Maxed Out Your SEP IRA and Want to Save More? Look at the Solo 401(k)
If you own an S corp with no employees other than your spouse, a Solo 401(k) lets you add a $24,500 employee deferral (2026) on top of the same 25% employer contribution your SEP IRA already allows. Same salary, same payroll tax, up to $24,500 more sheltered. Here is the math, the deadlines, one trap to check before you open the account, and a Maryland-specific reason to care.
A friend called me last week with a good problem. Business had a strong year, they had already put the maximum into their SEP IRA, and they wanted to know: can I put in more?
Short answer: not into the SEP. But there is very likely a better account sitting right next to it that most one-owner S corps never open: the Solo 401(k).
Why does a SEP IRA hit a ceiling for S corp owners?
A SEP IRA only takes employer contributions. For 2026 the IRS rule is:
- Up to 25% of the W-2 salary you pay yourself from your S corp or C corp
- Capped at $72,000 per year
- Only the first $360,000 of compensation counts
(If you are a sole proprietor or single-member LLC taxed on Schedule C, the math works out to roughly 20% of net self-employment income, because the contribution and the self-employment tax deduction feed into each other.)
So if you pay yourself $100,000, your SEP contribution stops at $25,000. Want to save $40,000? The SEP cannot get you there unless you raise your salary, and raising your salary means paying more payroll tax on every extra dollar.
Do you need a W-2 salary to contribute to a SEP IRA?
Yes, and this comes up constantly. If you run an S corp and take all the profit as distributions with no W-2 wages, two things are true:
- Your SEP contribution is zero. No salary, no compensation, nothing to take 25% of.
- The IRS expects you to pay yourself "reasonable compensation." Skipping salary entirely is one of the most common audit triggers for S corp owners.
A reasonable salary is also where the tax savings live. Self-employment tax runs 15.3%: 12.4% Social Security on the first $184,500 of wages in 2026 (SSA wage base), plus 2.9% Medicare on everything. Every dollar you legitimately take as a distribution instead of salary skips that 15.3%. Every dollar you do take as salary becomes the base for your retirement contributions. The right salary balances those two, and the number is different for every business. Set it with your CPA.
Solo 401(k) vs SEP IRA: the same business, two contribution buckets
A Solo 401(k), also called an individual 401(k) or one-participant 401(k), is a regular 401(k) plan built for a business with no employees other than the owner and the owner's spouse. If you have even one part-time W-2 employee who works 1,000+ hours a year (or 500+ hours for two consecutive years), you are generally not eligible. If it is just you, or you and your spouse, you qualify.
The SEP gives you one bucket. The Solo 401(k) gives you two, and they stack.
| SEP IRA (2026) | Solo 401(k) (2026) | |
|---|---|---|
| Employee salary deferral | Not allowed | $24,500 |
| Catch-up, age 50 to 59 or 64+ | Not allowed | +$8,000 |
| Super catch-up, age 60 to 63 | Not allowed | +$11,250 |
| Employer contribution | 25% of W-2 wages | 25% of W-2 wages |
| Combined cap (before catch-up) | $72,000 | $72,000 |
| Absolute max, age 50 to 59 or 64+ | $72,000 | $80,000 |
| Absolute max, age 60 to 63 | $72,000 | $83,250 |
| Roth option | No | Yes, on the deferral side |
| Plan loans | No | Yes, up to 50% of the vested balance or $50,000 |
| Spouse on payroll can also contribute | Yes, at 25% of their wages | Yes, with their own $24,500 deferral plus 25% |
Limits from the IRS 2026 announcement. The employee deferral is the whole game. It is a flat dollar amount that does not depend on how big your salary is. At a modest salary it more than doubles what you can shelter.
One 2026 wrinkle on the catch-up: if your prior-year FICA wages from the business were above $150,000, your catch-up contributions must be Roth, not pre-tax. An owner paying a $190,000 salary is caught by this. It is not a bad outcome, but the plan document has to allow Roth deferrals.
A concrete example (illustrative)
Say you are 45 and pay yourself a $100,000 W-2 salary.
| SEP IRA | Solo 401(k) | |
|---|---|---|
| Employee deferral | $0 | $24,500 |
| Employer contribution (25% × $100,000) | $25,000 | $25,000 |
| Total | $25,000 | $49,500 |
Same salary, same payroll tax, $24,500 more in tax-advantaged savings. At a 32% federal bracket plus Maryland state and county tax, that extra deferral cuts roughly $10,000 off this year's tax bill in this illustration. Your numbers will differ.
