SEP IRA vs Solo 401(k): Which Is Better for Fractional Executives?

Short answer: for most fractional executives with no employees, a Solo 401(k) lets you save more at the same income, because you contribute as both employee (up to $24,500 in 2026) and employer (about 20% of net self-employment earnings). A SEP IRA is simpler and can be opened as late as your tax filing deadline, which makes it a good fallback if you missed year-end.

Whether you call yourself a fractional CFO, an independent consultant, a 1099 contractor, a sole proprietor or the owner of a single-member LLC, the choice works the same way. Below are the 2026 limits, two worked examples and the questions that decide it.

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

Both are retirement plans for self-employed people, and both let you deduct contributions from your taxable income. The difference is who is contributing.

With a SEP IRA, only the "employer" contributes. As a self-employed person, that is you, and the limit is a percentage of your earnings.

With a Solo 401(k), also called a one-participant 401(k), you contribute twice: once as the employee (an elective deferral) and once as the employer (the same percentage-based contribution a SEP allows). The employee piece is what makes the gap so large at moderate incomes.

How much can I contribute to each in 2026?

Limits from the IRS 2026 cost-of-living announcement. The "about 20%" figure is the IRS's 25% plan rate converted for self-employed people, after subtracting half of your self-employment tax (IRS Publication 560, Chapter 5).

How does the math work at $100,000 of profit?

Worked example. A fractional CMO, age 45, has $100,000 of net profit in 2026 as a single-member LLC.

• Self-employment tax: $100,000 x 92.35% x 15.3% = $14,130. Half of that, $7,065, is deductible.
• Net earnings for retirement purposes: $100,000 minus $7,065 = $92,935.
• Employer contribution (both plans): 20% x $92,935 = $18,587.

With a SEP IRA, the most she can put in is $18,587.

With a Solo 401(k), she adds the $24,500 employee deferral on top: $18,587 + $24,500 = $43,087.

That is $24,500 more saved for retirement in a single year. At a combined federal and state rate of around 30%, it is also roughly $7,350 less in income tax this year. Your rate will differ, so run your own numbers or ask your Tax Pro.

What about at $300,000 of profit?

The gap narrows as income rises, because both plans hit the same $72,000 ceiling.

• Self-employment tax: Social Security tax applies only to the first $184,500 of earnings in 2026, and Medicare applies to all of it. On $300,000 of profit, that comes to about $30,912, half of which ($15,456) is deductible.
• Net earnings: $300,000 minus $15,456 = $284,544.
• Employer contribution: 20% x $284,544 = $56,909.

SEP IRA: $56,909. Solo 401(k): $56,909 + $24,500 = $81,409, capped at $72,000. The Solo 401(k) still wins by about $15,000, and if you are 50 or older the catch-up pushes your Solo 401(k) total past the cap, to $80,000.

When is a SEP IRA the better choice?

• You missed December 31. A SEP can be opened and funded up to your filing deadline, including extensions, so October 15 of next year is still in play.
• You want the simplest possible setup. Most brokerages open a SEP IRA in minutes, and there is no annual filing.
• Your income is high enough that both plans hit the same cap, and you would rather not manage a 401(k).

One caution: if you hire employees later, a SEP generally has to cover them at the same percentage you give yourself once they meet the eligibility rules (age 21, three of the last five years, and a small minimum pay).

When is a Solo 401(k) the better choice?

• Your profit is under roughly $300,000, where the employee deferral makes the biggest difference.
• You are 50 or older and want the catch-up contribution.
• You want the option of Roth contributions on the employee side.
• You have no employees other than a spouse.

Do I have to open a Solo 401(k) by December 31?

Plan on it. December 31 is the cleanest deadline for setting up a Solo 401(k) if you want to make employee deferrals for this year. Newer rules allow some sole proprietors to set up a plan after year-end and still defer for the first year, but the conditions are narrower and providers handle it differently. If you are reading this in October, you have time to open one without any of that complexity.

The employer contribution can be made later, up to your filing deadline.

What changes if I have an S-Corp?

If your fractional practice is taxed as an S-Corp, contributions are based on the W-2 salary you pay yourself, not your total profit. The employer contribution becomes 25% of that W-2 pay, so a low salary saves payroll tax but shrinks what you can put away. That tradeoff is worth modeling before you set your salary for 2027.

How do I decide in 10 minutes?

1. Estimate this year's net profit. If you are not sure, our free Tax Savings Calculator gives you a starting point in about two minutes.
2. Multiply it by roughly 18.6% for the employer piece. That is your SEP limit.
3. Add $24,500 (more if you are 50 or older). That is your approximate Solo 401(k) limit, up to $72,000.
4. If the difference matters to you and it is before December 31, open a Solo 401(k). If not, or if the year has already ended, a SEP IRA is a fine choice.
5. Set aside cash for the contribution the same way you set aside 20% to 30% of each client payment for taxes.

Frequently asked questions

Can I have both a SEP IRA and a Solo 401(k)?

For the same business in the same year, it usually does not help: the employer contributions share one limit. Most people pick one.

Can I still contribute to a Roth IRA?

Yes, if your income is under the Roth IRA limits. A Roth IRA is separate from both plans, with its own $7,500 limit in 2026.

I am fractional and also have a W-2 job. Does that change anything?

Yes. The $24,500 employee deferral is shared across every 401(k) you contribute to, including your employer's. The employer piece from your own business is separate.

Which is better for a first-year fractional executive?

If your first year's profit is modest and you can open the plan before December 31, the Solo 401(k) usually lets you save more. If you are getting organized after year-end, open a SEP.

Do I need a Tax Pro for this?

Not to open an account, but a quick review is worth it if you have an S-Corp, employees or income from several sources.

Sources and further reading

IRS, 401(k) limit increases to $24,500 for 2026; IRS, One-participant 401(k) plans; IRS, Simplified Employee Pension Plan (SEP); IRS Publication 560; SSA, 2026 COLA fact sheet. Tax situations vary, so confirm specifics with your tax professional.

Keep more of what you earn

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