2026-2027 SEP IRA and Solo 401(k) Contribution Limits, Rules, and Comparison

If you’re self-employed and not taking full advantage of a SEP IRA or Solo 401(k), you’re likely leaving a significant amount of tax-deferred savings on the table every year.

I’ve talked to a lot of freelancers and small business owners over the years who are diligently contributing to a regular IRA — $7,500 a year, doing the right thing — while sitting on self-employment income that would qualify them to shelter three, four, even ten times that amount. The SEP IRA is one of the most powerful and underused retirement accounts in the tax code, precisely because the contribution limit scales with your income rather than being a fixed dollar cap.

The pitch is simple: contribute up to 25% of compensation (or roughly 20% of net self-employment income after SE tax), deduct the full amount, and let it grow tax-deferred. No complicated setup, no annual filing requirements, no administrative headaches. You can even open one and fund it as late as your tax filing deadline with extensions — so if you had a good year and are looking for ways to reduce a tax bill before October, a SEP IRA is one of the cleanest options available.

This post also covers the Solo 401(k), which I think more self-employed people should seriously consider. The contribution limit is the same $72,000, but the structure is different in a way that significantly favors lower-income earners and anyone who wants catch-up contributions or a Roth option. I’ll show you the math on when each plan wins.

Below are the 2026 limits, confirmed by IRS Notice IR-2025-111.

2026 SEP IRA Contribution Limits

Looking ahead to 2027: The SEP IRA limit tracks the Section 415(c) defined contribution cap. At ~2.5% COLA it should move to approximately $74,000, with the compensation cap rising to $370,000. Confirmed figures arrive with the October/November IRS announcement.

The SEP IRA limit is the same as the total 401(k) defined contribution cap (IRC Section 415(c)) — they move together.

Who Can Open a SEP IRA?

Any self-employed individual, freelancer, or small business owner can open a SEP IRA — including those with full-time W-2 jobs elsewhere. There’s no minimum income requirement, and there’s no age cap for contributions (as long as you have earned income).

If you’re a solo business owner with no employees, it’s simple: you contribute on your own behalf. If you have employees, the rules get more complex: you must contribute the same percentage of compensation for all eligible employees as you do for yourself.

Eligible employees include anyone who:

• Is at least 21 years old
• Has worked for you in at least 3 of the last 5 years
• Earned at least $750 in compensation from you during the year (2026 threshold)

You can use less restrictive eligibility requirements if you want to include employees sooner.

Self-Employed Contribution Formula

If you’re self-employed, the math isn’t simply 25% of your gross income. The actual formula accounts for the fact that you deduct half of your self-employment (SE) tax before calculating the contribution:

1. Calculate your net self-employment income (Schedule C profit)
2. Multiply by 92.35% (to deduct the employer portion of SE tax)
3. Multiply the result by 20% (which effectively equals ~20% rather than 25% because the contribution itself reduces the base)

The IRS publishes a worksheet in Publication 560 that walks through this. Most tax software handles it automatically when you enter your Schedule C income.

Quick approximation: For most self-employed people, the effective contribution rate on gross self-employment income is roughly 18–20%.

Example: Self-Employed SEP IRA Calculation

Kim runs a consulting business and earns $250,000 in net self-employment income in 2026.

• Step 1: $250,000 × 92.35% = $230,875 (after SE tax deduction)
• Step 2: The contribution rate is effectively ~20% of net profit
• Contribution: roughly $46,175

That’s well under the $72,000 cap, so the cap doesn’t limit her here. She can also contribute to a traditional IRA on top of this (subject to deductibility phase-outs if she has no other workplace plan — but a SEP IRA counts as a workplace plan, so her deductibility phases out above $81,000 AGI as a single filer).

Ryan earns $400,000 from his S-corp. His W-2 from the S-corp is $360,000 (the compensation cap). 25% of $360,000 = $90,000, but that exceeds the $72,000 limit, so his SEP IRA contribution is capped at $72,000.

Subscribe or follow us and I’ll update this page when the 2027 IRS limits are released.

Solo 401(k) for the Self-Employed: How It Compares to a SEP IRA

The solo 401(k) — also called a one-participant 401(k) or individual 401(k) — is arguably the most powerful retirement vehicle for self-employed workers with no employees. It’s available to sole proprietors, freelancers, partners, and business owners whose only “employees” are themselves (and optionally their spouse).

Unlike the SEP IRA, which is funded entirely through employer-style contributions, the solo 401(k) has two distinct components:

• Employee deferral — up to $24,500 in 2026 (same ceiling as a traditional 401(k))
• Employer profit-sharing — up to 25% of W-2 compensation (or effectively ~20% of net SE income for sole proprietors)

The combined cap is $72,000 — same as the SEP IRA. But because the solo 401(k) includes a full $24,500 employee deferral before profit-sharing even starts, it reaches that ceiling much faster at lower income levels.

2026 Solo 401(k) Contribution Limits

The SEP IRA has no catch-up provision — there’s no bonus for being 50+. A solo 401(k) can be worth significantly more in total annual contributions for older workers at the same income level.

SEP IRA vs. Solo 401(k): Side-by-Side

When the Solo 401(k) Wins vs. the SEP IRA

Solo 401(k) wins at lower income levels. The employee deferral component is fixed at $24,500 regardless of income. A SEP IRA contribution is capped at ~20% of net SE income — so at $50,000 net income, that’s only about $9,900. The solo 401(k) allows roughly $33,000+ at the same income. This gap closes as income rises.