If you are 55, add the $8,000 catch-up and the total becomes $57,500. If you are 62, the super catch-up pushes it to $60,750.
Put your spouse on payroll for legitimate work and they get their own $24,500 deferral plus 25% of their wages. A couple can realistically shelter $100,000 or more a year through a single small business.
Can you have a SEP IRA and a Solo 401(k) in the same year?
It depends on the paperwork your SEP was opened with, and this is the trap to check before you do anything else.
If your SEP was set up on the IRS model document, Form 5305-SEP, the instructions say you cannot maintain any other qualified retirement plan in the same tax year. Opening a Solo 401(k) in a year you are also contributing to that SEP breaks the rule. Most brokerage SEPs use a prototype document instead, which usually permits a second plan, but you have to confirm which one you have.
Practical path for most owners:
- This year, if your SEP is a 5305-SEP: finish the year on the SEP. Open the Solo 401(k) so it exists by December 31, and start deferrals next January 1.
- This year, if your SEP is a prototype: you can open the Solo 401(k) now and split contributions, but the combined total across both plans still cannot exceed $72,000 (plus catch-up).
- Either way: you can later roll the SEP balance into the Solo 401(k) or leave it where it is. Rolling it in keeps one statement and, as you will see below, may matter for Maryland taxes.
Does Maryland tax 401(k) withdrawals differently from a SEP IRA?
Here is something almost nobody plans for. Maryland offers a pension exclusion for taxpayers who are 65 or older, or totally disabled, that removes a capped amount of retirement income from Maryland taxable income each year. The Comptroller's Technical Bulletin 51 spells out what qualifies: income from an employee retirement system, which includes a 401(k), does. A traditional IRA, a SEP, or a Keogh does not. And a 401(k) that you rolled into an IRA generally loses the exclusion.
So the account you choose in your forties changes your Maryland state tax bill every single year of retirement, and you cannot fix it later by rolling one account into the other. That is a strong tiebreaker for the Solo 401(k) if you expect to retire in Maryland. Read more in our guide to how Maryland taxes retirement income.
How to actually do it
Do it yourself. Several major brokerages offer a free Solo 401(k) with a standard plan document. Setup takes a week or two. Things to know before you start:
- Deadline. The plan needs to be adopted by your business's tax filing deadline, including extensions, for you to make employer contributions for that year. But if you are an S corp, employee deferrals have to run through payroll before December 31, so do not wait until March.
- Payroll. Your payroll provider needs to be set up to withhold the deferral. Tell them early.
- Form 5500-EZ. Once plan assets pass $250,000, you file a short annual form with the IRS. Miss it and the penalties are steep.
Get help. If you would rather have someone open the plan, build the portfolio, coordinate the salary decision with your CPA, and handle the annual filings, that is part of our business retirement plan work. If you want this modeled for your practice and household, book a call. More guides for owners are in our For Business Owners hub.
FAQ
Can I contribute to a SEP IRA and a Solo 401(k) in the same year? Only if your SEP was not opened on IRS Form 5305-SEP, which bars any other plan in the same year. Prototype SEPs from most brokerages usually allow it. Even then, your combined contributions across both plans cannot exceed $72,000 for 2026, plus any catch-up you qualify for.
How much salary do I need to max out a Solo 401(k) as an S corp owner? About $190,000 of W-2 wages in 2026: a $24,500 employee deferral plus 25% of $190,000 ($47,500) reaches the $72,000 combined cap. A SEP IRA alone needs $288,000 of salary to reach the same cap, all of it subject to payroll tax.
Does Maryland tax 401(k) withdrawals differently from a SEP IRA? Yes, for taxpayers 65 or older or totally disabled. Maryland's pension exclusion applies to income from an employee retirement system such as a 401(k). Traditional IRA, SEP, and Keogh withdrawals do not qualify, and a 401(k) rolled into an IRA generally loses the exclusion.
Do I need a W-2 salary to contribute to a SEP IRA? Yes. SEP contributions are 25% of W-2 compensation, so an S corp owner who takes only distributions can contribute nothing. The IRS also expects S corp owners who work in the business to pay themselves reasonable compensation. Set the salary with your CPA.
Contribution limits shown are 2026 IRS figures. This post is general education, not individual tax or investment advice. Talk to your CPA or advisor before changing your salary or opening a plan.
