SEP-IRA vs Solo 401(k) for LLC Owners: 2026 Comparison + Contribution Math

The Quick Verdict

For most LLC owners with no employees and under $329K net profit: **Solo 401(k) wins**. Allows both employee + employer contributions plus an optional Roth component.

For LLC owners with part-time employees or income over ~$329K: **SEP-IRA is simpler**.

For LLC owners who want maximum Roth: **Solo 401(k)** only.

The detailed math below.

2026 Contribution Limits

**SEP-IRA**: - Up to **25% of net self-employment income** (effectively 20% of Schedule C profit after half SE tax deduction) - Maximum annual contribution: **$69,000** (2026) - No catch-up contribution for age 50+ - All contributions are "employer" contributions - **No Roth option**

**Solo 401(k)**: - Employee contribution: **$23,500** (2026) - Catch-up contribution (age 50+): **additional $7,500** - Catch-up contribution (age 60-63): **additional $11,250** (replaces the $7,500) - Employer contribution: up to 25% of net SE income - Combined employee + employer maximum: **$69,000** (age under 50), **$76,500** (age 50+), **$80,250** (age 60-63) - Roth component available (employee contributions only, as of 2026)

Contribution Math Examples

Example 1: Sole proprietor, age 45, $80K net profit

SE tax adjustment: $80K × 92.35% × 15.3% × 0.5 = ~$5,650 Net earnings for retirement: $80K - $5,650 = $74,350

**SEP-IRA**: - Max: 20% × $74,350 = $14,870 - **Total contribution: $14,870**

**Solo 401(k)**: - Employee: $23,500 - Employer: 20% × $74,350 = $14,870 - **Total contribution: $38,370**

**Solo 401(k) advantage: $23,500 more in tax-deferred savings**

At a 24% marginal tax rate, Solo 401(k) saves $5,640 more in federal tax than SEP-IRA.

Example 2: Consultant, age 52, $150K net profit

Net earnings: ~$139K

**SEP-IRA**: - Max: 20% × $139K = $27,800 - No catch-up - **Total contribution: $27,800**

**Solo 401(k)**: - Employee: $23,500 + $7,500 catch-up = $31,000 - Employer: 20% × $139K = $27,800 - **Total contribution: $58,800**

**Solo 401(k) advantage: $31,000 more**. At 32% marginal rate, saves $9,920 more in tax.

Example 3: High-earning consultant, age 55, $400K net profit

Net earnings: ~$373K

**SEP-IRA**: - Max: 20% × $373K = $74,600, but capped at $69,000 - **Total contribution: $69,000**

**Solo 401(k)**: - Employee: $23,500 + $7,500 catch-up = $31,000 - Employer: 20% × $373K = $74,600, but combined cap is $69,000 + $7,500 catch-up = $76,500 - Combined cap applied: $76,500 - **Total contribution: $76,500**

**Solo 401(k) advantage: $7,500**. At 37% marginal rate, saves $2,775.

Example 4: LLC with part-time employee

Say you have one part-time employee earning $30K.

**SEP-IRA**: contributions must be proportional across all employees. If you contribute 20% for yourself ($14,870), you must contribute 20% of the employee's salary ($6,000). Total: $20,870.

**Solo 401(k)**: if you have ANY non-spouse W-2 employee working 1,000+ hours/year, you can't have a Solo 401(k). You'd need a "real" 401(k) plan with nondiscrimination testing.

**SEP-IRA wins for LLCs with part-time employees**.

When SEP-IRA Makes More Sense

1. **You have part-time employees** — Solo 401(k) isn't available 2. **You want maximum simplicity** — SEP-IRA has almost no ongoing paperwork 3. **You contribute inconsistently** — SEP-IRA lets you skip years without penalty 4. **Your income is $329K+** — both plans cap at $69K, so the extra Solo 401(k) machinery doesn't help 5. **You don't care about Roth** — SEP-IRA has no Roth option

When Solo 401(k) Wins

1. **You're under $329K net profit** — Solo 401(k) allows dollar-for-dollar employee contribution on top of the 20% employer match, dramatically increasing your savings vs SEP-IRA 2. **Age 50+** — $7,500 catch-up only available in Solo 401(k) 3. **Age 60-63** — $11,250 super-catch-up only available in Solo 401(k) 4. **You want Roth** — Solo 401(k) offers Roth employee contributions (tax-free growth) 5. **You want loan capability** — Solo 401(k) allows loans up to $50K; SEP-IRA doesn't 6. **Your spouse works in the business** — both spouses can contribute, potentially doubling household retirement savings

The Roth Question

Solo 401(k) Roth contributions: - No current-year tax deduction - Tax-free growth - Tax-free qualified distributions in retirement - Pay tax now at current rate, avoid it later

SEP-IRA has no Roth option. If you already have a Roth IRA, that's separate (max $7,000/year 2026, income-limited).

