If you’re self-employed in New York City, the Solo 401k vs SEP IRA decision is one of the most valuable tax choices you’ll make this year. Both plans let you put away large amounts for retirement and cut your federal, New York State, and New York City income taxes. But they work differently, and for most NYC business owners, one plan comes out clearly ahead.
In this guide, we’ll walk through how each plan works, how much you can contribute in 2026, and why the Solo 401(k) often wins: you can usually contribute more at the same income, and it keeps the door open for a clean backdoor Roth IRA if your income is too high to contribute to a Roth directly.
What Is a SEP IRA?
A SEP IRA (Simplified Employee Pension) is a retirement account that only the employer funds. If you’re self-employed, you are the employer, so you make the contribution on your own behalf.
SEP IRAs are popular because they’re simple. There’s no annual IRS filing, you can open one at almost any brokerage in a few minutes, and you can open and fund it as late as your tax return due date, including extensions.
The catch is that all contributions are based on a percentage of your pay. For an S corp owner, that’s up to 25% of your W-2 salary. For a sole proprietor or single-member LLC, it comes to roughly 20% of your net self-employment earnings. There is no separate “employee” contribution, so at moderate income levels, the dollar amount can be limited.
What Is a Solo 401(k)?
A Solo 401(k), sometimes called an individual 401(k), is a 401(k) plan for a business owner with no full-time employees other than a spouse. It’s built for the self-employed: sole proprietors, single-member LLCs, partners, and S corp owners.
The key advantage is that you contribute in two roles:
- As the employee, you can defer up to $24,500 of your pay in 2026, either pre-tax or as Roth.
- As the employer, your business can add a profit-sharing contribution of up to 25% of your W-2 salary (S corp) or about 20% of your net self-employment earnings (sole proprietor or LLC).
Those two pieces stack. That’s why a Solo 401(k) usually allows a much larger contribution than a SEP IRA at the same income.
Solo 401k vs SEP IRA Contribution Limits for 2026
Both plans share the same overall ceiling for 2026: $72,000 per person. The difference is how quickly you reach it.
- SEP IRA: employer contribution only, up to 25% of W-2 salary or about 20% of net self-employment earnings, capped at $72,000.
- Solo 401(k): $24,500 employee deferral plus the same employer percentage, combined cap of $72,000 (before catch-up contributions).
- Compensation limit: only the first $360,000 of pay counts toward the percentage calculation in either plan.
Solo 401k vs SEP IRA Example: How Much Can You Contribute?
Here’s how the numbers play out for a few NYC business owners under age 50 in 2026. Self-employment figures are approximate and account for the deduction for half of self-employment tax.
| Business owner | SEP IRA | Solo 401(k) | Extra with Solo 401(k) |
|---|---|---|---|
| Sole proprietor, $60,000 net profit | about $11,150 | about $35,650 | about $24,500 |
| Sole proprietor, $150,000 net profit | about $27,880 | about $52,380 | about $24,500 |
| S corp owner, $100,000 W-2 salary | $25,000 | $49,500 | $24,500 |
At these income levels, the Solo 401(k) lets you shelter roughly $24,500 more per year. For a New York City resident paying federal, New York State, and NYC income tax, that extra deduction can be worth thousands of dollars in tax savings every year.
At very high incomes, both plans can hit the $72,000 cap, and the contribution gap closes. But even then, the Solo 401(k) still has advantages a SEP IRA can’t match, starting with the backdoor Roth.
The Backdoor Roth Advantage for High-Earning New York City Business Owners
For 2026, you can’t contribute directly to a Roth IRA if your modified adjusted gross income is above $168,000 (single) or $252,000 (married filing jointly). The ability to contribute phases out starting at $153,000 and $242,000.
Many successful NYC business owners are above those limits. The common workaround is the backdoor Roth IRA: you make a nondeductible contribution to a traditional IRA (up to $7,500 in 2026, or $8,600 if you’re 50 or older) and then convert it to a Roth IRA. If you do it correctly, the conversion is tax-free, and the money grows tax-free from then on.
How a SEP IRA Gets in the Way
This is where the SEP IRA creates a problem. When you convert IRA money to a Roth, the IRS doesn’t let you pick only the after-tax dollars. Under the pro-rata rule, it looks at all of your traditional, SEP, and SIMPLE IRA balances as of December 31 of the year you convert.
Say you have $150,000 in a SEP IRA, and you make a $7,500 nondeductible contribution and convert it. The IRS treats your conversion as coming proportionally from all $157,500. Only about 5% of the conversion is tax-free. The other 95% is taxable income on your federal, New York State, and NYC returns. Your “backdoor Roth” mostly turns into a taxable event.
How a Solo 401(k) Keeps the Backdoor Open
Solo 401(k) balances don’t count in the pro-rata calculation. Only IRAs do. That means a business owner with a Solo 401(k) and no other pre-tax IRA money can do a clean, tax-free backdoor Roth every year.
It gets better. If you already have a SEP IRA or old rollover IRA, many Solo 401(k) providers let you roll that pre-tax IRA money into your Solo 401(k). Once your IRA balances are at zero by December 31, the pro-rata problem disappears, and the backdoor Roth works the way it’s supposed to.
