SEP IRA and Solo 401(k) for funded traders

Updated October 27, 2026 · For the 2026 tax year

Prop firm payouts reported on a 1099-NEC are self-employment income, and self-employment income can fund your own retirement plan. The money you put in comes off your taxable income for the year. Here's how the two common plans work for funded traders, with the 2026 limits from the IRS.

Who can use them

A SEP IRA or a Solo 401(k) is a plan for a business, and a sole proprietor counts. If your payouts go on Schedule C, you're a sole proprietor and can set one up for that business, even if you also have a day job with its own 401(k). What you can put in is based on your net earnings from self-employment: your payouts minus your trading costs, minus the deductible half of your self-employment tax.

SEP IRA

• How much: for you as the business owner, up to 20% of those net earnings, and no more than $72,000 for 2026.
• Setup: simple, usually one form at a brokerage. You can set it up and fund it for 2026 as late as your return's due date, including extensions.
• Day job 401(k): doesn't affect the SEP amount.

Solo 401(k)

• How much: two parts. As the "employee" you can defer up to $24,500 for 2026 ($8,000 more at age 50 or older, or $11,250 more instead if you're 60 to 63 in 2026). As the "employer" you can add the same 20% of net earnings as a SEP. Both parts together can't be more than your net earnings or $72,000.
• Setup: a plan document from a brokerage. A sole proprietor with no employees can adopt one after year end, up to the filing deadline (without extensions). Once the plan holds more than $250,000 at the end of a year, it needs a yearly Form 5500-EZ.
• The day-job catch: the $24,500 employee limit is per person, across every plan. If you already defer to a 401(k) at your day job, that counts against the same $24,500. Defer the full amount at work and the Solo 401(k) adds only the 20% employer part, the same as a SEP.

Example: $20,000 of payouts

Single, $70,000 day job, $20,000 of payouts, no costs, 2026 IRS tables:

• Self-employment tax: $20,000 × 92.35% × 15.3% = $2,825.91. Half is deductible: $1,412.96.
• Net earnings for the plan: $20,000 − $1,412.96 = $18,587.04.
• SEP IRA: 20% = up to $3,717. Taxable income is about $72,487 without it, in the 22% bracket, so it saves about $818 of federal income tax.
• Solo 401(k), no deferrals at work: up to about $18,587 (all of the net earnings, mostly as employee deferrals). That saves about $4,089 at 22%, and taxable income stays in the 22% bracket.

Self-employment tax doesn't change: the contribution is deducted on Schedule 1, not on Schedule C. Your state may follow the federal deduction; check its rules. The money is for retirement: taking it out before age 59½ usually means income tax plus a 10% additional tax.

Which one?

With smaller payouts and no 401(k) deferrals at work, a Solo 401(k) lets you put in far more. If you already max out a 401(k) at your day job, the two give about the same amount and a SEP is simpler. Traditional (pre-tax) or Roth, and which provider, are questions for your CPA or a financial adviser.

Planning information, not tax or investment advice. Confirm with a CPA before you open or fund a plan.

Sources

• IRS, Notice 2025-67: 2026 limits: $72,000 annual additions (section 415(c)), $24,500 elective deferrals (section 402(g)), $8,000 catch-up at 50+, $11,250 at ages 60 to 63
• IRS, Publication 560, Retirement Plans for Small Business: for a self-employed person, 20% of net earnings from self-employment (the 25% plan rate on the Rate Table for Self-Employed); net earnings reduced by the deductible part of SE tax; the deduction on Schedule 1 (Form 1040), line 16; SEP set-up by the return due date including extensions; 401(k) plans adopted after year end by a sole proprietor with no employees; Form 5500-EZ not required at $250,000 or less of plan assets; the 10% tax on early distributions before age 59½
• IRS, 401(k) and profit-sharing plan contribution limits: elective deferrals added up across all plans you take part in; annual additions to an unrelated employer's plan apply to each plan separately
• IRS, Rev. Proc. 2025-32: 2026 tax brackets and standard deduction used in the example

General information, not tax advice. This guide explains common rules for US funded traders; your situation may differ. It isn't a substitute for a licensed CPA or IRS enrolled agent, so review your own numbers with one before you file or pay.