Retirement Accounts for Self-Employed: SEP-IRA vs Solo 401(k) – SelfEmployedDocs

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Retirement Accounts for the Self-Employed: SEP-IRA vs Solo 401(k) Explained

One of the most overlooked financial advantages of being self-employed is the ability to contribute far more to a retirement account than a typical employee can. While a salaried worker is limited to standard 401(k) employee contribution limits, a freelancer or independent contractor can use a SEP-IRA or Solo 401(k) to shelter tens of thousands of dollars from taxes every single year. Yet surveys consistently show that the majority of self-employed workers have no retirement savings at all — largely because they don’t know these options exist or think they’re too complicated to set up. This guide explains both major retirement account options for self-employed workers, how much you can contribute, what the tax advantages are, and exactly which one makes sense for your situation.

In This Article

Why Retirement Savings Matter More When You’re Self-Employed
The SEP-IRA: Simple and Powerful
The Solo 401(k): Maximum Contribution Potential
SEP-IRA vs Solo 401(k): Side-by-Side
Which Account Is Right for You?
Other Options: SIMPLE IRA and Traditional IRA
How to Open a Self-Employed Retirement Account
Frequently Asked Questions

Why Retirement Savings Matter More When You’re Self-Employed

When you work for an employer, retirement savings happen somewhat automatically — your employer withholds contributions, may match them, and handles plan administration. As a freelancer or gig worker, none of that exists. No employer match, no automatic withholding, no company plan. Every dollar you retire on is a dollar you deliberately set aside yourself.

That makes the tax advantages of self-employed retirement accounts not just useful — they’re essential. Every dollar you contribute to a SEP-IRA or Solo 401(k) reduces your adjusted gross income dollar for dollar. For a freelancer in the 22% federal tax bracket also paying 15.3% self-employment tax, that’s a combined marginal rate of over 37% on each additional dollar earned. A $10,000 retirement contribution can save you $2,200 or more in federal income tax alone — money that would otherwise leave your business and never return.

Key Takeaway Self-employed retirement accounts serve two purposes simultaneously: building long-term wealth and reducing your current-year tax bill. The earlier you start, the more years of tax-deferred compounding you gain — and the lower your tax bills become every year you contribute.

No Employer? No Problem.

The IRS has created retirement account structures specifically for self-employed individuals that allow contribution limits far higher than standard employee 401(k) plans. In 2024, an employee could defer up to $23,000 into a 401(k) (plus a $7,500 catch-up if over 50). A self-employed person using a Solo 401(k) could potentially shelter over $60,000 in the same year — both as the “employee” and as the “employer.” (Verify current contribution limits at IRS.gov, as they are adjusted for inflation annually.)

The SEP-IRA: Simple, Flexible, and Powerful

The SEP-IRA — Simplified Employee Pension Individual Retirement Account — is the most popular retirement account among self-employed workers, and for good reason. It’s easy to open, has almost no administrative burden, and allows substantial contributions that reduce your taxable income significantly.

How It Works

A SEP-IRA functions like a traditional IRA but with much higher contribution limits. You contribute as the employer — contributions are deductible as a business expense — and the money grows tax-deferred until you withdraw it in retirement, at which point it’s taxed as ordinary income.

Contribution Limits

You can contribute up to 25% of your net self-employment income per year, up to the IRS annual dollar cap. (Verify the current cap at IRS.gov — it adjusts annually for inflation.) Note that “net self-employment income” for this calculation means your net Schedule C profit minus half of your self-employment tax — not your gross revenue.

✓ Example You earn $80,000 net on Schedule C. After subtracting half of SE tax (~$5,650), your adjusted net SE income is approximately $74,350. 25% of that is roughly $18,587 — your maximum SEP-IRA contribution for the year. That contribution reduces your AGI by the same amount, saving you thousands in federal income tax.

Key Features of a SEP-IRA

Deadline: Contributions can be made up to the tax filing deadline, including extensions (October 15 for most sole proprietors). This gives you flexibility to calculate the optimal contribution amount after the year ends.
Setup: Takes 15–30 minutes to open at most major brokerages (Fidelity, Vanguard, Schwab, etc.). No IRS filing required to establish the plan.
No employee contributions: All contributions come from the employer side (you). There’s no Roth option in a SEP-IRA.
Employees: If you hire employees, you must contribute the same percentage of compensation to their SEP-IRA as you contribute for yourself — a significant consideration if you grow your team.
Investments: Invest in anything available in a standard IRA — stocks, bonds, mutual funds, ETFs.

The Solo 401(k): Maximum Contribution Potential

The Solo 401(k) — also called an Individual 401(k) or Self-Employed 401(k) — is a full 401(k) plan designed for businesses with no full-time employees other than the owner (and a spouse, if applicable). It has more moving parts than a SEP-IRA but allows significantly higher contributions at lower income levels, making it the better choice for many freelancers.