Solo 401(k) wins if you want catch-up contributions. The SEP IRA has no catch-up. If you’re 50+, the solo 401(k) adds $8,000 more per year on top of regular limits. If you’re 60–63, that jumps to $11,250 — a substantial difference.

Solo 401(k) wins if you want a Roth option. A SEP IRA is pre-tax only. A Roth solo 401(k) — available at Fidelity, Vanguard, Schwab, and most major brokerages since SECURE 2.0 — lets contributions grow and withdraw tax-free.

SEP IRA wins if you have eligible employees. A solo 401(k) is strictly for self-employed owners with no non-spouse employees. If you have anyone on payroll who meets the eligibility rules (age 21+, worked 3 of 5 prior years, earned $750+), the solo 401(k) isn’t available.

SEP IRA wins for last-minute filers. You can open and fully fund a SEP IRA up to October 15 (with extension) for the prior tax year. A solo 401(k) must be established by December 31 of the plan year — you can’t set one up in February and fund it retroactively.

Examples: Which Plan Wins?

Example 1: Lower income, younger freelancer

Marcus, 38, earns $80,000 net SE income in 2026.

• SEP IRA: $80,000 × ~20% = ~$16,000 maximum contribution.
• Solo 401(k): $24,500 employee deferral + profit-sharing (~20% × adjusted income) = roughly $33,000–$35,000 total.

For Marcus, the solo 401(k) doubles his contribution capacity. The SEP IRA would be leaving money on the table.

Example 2: High income, employee on payroll

Carol, 52, earns $400,000 from her design firm, which now has one part-time employee who meets the eligibility rules.

The solo 401(k) is off the table — it doesn’t allow non-spouse employees. She needs a SEP IRA (or a traditional 401(k)/profit-sharing plan), but must contribute the same percentage to her employee’s SEP as she takes for herself. Her SEP IRA contribution: $72,000 (25% × $360,000 compensation cap).

Example 3: Near-retiree maximizing catch-up

Jim, 62, earns $250,000 from freelance consulting in 2026.

• SEP IRA: ~$46,000 (~20% of net SE income). No catch-up. Full stop.
• Solo 401(k): $24,500 employee deferral + $11,250 super catch-up (60–63 SECURE 2.0 provision) + profit-sharing contribution = $83,250 combined ceiling.

At Jim’s income level, the solo 401(k) allows roughly $37,000 more — potentially tens of thousands of dollars in additional tax-deferred savings per year.

Note: contributions to a SEP IRA and a solo 401(k) from the same business count toward the same combined $72,000/$83,250 ceiling — they’re not separate caps. If you have a W-2 job with its own 401(k) plus a side business with a SEP IRA, the interaction is more nuanced — a tax professional is worth the conversation.

See our detailed breakdown of employee, employer, and super catch-up limits: 2026-2027 401(k), 403(b), and TSP Contribution Limits.

SEP IRA Contribution Deadlines

Unlike 401(k) plans, the SEP IRA contribution deadline is your tax filing deadline, including extensions:

• If you file by April 15: contributions due April 15
• If you get an automatic 6-month extension: contributions due October 15

This is a big advantage — you can wait until after the tax year ends to decide how much to contribute, once your income is known. You can even open a new SEP IRA account and fund it by the extension deadline.

Common Issues to Watch Out For

1. Using gross self-employment income instead of net. The 25% (effective ~20%) is applied to your net self-employment income — after all business expenses and after deducting half of your SE tax. Using gross revenue overstates your allowed contribution and can result in an excess that’s subject to a 10% excise tax.

2. Thinking you avoid mandatory employee contributions by using a SEP IRA. If you have employees, you must fund their SEP IRAs at the same percentage you use for yourself. If you contribute 20% of your compensation to your own SEP, you must contribute 20% of each eligible employee’s compensation to their SEP. This is why many small business owners with employees switch to a 401(k) or SIMPLE IRA instead — both offer more flexibility around employer contributions.

3. Missing the catch-up opportunity that doesn’t exist. SEP IRAs have no catch-up contribution provision — there’s no bonus for being 50+ as there is with a 401(k) or traditional IRA. The $72,000 cap is the cap, regardless of age.

4. Contributing past the cap. Excess SEP IRA contributions are subject to a 10% excise tax on the excess per year until corrected. The correction process requires removing the excess contribution plus earnings, which can get complicated.

5. Forgetting the SEP IRA counts as a workplace plan. Having a SEP IRA (even as a self-employed person) means your traditional IRA deduction phases out above the standard threshold — $81,000 to $91,000 for single filers in 2026.

Looking Ahead: 2027

The SEP IRA limit tracks the Section 415(c) defined contribution cap. Based on ~2.5% COLA trends, the 2027 limit is projected at $74,000 with a compensation cap of $370,000. Official figures typically arrive in October or November 2026.

Also worth noting: SEP IRA contributions reduce your AGI, which can help you qualify for the Saver’s Credit if you’re near an income threshold — a credit worth up to $1,000 per person on top of the deduction.

For the full picture of 2026 retirement limits, see the 401(k) and IRA contribution limits hub.