David, 55, Independent Consultant Earning $180K — The $32,500 Gap His SEP IRA Never Told Him About
David has run an independent consulting practice for twelve years, mostly working with mid-sized manufacturing companies on operations strategy. His SEP IRA has felt like the "grown-up" choice the whole time — higher limits than a regular IRA, simple to administer, no employees to worry about. At $180,000 in net income this year, he assumed he was already contributing close to the maximum any self-employed retirement account would allow.
He wasn't. The gap between what his SEP IRA allows and what a Solo 401(k) would allow at the same income came to $32,500 — money he's been leaving unclaimed every year without realizing there was a larger option available.
Where David's SEP IRA Tops Out
At David's income level, the SEP IRA formula (roughly 20% of net self-employment income for a sole proprietor) works out to:
$180,000 × 20% = $36,000 maximum SEP IRA contribution
This is a meaningful contribution — David has been maxing it out for the past several years, which is exactly why he assumed he'd found the ceiling.
What a Solo 401(k) Adds at the Same Income
The Solo 401(k)'s structure gives David two separate contribution buckets instead of one:
- Employee deferral: $24,500 (2026 limit), independent of income
- Employer contribution: The same ~20% formula, applied to $180,000: $36,000 — but capped by the overall $72,000 combined limit once combined with the employee deferral, bringing the employer portion down to $35,500 in practice
- Catch-up contribution: Because David is 55, he qualifies for the standard 50+ catch-up of $8,000 on top of the above
Total: $24,500 + $35,500 + $8,000 = $68,500
The Gap
| SEP IRA | Solo 401(k) | |
|---|---|---|
| Base contribution | $36,000 | $60,000 (employee + employer, capped) |
| Catch-up (age 55) | Not available | $8,000 |
| Total | $36,000 | $68,500 |
Difference: $32,500 per year — nearly double what David's SEP IRA allows, at an income level where he'd assumed he was already near the ceiling of what any self-employed retirement account could offer.
Why High Earners Often Miss This Gap Entirely
David's situation is common among consultants and established freelancers in this income range: the SEP IRA feels sufficient because it's genuinely a large-sounding number ($36,000 is a substantial contribution by most standards), so there's rarely an obvious signal prompting a second look. The Solo 401(k)'s advantage isn't visible unless someone actually runs both calculations side by side — which is exactly what most people never do once they've settled into a retirement account that "seems fine."
What Changes When David Turns 60
There's a detail worth flagging for David specifically, since he's close to it: starting at age 60, the standard $8,000 catch-up increases to an enhanced "super catch-up" of $11,250 for ages 60 through 63, available only in a Solo 401(k), not a SEP IRA. If David switches now, he won't just close this year's $32,500 gap — he'll also be positioned to claim an additional $3,250 in catch-up room once he reaches 60, a detail that has no equivalent path in a SEP IRA at any age.
The Deadline That Applies Either Way
Like any Solo 401(k) setup, the account itself needs to be established by December 31 of the tax year for that year's contributions to apply — the funding can happen later, up to the tax filing deadline, but the account needs to exist by year-end. For someone in David's position, switching this year rather than waiting means capturing this year's $32,500 gap immediately rather than losing another year to the SEP IRA's lower ceiling.
Run Your Own Numbers
David's case is a reminder that "I'm already maxing out my SEP IRA" and "I'm saving the maximum I can" are not the same statement. See exactly how large your own gap is with our Solo 401(k) vs SEP IRA Calculator — the difference tends to be largest precisely for people who assumed their current account was already the ceiling.