For a married couple who both qualify, that’s $15,000 or more per year moving into Roth accounts that grow tax-free, on top of what you put in the Solo 401(k) itself.
Roth Contributions Inside the Solo 401(k)
A Solo 401(k) can also include a Roth option. Unlike a Roth IRA, Roth 401(k) deferrals have no income limit. You can put up to $24,500 of your 2026 employee deferral into Roth regardless of how much you earn. Some plans also allow after-tax contributions that can be converted to Roth, sometimes called a “mega backdoor Roth.” Not every provider offers these features, so it’s worth checking before you open the plan.
Catch-Up Contributions After Age 50
If you’re 50 or older, the Solo 401(k) gives you another edge. You can add an $8,000 catch-up contribution in 2026 on top of the $72,000 limit. If you’re between 60 and 63, the catch-up rises to $11,250. A standard SEP IRA has no catch-up contribution at all.
One new rule for S corp owners: starting in 2026, if your W-2 wages from your company were above $150,000 in 2025, your catch-up contributions must go in as Roth. Sole proprietors and single-member LLC owners without W-2 wages aren’t affected by this rule.
Solo 401k vs SEP IRA Deadlines: When to Open and Fund Each Plan
Timing matters, especially at year-end.
- SEP IRA: open and fund by your tax return due date, including extensions. This is the most flexible option.
- Solo 401(k) for sole proprietors and single-member LLCs: under SECURE 2.0, you can open a brand-new plan after year-end and still make both employee and employer contributions for the prior year, as long as you set up the plan by your original filing deadline, without extensions.
- Solo 401(k) for S corp owners: the retroactive rule doesn’t apply. Your plan should be in place, and your employee deferrals run through payroll, by December 31. Employer contributions can still be made up to the S corp’s tax return due date, including extensions.
If you own an S corp and are considering a Solo 401(k) for 2026, now is the time to act. Waiting until January means you lose the $24,500 employee deferral for the year.
Solo 401k vs SEP IRA When You Have Employees
A Solo 401(k) only works if your business has no full-time employees other than you and your spouse. Once you hire eligible employees, you’ll need a regular 401(k) or another plan that covers them.
A SEP IRA can cover employees, but there’s a cost: you must contribute the same percentage of pay for every eligible employee that you contribute for yourself. If you put 25% of your salary into your SEP, you generally owe 25% to eligible staff too. For many growing NYC businesses, that makes a SEP expensive once the team grows.
There is a waiting period. A SEP can exclude employees until they have worked for you in 3 of the last 5 years, so practically speaking, you get about 3 years before a new hire must be included. One catch: any year an employee works for you counts as a full year, even if it was only one week.
If you’re planning to hire soon, it’s worth thinking ahead. Our guide to hiring your first employees in NYC covers the other requirements that come with that step.
How Retirement Contributions Lower Your NYC and New York State Taxes
New York City residents pay three layers of income tax: federal, New York State, and New York City. Pre-tax contributions to a Solo 401(k) or SEP IRA reduce your federal adjusted gross income, which carries through to your New York State and NYC returns. Each pre-tax dollar you contribute can save you tax at all three levels.
For S corp owners, the company deducts employer contributions, which lowers the income that flows through to your personal return. Your employee deferrals reduce the taxable wages on your W-2.
This is why retirement contributions are one of the most effective tax planning tools available to New York City business owners. If you’re also reviewing how you pay yourself, see our guide on how NYC business owners should pay themselves, since your salary level directly affects how much you can contribute.
When a SEP IRA Still Makes Sense
A SEP IRA isn’t a bad choice. It can be the right fit when:
- You missed the year-end deadline as an S corp owner and need a plan you can still open for the prior year.
- Your income is high enough that you’ll reach the $72,000 cap with the employer contribution alone, and you don’t plan to do a backdoor Roth.
- You want the simplest possible setup with no annual filing.
On that last point, a Solo 401(k) does have slightly more paperwork. Once plan assets exceed $250,000 at year-end, you need to file Form 5500-EZ each year. For most business owners, that small extra step is well worth the higher contributions and Roth flexibility.
Solo 401k vs SEP IRA: Which Is Right for You?
In the Solo 401k vs SEP IRA comparison, the Solo 401(k) is the stronger plan for most self-employed New York City business owners without employees. It generally allows larger contributions at the same income, offers catch-up contributions after age 50, includes a Roth option with no income limit, and preserves your ability to do a clean backdoor Roth IRA each year.
The SEP IRA still has a place, mainly for simplicity and for owners who need to set up a plan after the year has ended.
The right answer to Solo 401k vs SEP IRA depends on your entity type, income, age, existing IRA balances, and hiring plans. Those details are worth reviewing before December 31, especially if you own an S corp. For the IRS rules on both plans, see retirement plans for self-employed people. For more options, see our overview of retirement plans for self-employed New York business owners and our year-end tax planning checklist for NYC business owners.
Meir Spear is a CPA and CFP based in New York City. He specializes in New York City and New York State taxes, working with small business owners on tax planning, entity structuring, and accounting. Schedule a consultation