Two Contribution Buckets

The Solo 401(k)’s power comes from the fact that you contribute in two capacities:

Employee elective deferral: Up to 100% of net self-employment income, capped at the annual employee contribution limit ($23,000 in 2024; $30,500 if age 50+). (Verify current limits at IRS.gov.)
Employer profit-sharing contribution: Up to 25% of net self-employment income (same calculation as a SEP-IRA).

The combined total of both contributions cannot exceed the IRS annual combined limit. (Check IRS.gov for the current combined ceiling, which is substantially higher than either bucket alone.)

Why This Matters at Lower Income Levels At a net income of $50,000, a SEP-IRA allows a contribution of roughly $9,293 (25% of adjusted net SE income). A Solo 401(k) allows the full employee deferral of $23,000 — more than double — even at that income level. The Solo 401(k) wins decisively for most freelancers earning under $200,000 per year.

Key Features of a Solo 401(k)

Roth option: Many Solo 401(k) plans offer a Roth contribution option, allowing after-tax contributions that grow and are withdrawn tax-free in retirement.
Loan provision: Unlike a SEP-IRA, a Solo 401(k) may allow you to borrow against your balance — up to 50% of your vested balance or $50,000, whichever is less.
Deadline: The plan must be established by December 31 of the tax year you want to use it (unlike a SEP-IRA, which can be opened up to the filing deadline). Contributions themselves can be made up to the filing deadline.
IRS filing: Once your Solo 401(k) balance exceeds $250,000, you must file Form 5500-EZ annually with the IRS.
No full-time employees: The moment you hire a full-time employee (other than a spouse), you can no longer use a Solo 401(k) and must convert to a standard 401(k) plan.

SEP-IRA vs Solo 401(k): Side-by-Side

Option 1

SEP-IRA

Contribute up to 25% of net SE income
Open by tax filing deadline (incl. extension)
No Roth option
No loans against balance
Extremely simple to set up and maintain
Must cover eligible employees at same %
No IRS filing required (under $250K)

Option 2

Solo 401(k)

Employee deferral + 25% employer contribution
Plan must be opened by Dec 31
Roth option available at most brokerages
Loans against balance allowed
Slightly more paperwork to set up
Owner (+ spouse) only — no other employees
Form 5500-EZ required above $250K balance

Feature	SEP-IRA	Solo 401(k)
Max contribution at $50K net income	~$9,300	~$23,000+
Max contribution at $150K net income	~$34,800	~$57,000+
Roth contributions	No	Yes (at most brokerages)
Plan establishment deadline	Tax filing deadline	December 31
Works if you have employees	Yes (must cover them)	No
Loan provision	No	Yes
Setup complexity	Very simple	Moderate

Contribution amounts above are illustrative estimates based on 2024 figures. Always verify current IRS contribution limits at IRS.gov before making contribution decisions.

Which Account Is Right for You?

For most freelancers the answer is clear once you know your income level and situation:

Choose this if…

Solo 401(k)

You are a solo freelancer with no full-time employees, especially if your net income is under $200K. The higher contribution limits at lower income levels make this the better tax shelter for most independent contractors.

Choose this if…

SEP-IRA

You have or plan to hire employees, you want the absolute simplest setup, or you missed the December 31 deadline to open a Solo 401(k) for this tax year.

If you are undecided and it’s still early in the tax year, open a Solo 401(k) — you can always choose not to maximize contributions if your income ends up lower than expected. If it’s after December 31 and you haven’t set up a plan yet, a SEP-IRA is your only option for that tax year (since it can be opened up to the filing deadline).

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Other Options: SIMPLE IRA and Traditional IRA

While the SEP-IRA and Solo 401(k) are the primary retirement vehicles for most freelancers, two other options are worth knowing about.

SIMPLE IRA

The SIMPLE IRA (Savings Incentive Match Plan for Employees) is designed for small businesses with up to 100 employees. It allows both employee and employer contributions, but the contribution limits are lower than a Solo 401(k) and the setup requirements are more involved. For solo freelancers, the SIMPLE IRA is almost never the best choice — the Solo 401(k) offers higher limits with comparable complexity. SIMPLE IRAs become relevant once you’re building a small team.

Traditional and Roth IRA

Any person with earned income can contribute to a Traditional or Roth IRA, including the self-employed. However, the annual contribution limit is far lower than a SEP-IRA or Solo 401(k) — $7,000 per year in 2024 ($8,000 if age 50+), with income phase-outs for Roth IRA eligibility. (Verify current limits and phase-out thresholds at IRS.gov.)

A Traditional or Roth IRA is best used as a supplement to a SEP-IRA or Solo 401(k), not a replacement. If you’ve already maxed out your primary self-employed retirement account, contributing the additional $7,000 to a Roth IRA (if your income qualifies) is a sensible next step — giving you tax-free growth on top of your tax-deferred retirement savings.

