Clear Money Guide
What this guide covers
A quick view of the questions and evidence developed below.
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Updated July 28, 2026. Quick answer: You cannot. Salary-reduction SEPs — SARSEPs — were closed to new plans by IRC §408(k)(6)(H), which provides that the permission “shall not apply to years beginning after December 31, 1996” except for arrangements already in place. Any SEP you could open today is employer-contribution-only, and that single fact drives most of the solo 401(k) comparison.
The provision and the grandfather
§408(k)(6)(H) did not abolish existing SARSEPs. It withdrew the permission going forward, preserving arrangements whose terms were in effect on 31 December 1996 — and the IRS confirms that participants in one, including employees hired after 1996, can carry on contributing. So a reader who genuinely has a SARSEP is not wrong; they simply have something that cannot be created any more.
Why this is the load-bearing fact in the comparison. Every “solo 401(k) beats a SEP” argument reduces to this: the 401(k) can take an employee deferral on top of the same employer contribution, and IRC §404(n) keeps that deferral outside the 25% deduction limit. The SEP has no deferral to add. It is not that the SEP is badly designed — it is a different instrument.
Get the self-employed plan structure checked
The right plan for an owner depends on the entity, the payroll and whether anyone else is on the books, and an adviser can check the structure before a contribution is made that has to be unwound.
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What a SEP is still good at
| Feature | SEP | Solo 401(k) |
|---|---|---|
| Employee deferral | No | Yes |
| Catch-up contributions | No — they attach to deferrals | Yes |
| Roth option | Generally no | Yes |
| Participant loans | No | Usually available |
| Set-up and annual admin | Minimal | More, and a filing obligation once assets pass a threshold |
| Can be opened after year end | Yes, up to the filing deadline | More constrained |
The honest case for a SEP is administrative simplicity and late establishment — a real advantage if you are deciding in March about last year. It is not a contribution-capacity advantage, and for anyone 50 or over the gap never closes.
Every dollar limit in this area is indexed and changes annually. The figures printed in the Code itself — $40,000 for the defined-contribution limit, $160,000 for the defined-benefit limit, $15,000 for elective deferrals — are 2001 and 2005 base amounts that will never be updated in the statute; IRC §415(d) and §402(g)(4) do the adjusting. Get the current year’s figures from the IRS cost-of-living notice for that year rather than from any article, including this one. Nothing on this page states a dollar amount for that reason.
Sources
IRC §404(a)(3)(A) and §404(h)(1)(C) (the 25% deduction limit); §404(n) (elective deferrals excluded from it); §415(c) and §415(d) (annual additions, and indexing); §401(c)(2) and §1402(a) (earned income); IRS Publication 560, Retirement Plans for Small Business, current edition (the Rate Table for Self-Employed and the Deduction Worksheet); IRS Retirement plan FAQs regarding contributions — S corporation.
This states what the cited authority says. It is not tax advice, and retirement-plan design turns on facts about your business and your other entities that no page can see. Every dollar limit referenced here is indexed and changes annually.
Related
The rate is 20%, not 25%. The contribution calculator does the circular maths the way Publication 560 does it — and reproduces the IRS’s own worked example to the dollar — then puts a solo 401(k) and a SEP side by side at your numbers.
If the SEP exists because of a small amount of self-employment income in retirement, the eligibility question comes before the limits: a pension is not compensation and will not fund an account.