| Net earnings | SEP IRA max | Solo 401(k), under 50 | Solo 401(k), age 50 and older | Solo 401(k), ages 60 to 63 | Extra vs SEP, under 50 |
|---|
| $50,000 | $10,000 | $34,500 | $42,500 | $45,750 | +$24,500 |
| $100,000 | $20,000 | $44,500 | $52,500 | $55,750 | +$24,500 |
| $150,000 | $30,000 | $54,500 | $62,500 | $65,750 | +$24,500 |
| $237,500 | $47,500 | $72,000 | $80,000 | $83,250 | +$24,500 |
| $300,000 | $60,000 | $72,000 | $80,000 | $83,250 | +$12,000 |
| $360,000 | $72,000 | $72,000 | $80,000 | $83,250 | $0, catch-ups only |
At $300,000 of net earnings, the SEP maximum is $60,000 and the solo 401(k) maximum is $72,000. The gap between them is $12,000.
At $360,000, both plans reach $72,000, and only catch-up contributions remain. Those catch-ups are $8,000 at age 50 and older, or $11,250 at ages 60 to 63. A SEP plan allows no catch-up contributions.
Which early-withdrawal exceptions apply to which plan?
The IRS table of exceptions to the 10% additional tax sorts accounts into two columns. A SEP-IRA sits with IRAs and SIMPLE IRAs, which are savings incentive match plans for employees. A 401(k) sits with other qualified plans.
Three exceptions apply to IRAs, SEP-IRAs and SIMPLE IRAs, but not to 401(k) plans. The first is the $10,000 qualified first-time homebuyer exception. The second covers qualified higher-education expenses. The third covers health insurance premiums paid while you are unemployed.
One exception runs the other way. The separation-from-service exception applies when the employee separates from service during or after the year the employee reaches age 55. It covers 401(k) plans, but not IRA, SEP-IRA or SIMPLE IRA accounts.
The age 59 1/2 exception applies to both. For the health coverage side, read health insurance for the self-employed.
That split gives you a simple rule. If you might need tuition money or a first home before 59 1/2, the SEP is the safer account. If you might need access when you stop working at 55 or older, the 401(k) plan provides it. The IRS exceptions page has the full list.
| IRS exception to the 10% tax | SEP IRA | Solo 401(k) |
|---|
| Age 59 1/2 | Yes | Yes |
| Separation from service at 55 and older | No | Yes |
| First-time homebuyer, up to $10,000 | Yes | No |
| Qualified higher-education expenses | Yes | No |
| Health insurance premiums while unemployed | Yes | No |
| Emergency personal expense, up to $1,000 | Yes | Yes |
| Domestic abuse victim, up to $10,000 | Yes | Yes |
| Terminal illness, divorce transfers, corrective distributions | No | Yes |
What are the deadlines for setting up and funding each plan?
The SEP deadline follows your business tax return. You can set up a SEP for a year as late as your business income tax return due date. Extensions count, so you can fund the plan later. Contributions must be deposited by that same due date.
A solo 401(k) normally runs for a calendar year. Its set-up and deferral dates can differ from the SEP date, so check your plan document.
Paperwork is where the two plans part company again. Generally the employer has no filing requirements for a SEP, including no Form 5500 return. A SEP is set up with a written agreement or the Form 5305-SEP prototype. That prototype is never filed with the IRS.
Contributions are always 100% vested. You do not have to contribute every year, but if you do, the employer must fund every eligible employee's SEP-IRA.
A one-participant 401(k) has a different rule. It generally must file an annual report on Form 5500-EZ. That filing applies only if it has $250,000 or more in assets at year end. A plan with fewer assets may be exempt.
Should you choose a traditional or Roth version?
Both plan types now offer a Roth option. A SEP IRA may be traditional or Roth for tax years beginning after December 31, 2022. A solo 401(k) plan may allow Roth contributions, subject to the same dollar limit as pre-tax deferrals.
A traditional contribution lowers this year's taxable income, while a Roth contribution is made after tax. A lower bracket now with higher brackets later favors traditional. A higher bracket now with lower brackets later favors Roth.
Compare the IRA side in Roth IRA vs 401(k): which one wins on taxes? before you pick a version.
What should you do next?
- Write down your net earnings for 2026 and find that row in the savings table.
- Decide which withdrawal rules you may need before you choose a plan.
- For a SEP, sign a written agreement and fund it by your business return due date.
- For a solo 401(k), adopt a plan document and set a salary deferral of up to $24,500.
- Check your plan assets each year, since Form 5500-EZ filing starts at $250,000.
- Rules change, and this is general information, not advice. Ask a tax professional to confirm your numbers.
An individual 401(k) is a one-participant 401(k) plan, the IRS name for a solo 401(k). It adds $24,500 of employee deferrals on top of the employer contribution. A SEP IRA is simpler, needs no IRS filing, and keeps the IRA-style withdrawal exceptions. Your income and how early you need the money settle the individual 401k vs sep ira choice.
Photo: jarmoluk, Pixabay Content License, via Pixabay (https://pixabay.com/photos/money-bills-calculator-to-save-256312/)
Fazlur Rahman
