Solo 401k vs SEP IRA

What This Guide Covers

This guide compares the two most powerful retirement account options for Detroit's self-employed workers: the Solo 401k and the SEP IRA. Both allow significantly higher contributions than standard employee 401k plans, but they work differently and suit different situations.

Solo 401k: 2026 Limits and Key Features

The Solo 401k (also called an Individual 401k) allows contributions as both employee and employer. As an employee, you can contribute up to $23,500 in 2026 (plus $7,500 catch-up if age 50+, or $11,250 if age 60-63 under SECURE 2.0). As the employer, you can contribute up to 25% of net SE income. Combined maximum is $70,000 ($77,500 age 50+).

The Solo 401k also offers a Roth option for employee contributions, a loan provision (up to $50,000 or 50% of balance), and no annual filing requirement until your balance exceeds $250,000 (then Form 5500-EZ applies).

You must establish the Solo 401k by December 31 of the contribution year. The plan cannot be opened and backdated after year-end. Contributions can be made up to the tax filing deadline including extensions.

SEP IRA: 2026 Limits and Key Features

The SEP IRA allows contributions of up to 25% of net SE income, maximum $70,000 in 2026. There is no employee contribution component — only the employer percentage applies. The SEP IRA has no Roth option, no loan provision, and no annual filing requirement. It can be opened and funded up to the tax filing deadline including extensions.

At Lower Income Levels: Solo 401k Wins

At $40,000 in net SE income, the SEP IRA maximum contribution is approximately $10,000 (25% of net). The Solo 401k allows up to $23,500 (the full employee contribution) plus the 25% employer percentage — more than double the SEP IRA limit at the same income. For Detroit freelancers not yet earning six figures, the Solo 401k allows far more retirement savings.

When to Choose SEP IRA

• You want maximum simplicity and no December 31 establishment deadline
• You are approaching retirement and primarily need the employer contribution percentage
• You are planning to hire employees and want to avoid the Solo 401k employee restriction
• You already max the Solo 401k employee contribution and only need the employer portion

Opening Your Account

Major brokerages including Fidelity, Schwab, and Vanguard offer both Solo 401k and SEP IRA accounts with no annual fees. Fidelity's Solo 401k includes a Roth option. Setup typically takes 15-30 minutes online. The Solo 401k must be established by December 31 — do not wait until April.

For a worked example at different Detroit freelancer income levels and a deeper dive into retirement planning, see FHR's blog post: Solo 401k vs SEP IRA for Detroit Freelancers.