Solo 401(k) vs SEP-IRA Contribution Comparator
Compare the maximum annual contribution between a Solo 401(k) and a SEP-IRA for the same self-employment income. Solo 401(k) usually wins for self-employed earning under ~$300K because the employee elective-deferral portion (IRC §401(k)) stacks on top of the employer-side contribution (IRC §415(c)). SEP-IRA caps employer-side only (IRC §408(k)), but wins on administrative simplicity. Cited to IRS Pub 560, IRC §401(k), §408(k), §415(c).
- Employee deferral
- $23,500
- Employer (20%)
- $16,000
- Employer (20%)
- $16,000
- Employee deferral
- —
Blue = the §401(k) employee elective deferral (Solo 401(k) only). Orange = the 20% effective employer-side contribution (both plans). The SEP-IRA has no blue segment — that stacked deferral is the Solo 401(k)’s structural edge below the §415(c) ceiling.
View the TypeScript implementation on GitHub: packages/calc/src/solo-401k-vs-sep-ira.ts · view tests
What this means
A Solo 401(k) and a SEP-IRA both let a self-employed operator shelter retirement money, but they are built differently. A SEP-IRA has a single lever: an employer-side contribution at the effective 20% of net self-employment earnings. A Solo 401(k) has two levers that stack — the same 20% employer piece plus a flat employee elective deferral (IRC §402(g)) that does not scale with income. Both are then capped at the same overall §415(c) ceiling. That second lever is the whole story.
In my experience, the deferral is exactly why the Solo 401(k) tends to win for operators earning under roughly $300K of net SE income. The flat $23,500 (2025) sits on top of the percentage piece, so at $80K the Solo plan reaches about $39,500 while the SEP stops near $16,000. I’ve found people underestimate this because they compare the percentage rates and miss that one plan has an extra fixed slab the other simply does not.
I’ve seen the gap close, though, as income climbs. Once the 20% employer piece is large enough that both plans bump the §415(c) ceiling, they converge — and at that point the decision stops being about dollars and becomes about administration, paperwork, and funding deadlines, where the SEP-IRA’s simplicity can pull ahead. The arithmetic here settles the contribution question; the rest is a judgment call that belongs to you and your CPA — I am not telling you which plan to open.
Worked example
A freelancer with $80,000 of net self-employment earnings (net Schedule C profit after subtracting half of SE tax), age 40, with no separate-employer 401(k).
Solo 401(k). The employee elective deferral is the full $23,500 §402(g) limit. The employer piece is 20% × $80,000 = $16,000. Combined: $23,500 + $16,000 = $39,500, comfortably under the $70,000 §415(c) cap.
SEP-IRA. Employer side only: 20% × $80,000 = $16,000. No employee deferral, no catch-up.
Result: the Solo 401(k) allows $23,500 more($39,500 vs $16,000) — that’s the stacked employee deferral the SEP cannot match. Now push net SE earnings to $400,000: the 20% employer piece alone is $80,000, so both plans slam into the $70,000 §415(c) ceiling and the comparison becomes a tie. Same operator, two very different regimes — below the ceiling the Solo plan’s extra lever wins on dollars; at the ceiling, only the administrative tradeoff remains, and that call is yours.
Frequently asked questions
The information and tools on this website are for general educational purposes only and do not constitute financial, investment, legal, or tax advice. Consult a licensed professional for decisions specific to your situation.