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Educational and Tax Disclosure: This article is provided for general educational purposes only. It does not constitute retirement, pension, investment, tax, legal, accounting, or employment advice. State Employee Advisor Network is a marketing and referral platform operated by Revenx LLC. SEAN does not establish retirement plans, calculate deductible contributions, recommend account types, prepare tax filings, or provide individualized investment strategies. Plan eligibility and contribution calculations should be verified through the IRS, plan provider, employer, tax professional, or another authorized source.
A state employee may be able to establish a Solo 401(k) or SEP IRA when the employee also earns qualifying income through self-employment or a separate business.
State employment alone does not create eligibility for either plan.
Possible qualifying activities may include:
The business must generate eligible compensation or net earnings from self-employment. Investment income, interest, dividends, and ordinary passive income generally do not create retirement-plan contribution capacity by themselves.
The central difference is:
That difference can make a Solo 401(k) useful at lower or moderate business income levels. A SEP IRA may appeal to business owners prioritizing simpler setup and administration.
Neither is universally better.
A Solo 401(k) is a regular 401(k) plan covering:
It may also be called:
The IRS emphasizes that it is not a separate legal category of retirement plan. It follows the general rules applicable to 401(k) plans.
The owner participates in two capacities:
This allows elective deferrals plus employer contributions, subject to compensation and annual limits.
A Solo 401(k) generally stops being a one-participant plan when the business hires common-law employees who satisfy its eligibility requirements. At that point, additional participation, testing, disclosure, and administrative requirements may apply.
SEP stands for Simplified Employee Pension.
A SEP arrangement allows an employer to make contributions to individual SEP-IRAs established for eligible employees.
It may be used by:
A SEP IRA generally does not permit ordinary employee elective salary deferrals or age-based catch-up contributions.
The business decides each year whether to contribute. When it contributes, it generally must apply the same contribution percentage to all eligible employees covered under the plan.
That employee-coverage obligation can materially affect the cost for a business with workers.
The actual contribution is limited by business compensation, earned income, plan terms, and other retirement-plan participation.
For 2026, the general employee elective-deferral limit is:
$24,500
An eligible participant age 50 or older may generally make an additional:
$8,000 catch-up contribution
A participant who turns age 60, 61, 62, or 63 during 2026 may generally use the higher catch-up limit of:
$11,250
The higher age-60-to-63 amount replaces the standard $8,000 catch-up. It is not added to it.
The general combined employee-and-employer contribution limit is:
$72,000
Catch-up contributions can increase the maximum to:
These are ceilings, not amounts every owner can contribute.
The contribution cannot exceed the amount supported by eligible compensation and the applicable self-employed contribution calculation.
The owner may make two contribution types.
The owner may defer up to 100% of eligible compensation, subject to the annual employee limit.
The deferral may be:
The business may make an employer contribution.
For an incorporated business, this can generally be up to 25% of eligible W-2 compensation, subject to limits.
For a sole proprietor or partner, the calculation is more complicated because it uses adjusted net earnings after subtracting:
The effective maximum for an unincorporated self-employed person is commonly lower than 25% of unadjusted business profit.
IRS Publication 560 contains the applicable worksheet.
For 2026, SEP contributions generally cannot exceed the lesser of:
For a self-employed owner, the contribution must be calculated using adjusted net earnings rather than simply multiplying gross business revenue by 25%.
The live article states that SEP contributions are always limited to 20% of net income. That figure is often used as a simplified description for sole proprietors, but the actual calculation depends on business structure, compensation, and the IRS self-employed contribution formula.
SEP plans do not provide:
An older business owner therefore does not receive additional SEP contribution capacity solely because of age.
Assume a state employee earns $30,000 of eligible compensation from a separately owned incorporated business.
Under a Solo 401(k), the owner may potentially make:
Under a SEP IRA, the contribution is generally limited to the employer percentage of eligible compensation.
This means the Solo 401(k) may permit a larger contribution at lower business-income levels because the employee deferral is added before reaching the overall plan ceiling.
The exact calculation depends on:
A state employee may already participate in:
Participation in a state plan does not automatically prevent the employee from establishing a retirement plan for a legitimate side business.
However, contribution limits can interact.
The $24,500 employee limit is generally a per-person limit across 401(k) and 403(b) plans.
For example, someone who defers $18,000 into a state-employer 403(b) would generally have only $6,500 of the regular 2026 elective-deferral limit remaining for a Solo 401(k).
Creating another 401(k) does not create another personal employee-deferral limit.
A governmental 457(b) generally has a separate elective-deferral limit from 401(k) and 403(b) plans.
That distinction can be important for state employees with side-business income.
Employer contributions to a Solo 401(k) are calculated separately from the owner’s employee deferral. Related-business and controlled-group rules can affect whether businesses and plans must be combined.
The existing 401(a) plan guide and 401(a) vs. 403(b) comparison provide background on common public-sector plans.
A Solo 401(k) should not be described as automatically better than a 401(a). They may be funded by different employers, use different contribution structures, and serve different employment income.
A Solo 401(k) is generally available only when the business has no eligible common-law employees other than the owner’s spouse.
Independent contractors working with the business do not automatically disqualify the plan, but a worker’s classification must be legally correct.
If the business hires an eligible employee, the plan may need to:
Improperly excluding an eligible employee can create a qualification failure requiring correction.
A SEP may cover a business owner and eligible employees.
Using the IRS model SEP document, an employer generally cannot exclude an employee who:
The employer may use less restrictive requirements.
Certain union employees and nonresident aliens may be excluded under applicable rules.
When the employer contributes 15% for the owner, it generally must contribute the same percentage for every covered eligible employee.
This can make a SEP substantially more expensive after the business hires staff.