**When Roth makes sense**: - Your current tax rate is lower than you expect in retirement - You're young and have decades of tax-free growth ahead - You've already maxed tax-deferred options and want to keep saving

**When traditional makes sense**: - Your current rate is higher than your retirement rate (most high-earning professionals) - You need the current-year deduction

Many sophisticated savers do both: Solo 401(k) traditional (for deduction + growth) + Backdoor Roth IRA (after-tax contributions to Traditional IRA, convert to Roth).

Setup Process

SEP-IRA (easier)

1. Open SEP-IRA at any brokerage (Fidelity, Schwab, Vanguard) — free 2. Complete Form 5305-SEP (one page, takes 10 minutes) 3. Fund by tax filing deadline (April 15, or October 15 with extension) 4. Deduct contribution on tax return

**No ongoing annual forms**. Simplest retirement plan for self-employed.

Solo 401(k) (more setup, more flexibility)

1. Open Solo 401(k) at brokerage offering it (Fidelity, Schwab, Vanguard, E*Trade all offer; Fidelity has best flexibility) 2. Adopt a plan document (provided by the brokerage or a third-party administrator) 3. Fund by tax filing deadline (employee portion by year-end if W-2 salary; employer by tax deadline) 4. File Form 5500-EZ annually if plan assets exceed $250,000 5. Deduct on tax return

**Annual Form 5500-EZ is trivial** (one page, no cost) once plan exceeds $250K.

Which Brokerage?

**Fidelity**: best all-around Solo 401(k). Supports Roth, loans, Mega-Backdoor Roth. No fees. Excellent online interface.

**Schwab**: solid Solo 401(k). Less robust feature set than Fidelity but fine for most.

**Vanguard**: SEP-IRA is fine. Their Solo 401(k) is basic; no Roth option until recently.

**E*Trade**: strong Solo 401(k) with Roth and loans.

Most owners pick Fidelity for Solo 401(k). Vanguard for SEP-IRA if you want ultra-low-cost index funds.

Can I Have Both?

Yes, with limits: - Total SEP-IRA + employer Solo 401(k) contributions combined cannot exceed $69,000 (across all employer-type plans for the same business) - Employee Solo 401(k) contributions ($23,500) are separate from the employer cap - You can contribute to both, but most people pick one

The only time having both makes sense: you want SEP-IRA's simplicity for one portion and Solo 401(k)'s loan/Roth features for another. Rare.

S-Corp Considerations

If your LLC has elected S-Corp taxation, the math changes:

- Your "self-employment income" for retirement is your **W-2 salary** from the S-Corp, not the whole business profit - Solo 401(k) employee contribution: up to 100% of your W-2 salary (up to $23,500) - Employer contribution: up to 25% of W-2 salary

Lower wages = lower retirement contribution ceiling. If you're doing aggressive S-Corp salary reduction (to minimize payroll tax), you also reduce retirement savings potential. Trade-off to model carefully.

Common Mistakes

Mistake 1: Missing the deadline

SEP-IRA must be funded by your tax return deadline (April 15, or Oct 15 with extension).

Solo 401(k): employee portion must be funded by year-end (Dec 31); employer portion by tax deadline.

Missing the deadline forfeits the deduction for that year.

Mistake 2: Contributing too much

SEP-IRA caps at 20% of net SE earnings. Contribute more and you owe excise tax (6%/year on excess) until you withdraw.

Mistake 3: Not filing Form 5500-EZ

Solo 401(k) owners with $250K+ in the plan must file Form 5500-EZ annually. Simple form, but the IRS penalty for not filing is $250/day (yes, per day). Don't skip it.

Mistake 4: Setting up too late

Solo 401(k) must be established by December 31 of the year you want to contribute for. Can't set up a 2026 Solo 401(k) in January 2027 and backdate contributions.

SEP-IRA can be established as late as your tax filing deadline. More flexible.

FormifyAI + Retirement Planning

[FormifyAI forms your LLC](/sign-up) — that's our lane. We don't administer retirement plans but partner with CPAs who set them up correctly.

For Solo 401(k) setup, Fidelity's Self-Employed 401(k) is the most popular choice — free, full-featured, Roth-capable.

For SEP-IRA, Vanguard or Fidelity are both excellent.

What to Do Next

If you're self-employed without a retirement plan, you're leaving $10K-$50K+/year in tax savings on the table.

**Most LLC owners should**: set up a Solo 401(k) at Fidelity. Contribute employee ($23,500) + employer (20% of net). Choose Traditional if you want current deduction, Roth if you want tax-free growth.

**LLC owners with part-time employees**: set up SEP-IRA instead.

[Form the LLC](/sign-up) first, then open the retirement account. Your future self will thank present-you for the compound tax-deferred growth.