SEP-IRA vs. Solo 401(k): Which Should You Setup Before Year-End?
If you have no full-time employees other than yourself and possibly a spouse, a Solo 401(k) almost always beats a SEP-IRA for tax savings once your income passes about $60,000-$70,000. But the Solo 401(k) has to be opened by December 31, while a SEP-IRA can be opened as late as your tax filing deadline. That timing difference is why this decision needs to happen now, not in March.
Both plans let you deduct retirement contributions from your business income. The difference is how much you're allowed to contribute, and when you're allowed to act. Here's how to think about which one fits your business.
The Core Difference: Two Ways to Contribute
SEP-IRA: You can contribute as the "employer" only, up to 25% of compensation (roughly 20% of net self-employment income after adjustments), capped at $70,000 for 2026.
Solo 401(k): You can contribute as both "employee" and "employer." As the employee, you can defer up to $23,500 (or $31,000 if you're 50+), plus an employer contribution of up to 25% of compensation, capped at $70,000 total for 2026 ($77,500 if 50+).
That employee deferral is the whole reason the Solo 401(k) usually wins. It lets you get money into the plan even in years when 25% of your compensation alone wouldn't get you very far, which matters most for newer or lower-earning businesses.
A Side-by-Side Comparison
| Factor | SEP-IRA | Solo 401(k) |
|---|---|---|
| Setup deadline | Tax filing deadline (with extension) | Must be opened by Dec. 31 |
| Contribution deadline | Tax filing deadline (with extension) | Tax filing deadline (with extension) |
| Max contribution (2026) | $70,000 | $70,000 ($77,500 if 50+) |
| Contributes at lower income | Limited — 25% of comp only | Stronger — employee deferral applies regardless of profit level |
| Roth option | No | Yes, in most plans |
| Loan option | No | Yes, in most plans |
| Admin complexity | Minimal, no annual filing | Form 5500-EZ required once assets exceed $250,000 |
| Covers employees? | Yes, if you hire staff | Generally solo/spouse only |
The deadline trap: The single most common mistake we see is a business owner who plans to open a Solo 401(k) when they file their taxes in March or April. By then, it's too late. The plan itself must exist by December 31 of the tax year, even though the contribution can technically still be made afterward. If you want a Solo 401(k) for this year, the account needs to be open before the ball drops.
When a SEP-IRA Still Makes Sense
A SEP-IRA is the simpler choice if you have employees you want to include in the plan, since Solo 401(k)s generally can't cover non-owner staff. It's also a fine fallback if you've already missed the Solo 401(k) setup deadline for the year but still want to make a retirement contribution before you file.
When a Solo 401(k) Makes Sense
If it's just you (or you and a spouse) with no other employees, and you have time before December 31, a Solo 401(k) almost always allows a larger deduction for the same level of income, thanks to the employee deferral. It's also the better long-term choice if you might want a Roth option or the ability to borrow against the plan later.
Not sure which plan fits your business?
Latitude Tax Advisors can run the numbers on both options for your actual income and tell you which one puts more money in your pocket, before the Solo 401(k) deadline passes.
Schedule a Retirement Planning CallFrequently Asked Questions
What is the deadline to open a Solo 401(k)?
The plan must be established by December 31 of the tax year you want it to apply to. Contributions can be made afterward, up to your tax filing deadline including extensions, but the account itself has to exist by year-end.
Can I open a SEP-IRA after the tax year ends?
Yes. A SEP-IRA can be opened and funded as late as your business tax filing deadline, including extensions, which is one of its main advantages over a Solo 401(k) if you're deciding late in the year.
Which plan lets me contribute more money?
Both cap out at the same total dollar limit, but a Solo 401(k) typically lets you reach a higher contribution at a lower income level because of the employee deferral, which isn't available in a SEP-IRA.
Can I have both a SEP-IRA and a Solo 401(k)?
Generally you'd choose one or the other for a given business, since combining them doesn't increase your total contribution limit and adds unnecessary complexity. If you have income from multiple, unrelated businesses, the rules get more nuanced and are worth reviewing with your accountant.
