David has run an independent consulting practice for twelve years, mostly working with mid-sized manufacturing companies on operations strategy. His SEP IRA has felt like the "grown-up" choice the whole time — higher limits than a regular IRA, simple to administer, no employees to worry about. At $180,000 in net income this year, he assumed he was already contributing close to the maximum any self-employed retirement account would allow.
He wasn't. The gap between what his SEP IRA allows and what a Solo 401(k) would allow at the same income came to $32,500 — money he's been leaving unclaimed every year without realizing there was a larger option available.
Where David's SEP IRA Tops Out
At David's income level, the SEP IRA formula (roughly 20% of net self-employment income for a sole proprietor) works out to:
$180,000 × 20% = $36,000 maximum SEP IRA contribution
This is a meaningful contribution — David has been maxing it out for the past several years, which is exactly why he assumed he'd found the ceiling.
What a Solo 401(k) Adds at the Same Income
The Solo 401(k)'s structure gives David two separate contribution buckets instead of one:
- Employee deferral: $24,500 (2026 limit), independent of income
- Employer contribution: The same ~20% formula, applied to $180,000: $36,000. Combined with the employee deferral that comes to $60,500, which stays under the $72,000 overall cap — so at David's income neither piece gets trimmed
- Catch-up contribution: Because David is 55, he qualifies for the standard 50+ catch-up of $8,000 on top of the above
Total: $24,500 + $36,000 + $8,000 = $68,500
The Gap
| SEP IRA | Solo 401(k) | |
|---|---|---|
| Base contribution | $36,000 | $60,500 (employee + employer) |
| Catch-up (age 55) | Not available | $8,000 |
| Total | $36,000 | $68,500 |
Difference: $32,500 per year — nearly double what David's SEP IRA allows, at an income level where he'd assumed he was already near the ceiling of what any self-employed retirement account could offer.
Why High Earners Often Miss This Gap Entirely
David's situation is common among consultants and established freelancers in this income range: the SEP IRA feels sufficient because it's genuinely a large-sounding number ($36,000 is a substantial contribution by most standards), so there's rarely an obvious signal prompting a second look. The Solo 401(k)'s advantage isn't visible unless someone actually runs both calculations side by side — which is exactly what most people never do once they've settled into a retirement account that "seems fine."
What Changes When David Turns 60
There's a detail worth flagging for David specifically, since he's close to it: starting at age 60, the standard $8,000 catch-up increases to an enhanced "super catch-up" of $11,250 for ages 60 through 63, available only in a Solo 401(k), not a SEP IRA. If David switches now, he won't just close this year's $32,500 gap — he'll also be positioned to claim an additional $3,250 in catch-up room once he reaches 60, a detail that has no equivalent path in a SEP IRA at any age.
The Deadline That Applies Either Way
Like any Solo 401(k) setup, the account itself needs to be established by December 31 of the tax year for that year's contributions to apply — the funding can happen later, up to the tax filing deadline, but the account needs to exist by year-end. For someone in David's position, switching this year rather than waiting means capturing this year's $32,500 gap immediately rather than losing another year to the SEP IRA's lower ceiling.
Run Your Own Numbers
David's case is a reminder that "I'm already maxing out my SEP IRA" and "I'm saving the maximum I can" are not the same statement. See exactly how large your own gap is with our Solo 401(k) vs SEP IRA Calculator — the difference tends to be largest precisely for people who assumed their current account was already the ceiling.
Frequently Asked Questions
Can I move money from my existing SEP IRA into a Solo 401(k)?
Yes. SEP IRA balances can generally be rolled into a Solo 401(k) as a direct trustee-to-trustee transfer, which avoids withholding and keeps the money tax-deferred. The rollover is separate from the contribution limits — moving an existing balance does not use up any of the $68,500 David can contribute for the year. One practical reason people do it: consolidating into the Solo 401(k) leaves no pre-tax IRA balance behind, which matters if a backdoor Roth IRA is also part of the plan.
Do I have to close my SEP IRA to open a Solo 401(k)?
No. You can hold both accounts, but you cannot get two full sets of contributions out of them. The $72,000 overall limit applies per business, across all plans that business sponsors, so contributing to both simply splits the same ceiling. For a sole proprietor with no employees, the Solo 401(k) reaches that ceiling at a lower income than the SEP IRA does, which is the entire source of David's $32,500 gap.
Does the $32,500 gap apply at every income level?
No, and this is the part most comparisons get wrong. The gap is created by the Solo 401(k)'s employee deferral, which is a flat $24,500 regardless of income. At lower incomes that flat amount dwarfs the ~20% employer formula, so the gap is proportionally largest. Once net income is high enough that the ~20% formula alone reaches the $72,000 cap — roughly $360,000 for a sole proprietor — both accounts hit the same ceiling and the only remaining Solo 401(k) advantage is the catch-up contribution.
What if I have employees?
A Solo 401(k) is only available to a business with no employees other than the owner and a spouse. Hiring a non-spouse employee who meets the plan's eligibility rules generally disqualifies the Solo 401(k), and the plan has to convert to a regular 401(k) or be terminated. David runs a solo consulting practice, which is why the option is open to him — this is the most common reason the comparison does not apply to an otherwise similar business.
Is the December 31 deadline for opening the account or for funding it?
For opening it. The Solo 401(k) has to be established by December 31 of the tax year for that year's contributions to count. The money itself can go in later — employer contributions can be funded up to the tax filing deadline including extensions. Missing December 31 does not just delay the contribution; it forfeits that tax year's contribution room entirely, which is why waiting costs David a full year of the gap rather than a few months.