Solo 401k vs SEP IRA in 2026: Which Fits Your Store?

If you are a store owner with no employees, the retirement plan decision usually comes down to two choices: a solo 401(k) or a SEP-IRA. Both let you put away far more than a regular IRA, both are built for the self-employed, and both are offered by the big brokerages. The difference is in the details, and those details decide how much you can contribute, how flexible you are in a slow year and how much paperwork you sign up for.

I wrote this guide at Ecommerce Paradise as a head-to-head decision guide. My broader roundup of accounts is in the best retirement accounts guide, and this page goes deeper on just these two.

If you are earlier in the process, start with my pillar on how to start investing as a business owner.

All limits below are 2026 figures from IRS pages I read for this article. Where I do my own arithmetic, I label it as an example, because your actual numbers depend on your return and your CPA’s advice.

Disclosure: I am not a registered investment adviser, broker-dealer or financial advisor, and this article is education, not personalized financial advice. Ecommerce Paradise may earn a commission if you request offers through the partner tools on this page, at no extra cost to you. Investing involves risk, including the possible loss of principal, and past performance does not guarantee future results. Confirm tax and contribution rules with a qualified tax professional. Information in this article is current as of October 2026.

Solo 401(k) vs SEP-IRA at a Glance

Here is the side-by-side, built from the IRS one-participant 401(k) page. The SEP column comes from the IRS SEP page.

The 2026 dollar figures come from the IRS 2026 limits announcement.

Feature	Solo 401(k)	SEP-IRA
Who can use it	Owner with no employees, or the owner and a spouse	Business of any size, including self-employed people
Your own salary deferrals	Up to $24,500 in 2026	Not allowed (employer contributions only)
Catch-up contributions	$8,000 at 50 or older, $11,250 at ages 60 to 63	Not permitted
Employer-side contribution	Up to 25% of compensation, or 20% of net self-employment earnings for owners	Up to 25% of compensation, or 20% of net self-employment earnings for owners
Total 2026 ceiling before catch-up	$72,000	$72,000
Loans	Possible if the plan allows them	Not permitted
Roth option	Roth deferrals possible if the plan allows	Employer may allow Roth SEP, not required
Annual IRS filing	Form 5500-EZ once assets reach $250,000 at year end	No Form 5500 filing for the employer
Setup timing	Sole proprietors may adopt after year end, by the filing deadline without extensions	As late as the return due date, including extensions

The short version is that the SEP wins on simplicity and the solo 401(k) wins on ceiling at low and middle profits. At very high profits both can reach the same $72,000 cap, which I explain below.

Compare retirement plan providers for the self-employed

The Core Difference: Two Hats Versus One

A SEP-IRA only has an employer contribution. You are the employer, the business puts money into your SEP-IRA, and that is the whole story. The IRS describes the contribution as up to 25% of each employee’s pay, and for you as the owner the rate is effectively lower because of how self-employed income is calculated.

A solo 401(k) lets you wear both hats. As the employee you can defer part of your own earnings, up to the annual limit. As the employer the business can add a profit-sharing contribution on top. That structure is why the solo 401(k) can take in a lot more money when profits are modest, because the first $24,500 does not depend on a percentage formula.

How Self-Employed Compensation Is Figured

According to the IRS, a self-employed person’s compensation is net self-employment earnings minus one-half of self-employment tax and minus contributions made for yourself. The IRS points you to the rate table and worksheets in Chapter 5 of Publication 560, and the same publication uses 20% of net earnings from self-employment as the owner’s effective limit for a plan with a 25% rate.

That circular formula is why owners get tripped up. Your contribution lowers your compensation, which lowers your contribution. Let your CPA or the plan provider’s calculator handle it, and treat the examples here as rough guides only.

Worked Examples: What Each Plan Could Allow

These are my own arithmetic using the IRS rules above, and they are illustrations rather than quotes or advice. I assume a sole proprietor with no employees, and I use net profit levels low enough that I do not need to worry about the Social Security wage cap. Self-employment tax is figured as 15.3% on 92.35% of net profit, and I take half of it off before applying the 20% effective rate. The solo 401(k) column assumes you defer the full $24,500 and also make the employer contribution.

Net profit (example)	Rough SEP-IRA maximum	Rough solo 401(k) maximum	Difference
$40,000	about $7,435	about $31,935	about $24,500
$60,000	about $11,152	about $35,652	about $24,500
$75,000	about $13,940	about $38,440	about $24,500
$100,000	about $18,587	about $43,087	about $24,500

The pattern is clear. As long as you can actually afford to defer $24,500, the solo 401(k) allows roughly that much more than a SEP at the same profit.

The catch is cash flow. If you only have $40,000 of profit and you also need to pay income tax, self-employment tax and living expenses, deferring $24,500 may not be realistic. A solo 401(k) lets you choose a smaller deferral, so you are not forced to max it.

Also notice the rule that your total cannot exceed your earned income. With low profits, the plan’s own limit can cap you before the dollar limits do. The examples above stay well below that line.