The live article incorrectly says a SEP IRA is more administratively demanding and may require Form 5500-EZ.
The opposite is generally true.
A Solo 401(k) requires:
Form 5500-EZ is generally required when total one-participant plan assets reach at least $250,000 at the end of the plan year.
A final Form 5500-EZ is generally required when the plan terminates, even when assets are below that threshold.
A SEP is generally established using:
The employer must provide required information to eligible participants and deposit contributions into their SEP-IRAs.
A SEP generally does not file Form 5500.
This simpler administration is one of its primary distinctions from a Solo 401(k).
SEP employer contributions are generally due by the employer’s federal income-tax return deadline, including extensions.
Solo 401(k) deadlines depend on:
Employer contributions generally may be made by the business tax-return deadline, including extensions.
Employee-deferral elections and deposits follow separate rules. A self-employed owner should not assume every Solo 401(k) contribution can be decided after the year ends.
The plan provider and tax professional should confirm deadlines before year-end.
A Solo 401(k) may permit designated Roth elective deferrals.
Roth treatment is not automatic. The plan document must include the feature.
Roth deferrals:
Current law also permits Roth SEP contributions. However, practical availability can depend on the financial institution, plan document, reporting systems, and provider implementation.
The live article’s statement that SEP IRAs categorically cannot offer Roth contributions is therefore outdated.
Roth treatment should not be described simply as “tax-free growth and withdrawals.” Distribution qualification, account type, reporting, and other tax rules still apply.
A Solo 401(k) may permit participant loans when the plan document includes them.
The maximum permitted loan is generally the lesser of:
A limited exception may permit up to $10,000 when 50% of the vested balance is smaller, but plans are not required to provide that exception.
Loans generally require:
Failure to follow the repayment terms can cause a taxable deemed distribution.
A SEP IRA cannot offer participant loans. Using SEP IRA assets as collateral or borrowing from the account can create a prohibited transaction.
Loan availability should not be treated as automatically beneficial.
The live article says SEP IRAs do not require RMDs and that Solo 401(k) RMDs begin at age 72.
Both statements are outdated.
Traditional SEP IRA balances are generally subject to IRA required minimum distribution rules.
Traditional Solo 401(k) balances are also generally subject to workplace-plan RMD rules.
The applicable starting age depends on date of birth and current federal law. Roth account treatment can differ.
A business owner should review RMD requirements separately for:
Neither plan type automatically provides broader or better investments.
Available choices depend on the financial institution and plan provider.
Possible investments may include:
Some custom Solo 401(k) documents permit alternative investments. That does not make every alternative investment appropriate or legally permissible.
Both plans must avoid prohibited transactions involving:
Compare:
A SEP is not always cheaper, and a Solo 401(k) is not always more expensive.
A Solo 401(k) may be relevant when:
These factors do not establish that the plan is appropriate.
A SEP IRA may be relevant when:
A SEP can become expensive when the business must contribute the same percentage for multiple eligible employees.
State Employee Advisor Network is a marketing and referral platform operated by Revenx LLC. We connect consumers with independent, licensed financial professionals.
SEAN does not establish Solo 401(k) or SEP plans and does not provide retirement planning, investment advice, tax advice, legal advice, accounting, plan administration, or employment advice.
Professionals participating in the network are independent third parties. They are not employees or representatives of SEAN. All services, analysis, guidance, and recommendations come solely from the professional.
The introduction is free to consumers. Revenx LLC receives compensation from participating professionals for marketing and referral services. This creates a financial incentive to refer consumers to participating professionals.
Consumers should independently evaluate each professional’s licensing, registrations, small-business retirement-plan experience, services, fees, compensation, conflicts of interest, and disciplinary history.
Readers can review the 401(k) professional and retirement planning referral pages.
Schedule a free introduction to an independent professional.
A Solo 401(k) and SEP IRA can both support retirement savings from legitimate self-employment or business income.
A Solo 401(k) generally offers:
A SEP IRA generally offers:
The correct comparison depends on compensation, business structure, employees, existing workplace plans, age, desired contribution, Roth availability, fees, and administrative capacity.
Neither plan guarantees tax savings, investment growth, sufficient retirement income, or a better outcome.
Possibly. The employee must have qualifying self-employment or separate business income and generally cannot have eligible common-law employees in that business other than a spouse.
The general employee deferral limit is $24,500, while combined employee and employer contributions can generally reach $72,000 before catch-up contributions, subject to compensation.
Employer contributions generally cannot exceed the lesser of 25% of eligible compensation or $72,000.
Yes, when otherwise eligible, but the personal employee-deferral limit is generally shared across the 403(b) and Solo 401(k).
No. Ordinary SEP plans do not permit employee elective deferrals or age-based catch-up contributions.
It may when the plan document includes a loan feature. The maximum is generally limited to 50% of the vested balance or $50,000, whichever is less.
No. Form 5500-EZ applies to certain one-participant qualified plans, including Solo 401(k)s, rather than ordinary SEP arrangements.
Neither is universally better. A Solo 401(k) may allow larger contributions at lower income levels, while a SEP IRA may provide simpler administration.
Jeremy contributes regularly to State Employee Advisor Network. With a deep understanding of state pension systems and public-sector benefits, he offers readers insights and strategies to optimize their retirement outcomes.
State Employee Advisor Network is a marketing and referral platform operated by Revenx LLC. We connect consumers with independent, licensed financial professionals. We are not a registered investment adviser, broker-dealer, or insurance agency, and we do not provide investment, legal, or tax advice.
All financial services are provided solely by third-party professionals. Revenx LLC receives compensation from financial professionals for marketing and referral services, which may create a financial incentive to refer individuals to participating professionals. Users should independently evaluate any financial professional before engaging their services.
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