The $72,000 Question: Maximum Contributions for
Solo 401k vs SEP IRA

For 2026, the overall contribution limit for a Solo 401k has risen to $72,000—and if you are age 50 or older, catch-up contributions push that ceiling all the way to $80,000 (or $83,250 if age 60-63). The SEP IRA carries the same $72,000 headline number, yet the two plans could not be more different in practice.

The $72,000 Limit: What It Really Means for Self-Employed Individuals

Both the Solo 401k and the SEP IRA share the same 2026 overall contribution ceiling of $72,000. But the way each plan gets you to that ceiling—and what happens once you’re there—tells a very different story for solopreneurs.

Do You Need $72,000 of Income to Contribute $72,000?

A question heard frequently during My Solo 401k Financial webinars: “Does the $72,000 contribution limit mean I need $72,000 of self-employment income?” The short answer is yes—you cannot save more than you earn. The purpose of the Solo 401k is to allow self-employed individuals to shelter their earned self-employment income, so the plan will not permit contributions that exceed your actual compensation.

How Self-Employment Compensation Is Calculated

For sole proprietors, the contribution calculation works as follows:

1. Start with net income from Schedule C, Line 31.
2. Subtract one-half of the self-employment tax from that figure.
3. The result is your self-employment compensation—the figure used to determine maximum allowable Solo 401k contributions.

S-Corp owners follow a different formula: contributions are based on W-2 wages paid by the S-Corp rather than Schedule C net income.

Catch-Up Contributions for Age 50 and Older in 2026

If you are age 50 or older by December 31, 2026, you are eligible for a catch-up contribution on top of the $72,000 overall limit. For 2026 that catch-up amount is $8,000 (or $11,250 if age 60-63), bringing your potential maximum to $80,000 (or $83,250 if age 60-63). The SEP IRA does not offer catch-up contributions—a significant disadvantage for solopreneurs who are intensifying retirement savings later in their careers.

The Mega Backdoor Roth: The Solo 401k’s Biggest Advantage Over the SEP IRA

The Mega Backdoor Roth Solo 401k strategy is only available with a plan document that expressly allows both voluntary after-tax contributions and the subsequent transfer of those funds to a Roth account. A standard SEP IRA or a basic plan provided directly by a brokerage like Fidelity does not support this strategy. My Solo 401k Financial was the first Solo 401k provider to offer a plan supporting the Mega Backdoor Roth—and no provider has more experience with it.

How the Mega Backdoor Roth Works: Two Steps

The two-step process requires two dedicated accounts at your custodian (e.g., Fidelity):

1. Step 1 — Voluntary After-Tax Account: Make the after-tax contribution to a separate after-tax brokerage account opened under the plan’s EIN. This contribution is not reported on your personal or business tax return or W-2.
2. Step 2 — Roth Solo 401k Account: Transfer the after-tax funds to your Roth Solo 401k (or Roth IRA). The conversion is a reportable event—reported by the plan on a Form 1099-R. My Solo 401k Financial handles this reporting at no additional charge for clients who submit online form in a timely fashion.

Why does this two-step process matter? If you left the money sitting in the after-tax account, any investment gains would be taxable. By moving funds to the Roth account promptly, you lock in the potential for tax-free growth.

Already Have a Solo 401k Elsewhere? You Can Upgrade (Restate) Your Plan

Many solopreneurs start with a basic Solo 401k at a brokerage—one that does not allow the Mega Backdoor Roth—and later want to unlock the full power of the strategy. The good news: you don’t need to open a brand-new plan. You can restate your existing plan to a My Solo 401k Financial plan document.

SECURE Act Tax Credits: Another Reason the Solo 401k Beats the SEP IRA

Under the SECURE Act, solopreneurs who establish a new Solo 401k are eligible for a $500 per year tax credit for up to three years of plan establishment. This credit is not available to SEP IRA holders. If you set up a Solo 401k through My Solo 401k Financial in 2026, that’s $500 back—and if you maintain the plan in subsequent years, you continue to accumulate the credit.

Alternative Investments: Real Estate and More

A Solo 401k with the right plan documents (like those provided by My Solo 401k Financial) allows investment in real estate, private equity, private lending, and other alternative assets—not just stocks and bonds available through a standard brokerage account. A SEP IRA is limited by whatever the custodian permits, and alternative investment custodians for SEP IRAs often charge higher fees.

For real estate investing inside a Solo 401k, clients typically open both a brokerage account (for market investments) and a dedicated bank account for the plan. The bank account provides ACH capability, debit card access, and certified bank check functionality—all of which are essential for real estate closings and property management transactions.