Which Plan Fits Which Owner

When a SEP-IRA Is the Better Fit

I would lean toward a SEP in a few situations. The first is when you want the least paperwork. The IRS says the SEP employer has no filing requirement, including Form 5500, and the plan can be set up with the model Form 5305-SEP, which you do not file with the IRS.

The second is when you will not know your profit until after year end. The IRS says you can set up a SEP for a year as late as the due date of your return for that year, including extensions. That is a real advantage for an ecommerce owner who closes the books in March.

The third is when you plan to hire. The SEP covers businesses of any size, but you must contribute the same percentage for every eligible employee, and the IRS lists the eligibility rules as age 21, work in at least 3 of the last 5 years and at least the SEP minimum compensation, which is $800 for 2026 under IRS Notice 2025-67. That can become expensive, so model it before you hire.

The fourth is simply preference. Some owners want a plan that behaves like an IRA with a bigger limit, and a SEP is exactly that.

When a Solo 401(k) Is the Better Fit

The solo 401(k) is usually my pick when profit is in the middle range and you want to save the most you can. The deferral component means a $60,000 store can contribute far more than a SEP allows, as the table showed. If you are age 50 or older, the catch-up contributions add $8,000, or $11,250 at ages 60 to 63, which a SEP does not permit. The IRS annual additions page lists total figures of $80,000 including catch-up, or up to $83,250 for those ages 60 to 63.

It is also the better fit if you want a Roth option or loan access. The IRS comparison page says 401(k) deferrals can be designated Roth and that loans and hardship withdrawals are available if the plan is set up to allow them.

Provider rules vary, though. Schwab’s individual 401(k) page, for example, lists a Roth option but says participant loans are not available. Read the plan details before you assume a feature exists.

Finally, the solo 401(k) is attractive if you want to save in a given year without relying on a big employer contribution. Because the deferral is a fixed dollar amount, your plan does not depend on a percentage of an unpredictable profit.

Deadlines and Timing in Practice

This is the part people get wrong. For a SEP, setup and contributions both run to the tax return due date including extensions. For a solo 401(k), Publication 560 says a sole proprietor with no employees can adopt a 401(k) after the end of the tax year if it is adopted by the tax filing deadline without extensions.

Employee deferrals have to be elected by the end of the tax year, and can then be made by the return filing deadline, including extensions, according to that same publication. Employer profit-sharing contributions are due by the employer’s return due date, including extensions.

The IRS issue snapshot on late contributions adds that self-employed individuals adopting a new single-member 401(k) may defer prior-year net earnings up to the return due date, without extensions. Providers describe the rules differently, and Schwab’s page says incorporated owners must make deferral contributions in the same tax year. My advice is simple: do not wait until April. Open the plan before December 31, and confirm the exact timing with your CPA and provider.

If You Run an S-Corp or LLC Taxed as One

If you pay yourself W-2 wages through an S-corp, the mechanics change, because deferrals typically come out of payroll during the year and compensation is based on your W-2 wages. This is another reason to talk to a CPA before choosing. My overview of business formation for high-ticket dropshippers explains how entity choice ripples through your taxes.

Get the Business Side Right Before You Optimize the Retirement Side

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Paperwork, Fees and Providers

A SEP-IRA is typically opened at a brokerage using the provider’s own forms or Form 5305-SEP. A solo 401(k) needs a plan document and the annual Form 5500-EZ once assets reach $250,000 at year end. That filing is a real task, so factor it into your decision if you expect to grow your balance.

Many providers advertise low costs, and I compare them in my guide to the best solo 401(k) providers. As one example, Schwab’s pages for its individual 401(k) and SEP IRA each say there is no fee to open or maintain the account and list a $0 minimum opening deposit. They also note that other fees, fund expenses and commissions may apply, so read the fee schedule yourself before you open anything.

Not every brokerage offers both plans. Robinhood’s IRA overview describes traditional and Roth IRAs and does not mention SEP or solo 401(k) accounts, so if you want an owner plan, confirm availability with the provider first. My roundup of the best online brokerages lists where to start looking.

Can You Use Both a SEP and a Solo 401(k)?

Usually not in the way people hope. The IRS says you cannot use Form 5305-SEP if you currently maintain any other qualified retirement plan other than another SEP, and it lists a prototype document or an individually designed plan as the alternatives. Publication 560 also says contributions to a SEP must be added to contributions to other defined contribution plans you maintain when you apply the annual limit, and the deferral limit applies to the total elective deferrals you make across plans.

The deferral limit is per person rather than per plan, according to the IRS one-participant page, so if you also have a job with a 401(k), your own deferrals across both count against the same $24,500. That is a common surprise for people who work part-time for an employer while running a store. Check your W-2 job’s plan before you set a solo 401(k) deferral.

What If You Want to Switch Later?

You are not locked in. The IRS says SEP funds may be rolled over tax-free to other IRAs and qualified plans. A common path is to start with a SEP because it is quick, then move to a solo 401(k) when profit rises or you want deferrals or a Roth option. Move money with a direct rollover and keep records.

