SEP-IRA vs. Solo 401(k) for 1099 Workers: Which Reduces ACA MAGI More?

For self-employed workers managing their ACA Premium Tax Credit exposure, retirement contributions are among the most powerful MAGI levers available. Every dollar contributed to a SEP-IRA or Solo 401(k) reduces Adjusted Gross Income and, through it, ACA Modified Adjusted Gross Income — directly moving the household income number used to determine PTC eligibility. Unlike the SEHI deduction (which has a circular dependency with PTC) or capital loss harvesting (which is limited to $3,000/year against ordinary income), retirement contributions face high annual limits set by IRC § 415(c) and § 402(g) — and the contribution deadline can extend to the tax return due date (with extensions) for SEPs.

Both plan types reduce MAGI under the same line — Schedule 1, above-the-line adjustments. The acacliff.com calculator accepts these contributions in the `adjustments.sepOrSolo401k` field and reduces MAGI accordingly. The question of which plan to use depends on how much you can contribute at your specific income level — and the answer differs materially depending on where you are in the Schedule C income range.

The SEP-IRA contribution formula under IRC § 408(k) allows an employer contribution of up to 25% of compensation. For self-employed individuals, "compensation" means net self-employment earnings after subtracting one-half of the SE tax and the SEP contribution itself. Effectively, this works out to approximately 20% of net Schedule C income (the formula simplifies to 20% when accounting for the circular dependency). At $90,000 of Schedule C net income, the maximum SEP contribution is approximately $16,245 (20% of $90,000 − ½ SE tax). The 2025 overall § 415(c) limit on defined contribution plans is $70,000; the SEP cannot exceed this. The 2026 limit is indexed and will be announced by the IRS (typically in November for the following year via Notice — e.g., Notice 2024-80 announced 2025 limits); if unverifiable, treat 2025 as the current benchmark.

The Solo 401(k) — also called an Individual 401(k) or One-Participant 401(k) — operates differently. It has two components. First, an employee deferral (elective deferral) under IRC § 401(k): the participant can elect to defer up to 100% of earned income up to the annual § 402(g) limit, which was $23,500 for 2025 (indexed annually; the 2026 amount will be announced by IRS typically in November 2025 — treat 2025 as the current benchmark if 2026 is not yet confirmed). This $23,500 floor exists regardless of Schedule C income — even a $30,000 Schedule C can fund a $23,500 deferral (up to the earned income cap). Second, an employer nonelective contribution of up to 25% of compensation (same formula as SEP). The two components together cannot exceed the § 415(c) overall limit ($70,000 for 2025; indexed for 2026).

The crossover point between SEP and Solo 401(k) occurs at approximately $130,000 of net Schedule C income. Below that level, the Solo 401(k) allows a larger total contribution because the $23,500 employee deferral provides a floor that the SEP lacks. Above $130,000, the SEP's 20% formula catches up to and eventually matches the Solo 401(k) total. For ACA cliff planning, the crossover matters: a self-employed person with $60,000 of Schedule C income can contribute approximately $23,500 to a Solo 401(k) (the full employee deferral) versus only $10,600 to a SEP (20% of ~$53,000 after ½ SE tax). That $12,900 difference reduces MAGI by $12,900 more, which at a household income near the cliff can mean tens of thousands of dollars of PTC preserved.

Solo 401(k) plans also permit Roth designations and participant loans. Roth Solo 401(k) contributions do not reduce MAGI (Roth contributions are after-tax), so for MAGI management purposes, pre-tax (traditional) Solo 401(k) deferrals are what matter. The administrative complexity of a Solo 401(k) is higher than a SEP: a Solo 401(k) requires a plan document (typically provided by the custodian for free or low cost — Fidelity, Vanguard, and Schwab all offer no-fee Solo 401(k) plans), an annual Form 5500-EZ filing once plan assets exceed $250,000, and stricter contribution deadlines. The employee deferral portion must be elected by December 31 of the plan year; the employer contribution can be made up to the extended tax return due date. SEPs are simpler: no plan document requirement with a 5305-SEP form, contributions can be made up to the extended return due date, and the IRS model form handles most administration.

For ACA cliff planning with a specific income target, the choice is mechanical: (1) estimate Schedule C net income, (2) compute maximum SEP contribution (≈ 20% × (net income − ½ SE tax)), (3) compute maximum Solo 401(k) contribution (deferral up to $23,500 + employer 25% of adjusted compensation, capped at overall limit), (4) pick the plan that allows the larger deduction at your income level. Use the calculator with `adjustments.sepOrSolo401k` set to the projected contribution amount to see the resulting MAGI and PTC impact.

The $23,500 Solo 401(k) employee deferral floor is a categorical advantage at low-to-moderate Schedule C incomes that the SEP cannot match. A self-employed person earning $40,000 of Schedule C net income has roughly $34,000 of effective SE compensation after the ½ SE tax deduction. The SEP allows 20% of $34,000 = $6,800. The Solo 401(k) allows the full $23,500 deferral — more than three times as much, and a MAGI reduction of $16,700 more. At the ACA cliff near 400% FPL for a single filer ($62,640 in 2026), $16,700 of additional MAGI reduction can be decisive.

The Solo 401(k) contribution deadline asymmetry is operationally important. The employee deferral (the large $23,500 component) must be elected by December 31. Most self-employed workers who discover this too late in the year lose access to the full deferral benefit. Tax professionals familiar with ACA cliff planning typically advise self-employed clients to execute their Solo 401(k) deferral election in October or November of the plan year, based on updated income projections, rather than waiting until January. The employer nonelective contribution — roughly 20% of net SE income — retains the extended deadline flexibility.

For 1099 workers with multiple clients and fluctuating monthly income, the SEP's flexibility (contribution made any time before the extended return deadline) is administratively simpler. The Solo 401(k) requires more active management — electing the deferral amount by December 31 based on projected annual income, then funding it. The choice between the two plans is often a planning-style question as much as a math question: the Solo 401(k) optimizes MAGI reduction at lower incomes; the SEP optimizes administrative simplicity at any income.

Cross-reference with `gig-worker-1099-maximizing-ptc` for a scenario that models all four above-the-line 1099 levers simultaneously: ½ SE tax + SEHI (iterative) + HSA + SEP/Solo 401(k). That scenario demonstrates the full stack for a $80,000 Schedule C worker. The current scenario isolates the SEP vs. Solo 401(k) comparison for workers who want to understand which retirement vehicle maximizes their MAGI reduction at their specific income level.