Retirement

Solo 401(k) vs SEP IRA: which one fits a reselling business?

Published October 17, 2026 10 min read

A solo 401(k) can save you the same money from far less profit than a SEP IRA. To put away $10,000, a SEP IRA needs about $53,800 of profit, and a solo 401(k) about $21,500 if you set aside $6,000 from your own pay. The SEP IRA is the simpler of the two to open and run.

What is the difference between a solo 401(k) and a SEP IRA?

A SEP IRA takes money from the business only, while a solo 401(k) lets you put money in twice. A SEP IRA only permits employer contributions, so you cannot set aside your own pay in it. A solo 401(k) is an ordinary 401(k) for an owner with no employees, or an owner and spouse, and the owner wears two hats: as the employee, you set money aside from your pay (a deferral), and as the employer, you add a contribution on top.

The dollar caps change every year, so they are linked here instead of copied. The IRS keeps the deferral limit, overall limit and catch-up amounts on one yearly limits page.

How much can a reseller put in a SEP IRA or a solo 401(k)?

The business's share tops out at about 18.6% of your profit in either account, and a solo 401(k) lets you add your own deferral on top. Here is how the 18.6% gets built, using the worksheets in chapter 5 of IRS Publication 560 (Pub 560), the IRS's guide to retirement plans for small business.

1. Start with your profitWhat you sold for, minus what the items cost you, the fees, the shipping and your other business costs. That is the bottom line of Schedule C, the tax form where a sole proprietor reports it.
2. Take off half of your self-employment taxSelf-employment tax is the Social Security and Medicare tax you pay on your own profit. It is 15.3% of 92.35% of your profit, about 14.1% overall. Half of that, about 7.1%, is deductible, so this step leaves about 92.9% of your profit. To see your own tax, work it out with the self-employment tax calculator for resellers.
3. Multiply what is left by 0.20The top plan rate is 25%, but your own contribution comes out of the earnings it is based on, so the IRS shrinks the rate to 0.25 ÷ 1.25 = 0.20. That is the most you can put in a SEP IRA for yourself, and the employer part of a solo 401(k).
4. Solo 401(k) only: add what you set aside from your own payThat is the employee hat's share. It can go up to the yearly deferral limit and never more than you earn, and the worksheet checks the total.

Run those steps at three profit levels:

Check the middle row by hand. Self-employment tax on $40,000 is $40,000 × 0.9235 × 0.153 = $5,651.82, and half is $2,825.91. That leaves $37,174.09, and 20% of it is $7,434.82, which rounds to $7,435. The shortcut holds at every level: 0.20 × 0.92935 = 0.18587, so the SEP IRA maximum is always about 18.6% of profit.

The $6,000 deferral in the last column is an example, not a target. It sits under the deferral limit and within what the worksheet allows at these profits, and no overall cap comes close. At filing time you deduct the contribution on Schedule 1, not Schedule C. It lowers your income tax but not your self-employment tax, which is figured on the Schedule C profit.

How much profit do you need to save $10,000 in a year?

About $53,800 for a SEP IRA, and about $21,500 for a solo 401(k) if $6,000 of the $10,000 is your own deferral. The gap is the point of the deferral: in a SEP IRA every dollar has to come out of the 18.6% share, while in a solo 401(k) the first $6,000 skips it.

The working: profit less half of self-employment tax is 0.92935 of profit (1 − 0.9235 × 0.153 ÷ 2). A $10,000 SEP contribution at 20% needs $50,000 of profit after that deduction, so $50,000 ÷ 0.92935 = $53,801. For the solo 401(k), $4,000 ÷ 0.20 = $20,000, and $20,000 ÷ 0.92935 = $21,520, with the $6,000 deferral covering the rest.

That compares ceilings. It does not mean you should save $10,000. Your profit is figured after what the items cost you, but you pay the contribution from cash you hold the day you fund it, and the same cash has to cover your next round of stock and the tax bills that arrive when nobody withholds for you. Money in a retirement account is not runway, as the runway page explains. SEP IRA contributions are optional each year, so you can skip a slow one.

When do you have to open and fund each one?

You can wait until the year is over and you know your profit, but the SEP IRA gives you the longer wait. That matters if your sales swing from month to month, because the year's profit may not be clear until the books close.

The catch with a solo 401(k) opened after year end: the part you set aside from your own pay has to be in the plan by the filing deadline, and an extension does not move that date. For the employer part to count toward the earlier year, there are extra conditions under “When Contributions Are Considered Made”. Read them before you rely on a late contribution.

What are the downsides of a SEP IRA and of a solo 401(k)?

The table at the top covers loans, Roth options and paperwork. Two downsides it leaves out:

• A SEP IRA gets costly once you hire. Whatever percentage you give yourself, you give your eligible employees. A SEP can require at most that an employee is 21 or older, has worked for you in at least 3 of the last 5 years and has earned the minimum pay (the IRS sets the amount).
• Your solo 401(k) deferral limit follows you. It is per person, not per plan, so money you defer at a day job uses up the same room.

Can you have a SEP IRA and a solo 401(k) at the same time?

Yes, the rules allow both for one business, but a second account does not buy you more room. The IRS counts a SEP as one of your retirement plans when it applies the overall yearly limit, so what you put into each is added together. And the IRS's easy SEP form, Form 5305-SEP, cannot be used if you have any qualified plan other than another SEP.

Rule of thumb: pick one account per business. If you own more than one business, extra rules can apply, which is a question for a tax professional. A 401(k) at a day job is a separate plan, but the limit on what you set aside from pay is shared across all your 401(k)s.

Which one fits your profit: $20,000, $40,000 or $60,000?

A rule of thumb: if the SEP IRA maximum at your profit is more than you want to save, take the SEP IRA, because it is simpler. If you want to save more than that, you need the deferral that only a solo 401(k) has. Here is that test at the three profits above:

Two things besides profit can tip it:

• Your sales swing a lot. A SEP IRA can be opened and funded after you know the year's number, which is the longest wait of the two.
• You may hire help. A SEP IRA gives eligible employees the same percentage you give yourself, and a solo 401(k) stops being solo. Run the numbers again before you hire.

A SIMPLE IRA also exists for small businesses, and the IRS describes it on its retirement plans for self-employed people page. A tax professional can run the worksheet on your actual return.

Where does retirement saving fit in your quit number?

Retirement saving is not in your quit number unless you add it. Any employer match stops when you quit, and saving the same amount yourself comes out of your profit.

Say you want to save $400 a month, the amount in the table above. At this site's assumed 27% tax rate, you need $400 ÷ 0.73 = $547.95, about $548 more profit a month to keep $400. Added to the example quit number of $6,088, that makes $6,636. The result errs on the cautious side, because the contribution is deductible and the quit number leaves the deduction out, as it does for health insurance. The 27% is the site's assumption, so swap in your own in the quit number calculator.

Do this today: find your Schedule C profit so far this year, run the steps on it, and write down the SEP IRA and solo 401(k) numbers side by side. Take that page to a provider or a tax professional before you open anything.

Sources

Every tax rule on this page was checked against these pages, read 8 October 2026.

• IRS: One-participant 401(k) plans
• IRS: Publication 560
• IRS: Simplified Employee Pension plan (SEP)
• IRS: Retirement plans for self-employed people
• IRS: 401(k) and profit-sharing plan contribution limits
• IRS: Self-employment tax
• IRS Topic 554
• IRS: Retirement plans FAQs regarding loans
• IRS: About Form 5500-EZ

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