Most self-employed people open a SEP-IRA because it is the one they have heard of and it takes ten minutes to set up. For a large share of them that decision costs somewhere between $10,000 and $25,000 of annual contribution room, every year, for as long as it stands. The plan you pick matters more than almost anything you do inside it.
This is a decision guide rather than an encyclopedia. Four questions get you to the right answer, and the first one eliminates most of the field.
Question one: do you have employees?
This is the gate everything else runs through, and the definition is narrower than people expect. A spouse on the payroll does not count against you. Neither do genuine independent contractors. What counts is common-law employees working more than 1,000 hours a year.
If it is just you, or you and a spouse, the Solo 401(k) is available, and it is usually the answer. Read on.
If you have employees, the Solo 401(k) is off the table entirely, and you are choosing between a SEP-IRA, a SIMPLE IRA, and a full 401(k) plan. The tradeoff becomes what you are willing to contribute on their behalf, and our employee benefits guide covers that design question in more depth than this piece does.
Question two: how much do you actually want to put away?
Here is the arithmetic that makes the SEP-versus-Solo comparison lopsided, and it is the reason the default choice is so often wrong.
A SEP-IRA is funded entirely by employer contributions, capped at 25% of compensation. For a sole proprietor that works out to roughly 20% of net self-employment earnings. It is a pure percentage, so at moderate income it produces a moderate number.
A Solo 401(k) lets you contribute in both capacities. As the employee you can defer up to $24,500 in 2026 regardless of what percentage of your income that represents. As the employer you can then add the same profit-sharing contribution a SEP would have allowed. The two stack.
Both plans top out at the same overall limit, $72,000 in 2026 for someone under 50. The difference is how fast you get there. Above roughly $290,000 of income the two converge. Below it, the Solo 401(k) wins, often by a lot.
If your target contribution is larger than $72,000, you are into defined benefit or cash balance territory, where actuarially determined contributions can run well into six figures. Those plans carry real administrative cost and a commitment to fund consistently, so they suit stable high income rather than variable income.
Question three: how variable is your income?
This is where the simple answer sometimes beats the optimal one.
SEP-IRA contributions are entirely discretionary year to year. Great year, contribute the maximum. Bad year, contribute nothing. No filing, no commitment.
Solo 401(k) contributions are also discretionary, but the plan requires a Form 5500-EZ filing once assets exceed $250,000, and there is a plan document to maintain.
SIMPLE IRAs are the opposite: they carry a mandatory employer contribution, either a match up to 3% or a 2% non-elective contribution for every eligible employee, and you owe it in bad years too.
Defined benefit plans are the most demanding. The contribution is actuarially required, not optional, and a year where you cannot fund it is a genuine problem.
Question four: do you want a Roth option?
The Solo 401(k) supports Roth contributions on the employee deferral. That matters more than it sounds, because self-employed income is exactly the kind that swings between high and low years, and low years are when Roth contributions and Roth conversions are cheapest. A plan that lets you switch between pretax and Roth as your income moves is a genuinely useful tool over a full career.
Solo 401(k)s also permit plan loans, which SEPs do not. That is a feature to know about rather than one to plan around.
Putting it together
For most owner-only businesses the answer is the Solo 401(k), and the reason people do not have one is that the SEP was easier to open on a Tuesday afternoon. The setup difference is a few forms once. The contribution difference repeats every year.
The SEP still wins in two specific cases: you want zero administrative overhead and your income is high enough that the two produce the same number anyway, or you are setting up after year end. That second one is worth knowing. A SEP can be established and funded up to your extended filing deadline, which makes it the only plan that can still fix a prior tax year. A Solo 401(k) generally has to be established before year end to accept employee deferrals for that year.
A practical sequence for a profitable owner-only business: establish the Solo 401(k) before December 31, fund the employee deferral to whatever the year supports, then size the profit-sharing piece once the books close and you know the actual number. If you missed the December deadline entirely, a SEP is your fallback for that year and you set up the Solo 401(k) for the next one.
Where this sits in the wider picture
Retirement plan contributions are simultaneously the best savings mechanism and the single largest annual deduction available to most self-employed people. At a combined federal and state marginal rate of 40%, a $43,000 contribution is roughly $17,000 of tax deferred in that year alone.
That makes plan selection a tax decision as much as a retirement one, and it should be made alongside your entity structure rather than separately from it. An S-Corp election changes how your compensation is defined, which changes the contribution math. Our tax planning guide for business owners covers how those pieces fit together, and our tax savings estimator will put a figure on what a given contribution is worth against your own rate.