See plan and brokerage offers for business owners

A Simple Decision Guide

Here is how I would think about it as a sole owner. If you have employees now or expect them soon, price the SEP’s employee contributions first and talk to a CPA, because a solo 401(k) is designed for owners without employees, and eligible employees must be included once you have them. If you have no employees and want the highest contribution, choose the solo 401(k), as long as you can handle the plan document and, later, the Form 5500-EZ.

If you want the lightest paperwork and a late-in-the-year setup window, choose the SEP-IRA. If your profit is very high, check whether you would hit the $72,000 cap either way, because at that point the SEP’s simplicity may be worth more than the solo 401(k)’s extra features. If you are over 50, the catch-up contributions make the solo 401(k) hard to ignore.

And if you are not sure you can afford either, remember the IRA. The 2026 IRA limit is $7,500 with a $1,100 catch-up at age 50 or older, so it remains a legitimate first step. I compare providers in best IRA accounts.

Mistakes to Avoid and Next Steps

Mistakes to Avoid

The biggest mistake is picking a plan before you know your profit. Run your numbers first, set aside tax money and then decide what you can afford to contribute. The second is missing a deadline because you assumed all plans share the same one. The third is forgetting a spouse, because a spouse who works in the business can change the plan’s setup and the calculation.

The fourth is ignoring investment risk once the money is in. Contributing to a plan is not the same as investing it wisely, and any investment you choose inside the account can lose value. If you need a place to learn the basics, read my guide to how to invest in stocks. The best investing apps for beginners is another good place to start.

The fifth is skipping professional help. A CPA can run the real formulas and tell you what is deductible for your structure, and a few hundred dollars of advice can matter more than a fraction of a percent in fees. If you are still building the income to fund any of this, start with my high-ticket dropshipping guide.

Next Steps

Pull your last two years of profit, estimate this year’s number and note whether you expect to hire. Then run both plans through a provider’s calculator or have your CPA run them. Pick the plan, open it before year end, and automate contributions as a share of profit.

For the numbers on each plan, see my solo 401(k) contribution limits guide. The SEP IRA contribution limits guide covers the other side.

If you want help building the business behind the profit, start with my high-ticket niches list. My supplier guide is the next stop.

The free high-ticket dropshipping guide walks through the model itself.

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Frequently Asked Questions

Which is better for the self-employed, a solo 401(k) or a SEP-IRA?
Neither wins everywhere. The solo 401(k) allows your own deferrals of up to $24,500 in 2026 plus an employer contribution, so it usually allows more at modest profits. The SEP-IRA has less paperwork and a later setup deadline. Both share a $72,000 total limit before catch-up.

Can I contribute to both a solo 401(k) and a SEP-IRA in the same year?
The IRS says Form 5305-SEP cannot be used if you maintain another qualified plan other than another SEP, and SEP contributions count toward the same annual limits as other defined contribution plans. Ask your CPA before trying to combine them.

Do I have to contribute every year?
No. The IRS says SEP contributions are not required every year, and Schwab says its individual 401(k) plans are not required to be funded annually. Check your plan document for any specific terms.

What happens if I hire an employee?
A solo 401(k) is designed for owners with no employees other than a spouse, so hiring changes your options. A SEP requires you to contribute the same percentage for eligible employees. Talk to a CPA or plan provider before you hire.

Can I roll a SEP-IRA into a solo 401(k) later?
The IRS says SEP funds may be rolled over tax-free to other IRAs and qualified plans. Whether a particular solo 401(k) accepts rollovers depends on its plan document, so confirm with the provider.

More Guides in This Series

Once you have picked between these two plans, here are the other guides in my investing series for choosing a provider and deciding what to hold inside the account.

Best Solo 401(k) Providers: how to compare fees, Roth options and loan features across providers.
Best ETFs for Beginners: how to choose and compare your first funds.
Best S&P 500 Index Funds: costs, minimums and how to choose one.
Best Dividend ETFs: how to compare yield, cost and holdings.
How to Start Day Trading: the rules, taxes and risks business owners should know first.

If you found this useful, these guides go deeper on related topics:

Trevor Fenner

Trevor Fenner is an ecommerce entrepreneur and the founder of Ecommerce Paradise, a platform focused on helping entrepreneurs build and scale profitable high-ticket ecommerce and dropshipping businesses. With over a decade of hands-on experience, Trevor specializes in high-ticket dropshipping strategy, niche and product selection, supplier recruiting and onboarding, Google & Bing Shopping ads, ecommerce SEO, and systems-driven automation and scaling. Through Ecommerce Paradise, he provides free education via in-depth guides like How to Start High-Ticket Dropshipping, advanced training through the High-Ticket Dropshipping Masterclass, and fully done-for-you turnkey ecommerce services for entrepreneurs who want a faster, more hands-off path to growth. Trevor is known for emphasizing sustainable, real-world ecommerce models over hype-driven tactics, helping store owners build scalable, sellable, and location-independent brands.