Solo 401(k) vs SEP at $100K: $24.5K Head Start Wins

Maya is a freelance UX designer in Austin, Texas, filing single, with $100,000 of net self-employment income and no employees. She wants the plan that shelters the most. The answer is the Solo 401(k): it lets her contribute about $43,087 in 2026 versus roughly $18,587 in a SEP-IRA. Same business, same income, same year — the Solo 401(k) shelters $24,500 more, because it adds an employee deferral the SEP structurally cannot offer.

The structural difference in one sentence

A SEP-IRA gives a self-employed owner only an employer contribution (profit sharing). A Solo 401(k) gives that same employer contribution plus an employee salary-deferral contribution. At moderate income, the employee deferral is the entire ballgame — it is a flat dollar amount that does not depend on a percentage of profit.

• SEP-IRA (IRC §408(k)): up to 25% of compensation, which for a sole proprietor works out to an effective ~20% of net SE earnings after the SE-tax adjustment — capped at $73,500 for 2026.
• Solo 401(k) (IRC §401(c)): a $24,500 employee deferral (IRC §402(g)) on top of the same ~20%-of-net employer profit-sharing contribution — with a combined cap of $72,000 for 2026 (IRC §415(c)).

At $100K net, neither plan is anywhere near its dollar cap. So the comparison is not about caps — it is about whether you also get the $24,500 deferral. Only the Solo 401(k) does.

Worked example: Maya at exactly $100,000 net

Before either plan can be sized, you have to run the self-employment tax adjustment. The IRS does not let a sole proprietor base contributions on the raw $100,000 — it bases them on net earnings after the deductible half of SE tax. Here is the chain:

1. Net earnings from self-employment: $100,000 × 92.35% = $92,350 (the 7.65% reduction is the employer-equivalent SE-tax step).
2. SE tax: $92,350 × 15.3% = $14,130. The deductible half is $7,065 (an above-the-line deduction under IRC §164(f)).
3. Contribution base: $100,000 − $7,065 = $92,935. This is the figure both plans use for the employer/profit-sharing math.
4. Employer contribution (both plans): 20% × $92,935 = $18,587. (The 20% effective rate is the self-employed equivalent of the 25%-of-compensation statutory rate.)

That $18,587 is where the SEP stops. The Solo 401(k) keeps going by adding the $24,500 employee deferral on top.

Maya is a single filer. After the $15,750 standard deduction and the $7,065 half-of-SE-tax deduction, her taxable income before any retirement contribution is about $77,185 — squarely in the 22% bracket (single: $48,476–$103,350 for 2026). The $18,587 SEP deduction stays entirely inside that 22% band and saves about $4,089. The larger $43,087 Solo 401(k) deduction pulls her taxable income down to roughly $34,098, so part of it drops into the 12% bracket (which ends at $48,475). Spanning both bands, it saves about $8,040 — roughly $6,300 at 22% on the first ~$28,700 and about $1,700 at 12% on the rest. Texas has no state income tax, so there is no state-level layer; in a high-tax state like California (top rate 13.3%) the gap would widen further.

Roth: the second reason the Solo 401(k) wins

The SEP-IRA was a pre-tax-only vehicle for decades. SECURE 2.0 §601 added the option for Roth SEP contributions, but adoption among custodians is thin and the money is still employer money, not a true deferral. The Solo 401(k) offers a clean Roth deferral bucket for the full $24,500 in 2026 at nearly every major provider.

For a solopreneur in the 22% bracket who expects higher rates later, splitting deferrals between pre-tax and Roth — or going all Roth on the $24,500 — is a planning lever the SEP simply doesn’t hand you. Roth deferrals also dodge the SECURE 2.0 §603 high-earner Roth-catch-up mandate complications down the road, since Maya is years from age 50.

Loans and liquidity: only the 401(k) has them

A Solo 401(k) can permit participant loans — up to 50% of your vested balance, capped at $50,000, under IRC §72(p), repaid over five years (longer for a primary residence). A SEP-IRA can never allow a loan; any pre-59½ withdrawal is a taxable distribution plus a 10% early-withdrawal penalty under IRC §72(t).

For a self-employed person whose income is lumpy, that built-in liquidity option is meaningful. You probably won’t use it — but having the door is worth something the SEP cannot offer.

