SEP IRA vs Solo 401(k): Which Retirement Plan Fits a Self-Employed Person?
Leaving a job means leaving the employer 401(k) behind, but it does not mean giving up tax-advantaged retirement savings. Self-employed people have access to two plans that can hold far more than a regular IRA: the SEP IRA and the Solo 401(k) (also called an individual or one-participant 401(k)).
Both cut your taxable income, both are cheap to run, and both are available at most large brokerages. The difference is how much you can put in at a given income, and how much paperwork you accept in return.
The quick comparison
| SEP IRA | Solo 401(k) | |
|---|---|---|
| Who can use it | Any business, including ones with employees | Owners with no eligible employees other than a spouse |
| How contributions work | Employer contribution only | Employee deferral plus employer contribution |
| Contribution at modest income | Lower | Much higher |
| Catch-up contributions (age 50+) | No | Yes |
| Roth option | Allowed by law since 2023, but not every provider offers it | Roth deferrals widely available |
| Loans | No | Allowed if the plan document permits |
| Annual filing | None | Form 5500-EZ once plan assets exceed $250,000 |
| Setup effort | A one-page form (5305-SEP) and an account | Plan adoption agreement plus an account |
How the SEP IRA works
A SEP (Simplified Employee Pension) lets the business contribute up to 25% of compensation, subject to an annual dollar cap that the IRS adjusts for inflation. For a sole proprietor or single-member LLC owner, "compensation" means net self-employment earnings after subtracting half of your self-employment tax and the contribution itself. That circular definition works out to an effective rate of about 20% of net earnings after the half-SE-tax deduction.
The appeal is simplicity. There is no annual IRS filing, you can open the account and fund it as late as your tax-filing deadline (including extensions), and you can contribute nothing in a lean year.
The catch arrives when you hire. If you have eligible employees, generally those 21 or older who worked for you in three of the last five years and earned a small minimum, you must contribute the same percentage of pay for them that you contribute for yourself.
How the Solo 401(k) works
A Solo 401(k) gives you two buckets, because you wear two hats:
- As the employee, you can defer up to the annual 401(k) limit (the same limit a corporate employee has), plus catch-up contributions if you are 50 or older. Higher "super catch-up" limits apply in the years you turn 60 through 63.
- As the employer, you can add the same roughly-20%-of-net-earnings contribution a SEP allows.
The two together cannot exceed the overall annual cap (catch-ups sit on top of it). The employee bucket is what makes the Solo 401(k) so powerful at lower and middle incomes: it is a flat dollar amount, not a percentage, so someone netting $40,000 can shelter far more than they could with a SEP.
The trade-offs are modest. You need a plan document (your brokerage provides it), you must file Form 5500-EZ once the plan holds more than $250,000 at year end, and the plan only works while you have no eligible employees besides a spouse.
Worked example at $60,000 of profit
Jordan is 38, a single freelance developer with $60,000 of net profit on Schedule C. Using the 2025 limits as an illustration ($23,500 employee deferral, $70,000 overall cap):
- Self-employment tax ≈ $60,000 × 92.35% × 15.3% ≈ $8,478. Half of that, about $4,239, is deductible.
- Net earnings for plan purposes ≈ $60,000 − $4,239 = $55,761.
- Employer contribution (SEP or Solo 401(k)) ≈ 20% × $55,761 ≈ $11,152.
| Plan | Maximum for Jordan |
|---|---|
| SEP IRA | ≈ $11,152 |
| Solo 401(k) | $23,500 deferral + ≈ $11,152 employer = ≈ $34,652 |
At this income the Solo 401(k) allows roughly three times as much. The gap narrows as profit rises, because the SEP's 20% grows with income while the employee deferral is fixed. Very high earners can hit the overall cap with either plan; at that point the SEP's simplicity becomes the tie-breaker. Limits are adjusted every year, so plug in the current figures from the IRS before you contribute.
Deadlines that trip people up
- SEP IRA: open and fund by your tax-filing deadline, including extensions, for the prior year's contribution.
- Solo 401(k) employer contributions: also due by the filing deadline, including extensions.
- Solo 401(k) employee deferrals: traditionally you had to elect them by December 31. Newer rules allow a sole proprietor who opens a new Solo 401(k) after year-end (by the filing deadline) to make employee deferrals for that first plan year. In later years, make your deferral election before year-end. Ask your provider how it handles both.
Roth or traditional?
Traditional contributions lower your tax bill now; Roth contributions are taxed now and come out tax-free in retirement. A useful lens for freelancers: in a low-income year (a new business, a gap between contracts) Roth money is cheap, because you are paying tax at a low rate. In a high-income year, traditional contributions save more. A Solo 401(k) lets you choose per contribution; a SEP lets you do so only if your provider supports Roth SEP contributions.
Which one should you choose?
- Choose a Solo 401(k) if you have no employees, want to save aggressively, are over 50 and want catch-ups, or want a Roth option.
- Choose a SEP IRA if you want the simplest possible account, are deciding after year-end and only need an employer contribution, or expect to hire employees soon.
- Already have a SEP? You can usually switch to a Solo 401(k) for a future year. Talk to your provider about timing so you do not run two plans with conflicting rules in the same year.
If you also have a W-2 job with a 401(k), remember that the employee deferral limit is per person, not per plan. Deferrals at your day job reduce what you can defer to a Solo 401(k), though the employer bucket is separate.
Bottom line
For most solo freelancers, the Solo 401(k) is the more generous plan and the extra paperwork is minor. The SEP IRA wins on simplicity and suits owners with employees or people making a last-minute contribution after the year has closed. Either beats leaving retirement savings to "later."
Official sources: IRS Publication 560 (Retirement Plans for Small Business), the IRS "One-Participant 401(k) Plans" and "SEP Plan FAQs" pages, and Form 5500-EZ instructions.