How to Open a Self-Employed Retirement Account

Opening either account is straightforward and takes less than an hour at most major brokerages. Here’s the process:

Choose a brokerage. Fidelity, Vanguard, Charles Schwab, and TD Ameritrade all offer both SEP-IRAs and Solo 401(k)s with no account fees and a wide range of investment options. Compare their Solo 401(k) plan documents — some offer Roth options, some don’t.
Gather what you need. Your Social Security number (or EIN if you have one), your business name as it appears on your tax return, and basic personal information.
Complete the application. For a SEP-IRA, you’ll sign a brief plan adoption agreement (IRS Form 5305-SEP or the brokerage’s equivalent). For a Solo 401(k), you’ll complete a plan document — slightly longer but still manageable online.
Fund the account. Link your business checking account and transfer your contribution. Decide whether to invest in a target-date fund (simple, automatic rebalancing) or build your own allocation with index funds.
Record your contribution. For a SEP-IRA, contributions are deducted on Form 1040, Schedule 1. For a Solo 401(k), employee deferrals reduce your W-2 equivalent income and employer contributions are deducted on Schedule 1 as well. Your tax software or accountant will handle the exact placement.

✓ Pro Tip Don’t wait until April to think about retirement contributions. Set a calendar reminder in October or November to estimate your year’s net income and calculate your maximum allowable contribution. This gives you time to fund the account before year-end (critical for Solo 401(k) employee deferrals) and ensures you’re not scrambling at tax time.

Frequently Asked Questions

Technically yes, but in practice there’s rarely a reason to. The IRS combined contribution limit applies across both plans — meaning you can’t exceed the annual cap by splitting contributions between accounts. Most financial advisors recommend choosing one plan and maximizing it rather than maintaining two. The Solo 401(k) generally offers better terms for solo freelancers, so that’s typically the primary vehicle, with a Traditional or Roth IRA as a supplement if you have remaining contribution capacity.

Your existing balance stays in the account and continues to grow tax-deferred — nothing happens to money already contributed. You simply stop making new contributions while you’re an employee (since you’d no longer have self-employment income to base them on). If you return to freelancing, you can resume contributions. You can also roll the balance into a new employer’s 401(k) or a Traditional IRA if you prefer to consolidate accounts.

No — SEP-IRA and Solo 401(k) contributions are deducted above-the-line on Form 1040 (Schedule 1), which reduces your federal income tax but does not reduce your self-employment tax. SE tax is calculated on your Schedule C net profit before these retirement deductions. Only Schedule C business expense deductions reduce both SE tax and income tax simultaneously. That said, the income tax savings from retirement contributions are still substantial.

Yes, and this is a powerful combination. If you have a side freelance income alongside a regular job, you can contribute to your employer’s 401(k) at work and also open a SEP-IRA or Solo 401(k) for your freelance income. However, the combined employee deferral limit across all 401(k)-type accounts is shared — you can’t exceed the annual employee deferral cap across both plans combined. The employer contribution (profit-sharing) side of a Solo 401(k) is separate and can be added on top of your W-2 401(k) contributions.

Contributions to SEP-IRAs and Solo 401(k)s are completely discretionary — there is no minimum contribution requirement in any year. If you had a low-income year or needed to preserve cash flow, you simply contribute less or nothing at all. This flexibility is one of the major advantages of self-employed retirement accounts compared to plans with mandatory contributions. You can ramp contributions back up in better years.

Both accounts are designed for retirement — meaning penalty-free withdrawals begin at age 59½. Withdrawals before that age are subject to a 10% early withdrawal penalty in addition to ordinary income tax on the amount withdrawn. Required minimum distributions (RMDs) begin at age 73 under current law. (Verify current RMD age requirements at IRS.gov, as this has changed with recent legislation.) Roth contributions in a Solo 401(k) follow different withdrawal rules — contributions (not earnings) can be withdrawn penalty-free at any time.

Conclusion

Retirement accounts for the self-employed are one of the most powerful financial tools available to freelancers and independent contractors — combining long-term wealth building with immediate, substantial tax savings. The SEP-IRA and Solo 401(k) are both excellent options, but for most solo freelancers, the Solo 401(k) wins on contribution limits at most income levels. The SEP-IRA remains the right choice for simplicity, late starts, or anyone with employees.

The most important step is simply to start. Even modest annual contributions to a retirement account compound significantly over a 20–30 year horizon, and the tax savings in years of high income can be immediate and substantial. Open an account, contribute what you can, and increase contributions as your freelance income grows.

For tools that help you document and communicate your self-employment income to lenders, landlords, and financial institutions — including professional pay stubs that reflect your actual earnings — visit SelfEmployedDocs.com.

Disclaimer: The information provided in this article is for general informational purposes only and does not constitute financial, tax, or legal advice. Tax laws and regulations change frequently. Please consult a licensed tax professional or financial advisor for advice specific to your situation.