Where the SEP actually catches up — and it isn’t $100K

The Solo 401(k) lead is not permanent at every income level. The employee deferral is a fixed $24,500; the employer slice scales with income. The lead shrinks in two stages as net SE income climbs:

• Stage one (about $255,000 net): the Solo 401(k) hits its own $72,000 §415(c) cap once the ~20%-of-net employer slice reaches roughly $47,500 (so $24,500 + $47,500 = $72,000). Above this point the Solo total stops growing, so the SEP’s still-growing employer contribution begins to close the gap.
• Stage two (about $387,000 net): the SEP’s own ~20%-of-net contribution finally reaches $72,000 too. Only here do the two plans truly tie, both sheltering $72,000 (the SEP cannot exceed $73,500 regardless). The $24,500 deferral advantage is fully erased.

So the crossover sits far above $100K. At Maya’s $100,000 net the Solo 401(k) leads by the full $24,500, and it keeps a meaningful lead all the way past $290,000 (where the advantage is still about $18,000). Below roughly $255,000 net, the Solo 401(k) always shelters $24,500 more. At Maya’s income, the SEP isn’t close.

What most people miss: the deadline asymmetry

The single most common planning error is assuming both plans are equally last-minute friendly. They are not, and the difference can cost a procrastinating solopreneur the entire $24,500 deferral.

• The employer slice is flexible for both. SECURE 2.0 §317 lets a sole proprietor open and fund a Solo 401(k) by the tax-filing deadline (April 15, or October 15 with extension) and still make the employer profit-sharing contribution for the prior year. A SEP can be opened and funded on the same extended timeline.
• The employee deferral is not retroactive in the same way. The $24,500 employee deferral must generally be elected during the calendar year and the plan in place by year-end (Dec 31) for the deferral to count. Open the Solo 401(k) before December 31 to lock in the deferral — waiting until April only preserves the employer portion.
• Practical move: if you are reading this in November or December, open the Solo 401(k) now. If you are reading it in March with no plan yet, you can still open a SEP — or a Solo 401(k) for the employer portion — but the deferral window for last year has likely closed.

This deadline gap is exactly why a SEP sometimes wins by default: not because it shelters more, but because the taxpayer waited too long to capture the deferral. Don’t lose $24,500 to a calendar.

Switching from a SEP you already have

Already funding a SEP and want the Solo 401(k) upgrade? You can. Stop SEP contributions, open a Solo 401(k), and roll the SEP-IRA balance into the Solo 401(k) tax-free. The reason to roll into the 401(k) rather than leaving it in an IRA is the backdoor Roth pro-rata trap (IRC §408(d)(2)): any pre-tax balance sitting in any traditional IRA — including a SEP-IRA — pollutes future backdoor Roth conversions. Moving the SEP money into the Solo 401(k) keeps your IRA balance at $0, so backdoor Roth stays clean.

The decision lever

At $100,000 of net self-employment income with no employees, open the Solo 401(k) and fund it before December 31. You capture the full $24,500 employee deferral the SEP can never match, you unlock a Roth deferral bucket, and you keep a $50,000 loan option in reserve — for a combined $43,087 of sheltered income against the SEP’s $18,587. The only scenario where the SEP truly ties is net income around $387,000, where the SEP’s own employer contribution finally reaches the $72,000 cap, or a March-deadline scramble where you already missed the deferral window. Neither applies to a moderate-income solopreneur planning ahead.

One caveat: the SEP’s administrative simplicity

The Solo 401(k) wins on dollars sheltered, but the SEP wins on paperwork, and for some solopreneurs that matters. A SEP-IRA opens in minutes at any brokerage with no plan document and no annual filing — ever. A Solo 401(k) requires a written plan document at setup, and once total plan assets cross $250,000 you must file Form 5500-EZ with the IRS each year (a one-page information return, not a tax). Miss the 5500-EZ and the penalty can run to $250 per day up to $150,000, though the IRS Form 14704 late-filer program caps the fix at $1,500 for a one-participant plan. For a designer like Maya sheltering $43,087 a year, the extra form is trivial against $24,500 of additional deduction — but a hands-off saver who refuses to touch a single IRS form may rationally accept the smaller SEP shelter for zero ongoing compliance.

The honest framing: at $100,000 net, the Solo 401(k) shelters $24,500 more and gives you Roth and loan options the SEP lacks, at the cost of one plan document today and (eventually) a one-page annual return. For nearly every moderate-income solopreneur planning ahead, that trade favors the Solo 401(k) decisively.