the employer and SEP IRA accounts opened by eligible employees. Research account features, customer service, available investments, and account-opening requirements. If you’d like to make Roth SEP IRA contributions under SECURE 2.0, be aware that this feature is not yet widely available and may require choosing a provider that supports it. (Here’s how to open a SEP IRA with Fidelity if you’re interested.)
3. Gather required documents: The firm you choose will guide you on what you need, but typically you should be prepared to supply your:
- Social Security number (or tax ID)
- Business name and business type
- Employer Identification Number (EIN), if applicable
- Business address and contact information
- Employee information, if you have eligible employees
4. Open the plan: Complete an application, following your chosen firm’s instructions.
5. Have eligible employees open SEP IRAs: Employees must establish their own SEP IRA accounts and provide the account information needed for employer contributions.
6. Make employer contributions: Fund employee accounts with tax-deductible employer contributions, ensuring all eligible employees receive the same contribution percentage.
7. Choose investments and maintain the plan: Select investments yourself or use a robo advisor, like Fidelity Go®, then manage contributions and ongoing plan responsibilities as needed. Employees can choose their own investments within their SEP IRA accounts.