SEP IRA vs. Solo 401(k): The Only Comparison Freelancers Need
No employer means no employer 401(k) — but it also means you can open retirement accounts with contribution limits that dwarf a personal IRA. Skip the definitions dump: here's the decision, driven by math at your actual income level.
Disclaimer: Educational content, not investment advice. Contribution limits change yearly — verify current-year figures with the IRS or your brokerage.
The 30-second answer
| Your situation | Pick this |
|---|---|
| Net profit under ~$40k, want the simplest possible setup | SEP IRA |
| You want Roth contributions | Solo 401(k) — it's the only one of the two that offers Roth |
| Net profit over ~$60k, want to shelter the maximum | Solo 401(k) |
| You might hire employees (beyond a spouse) soon | Solo 401(k) now — the SEP has an employee-matching rule that gets expensive |
| You're 50+ and want catch-up contributions | Solo 401(k) — $11,500 extra employee deferral |
Contribution limits side by side (2026)
Both accounts share a combined ceiling of $72,000 for 2026 (under age 50). The difference is how you get there:
| Feature | SEP IRA | Solo 401(k) |
|---|---|---|
| Contribution type | Employer only: up to 25% of net self-employment earnings | Two buckets: employee elective deferral + employer contribution |
| Employee deferral limit | N/A | $24,500 (plus $11,500 catch-up at 50+) |
| Employer limit | 25% of net earnings | 25% of compensation |
| Combined max | $72,000 | $72,000 |
| Roth option | No | Yes |
| Annual IRS filing | None | Form 5500-EZ once balance exceeds $250,000 |
| Hiring employees | Must contribute the same % for eligible employees | Disqualifies you from "solo" status |
Why the Solo 401(k)'s employee bucket matters: the SEP only lets you contribute a percentage of earnings. The Solo 401(k) lets you put in a flat $24,500 before the percentage kicks in — so at the same income, the Solo 401(k) shelters more.
Scenario math: $35k, $75k, and $140k of net profit
Note: both calculations use net earnings after the 92.35% self-employment-tax adjustment the IRS requires (roughly 92.35% of Schedule C net profit).
Scenario A: $35,000 net profit
- SEP IRA: 25% × $32,323 ≈ $8,081
- Solo 401(k): $24,500 employee deferral + ~$8,081 employer share, but capped by earnings — you can't contribute more than you earn. Effective max ≈ $32,323 (you'd need the income to support it; in practice ~$30k)
Verdict at $35k: The Solo 401(k) shelters dramatically more, but most freelancers at this income can't spare that much. If you're saving what you can and want zero paperwork, the SEP IRA is fine. If you're aggressively saving, the Solo 401(k) wins.
Scenario B: $75,000 net profit
- SEP IRA: 25% × $69,263 ≈ $17,316
- Solo 401(k): $24,500 + ~$17,316 ≈ $41,816
Verdict at $75k: Solo 401(k) wins decisively — $24,500 more sheltered, worth roughly $5,900 in immediate tax savings at a 24% marginal rate. This is the income band where the Solo 401(k) pays for its paperwork many times over.
Scenario C: $140,000 net profit
- SEP IRA: 25% × $129,290 ≈ $32,323
- Solo 401(k): $24,500 + ~$32,323 ≈ $56,823
Verdict at $140k: Solo 401(k) again — nearly $24,500 more in sheltered savings, worth ~$7,800 in tax savings at 32%. If you're earning six figures freelancing without a Solo 401(k), you're leaving real money on the table.
The Roth question
Only the Solo 401(k) offers a Roth option. With Roth contributions, you pay tax now and withdraw tax-free in retirement. When does that matter for a freelancer?
- Low-income year, high expected future income. If you're netting $35k now but expect $120k in a few years, Roth contributions at today's low bracket are a bargain.
- Tax diversification. Having both pre-tax and Roth buckets in retirement gives you control over your tax bill year to year.
- No Roth needed if: you're in a high bracket now and expect lower income in retirement — traditional pre-tax contributions win there.
Paperwork and gotchas
- Form 5500-EZ. Once your Solo 401(k) balance exceeds $250,000, you file this short form annually. It's a one-page filing, not a tax return — takes about 20 minutes.
- The SEP IRA employee rule. If you hire an employee (beyond your spouse), you must contribute the same percentage of their compensation that you contribute for yourself. A 25% contribution for you means 25% for them. The Solo 401(k) avoids this — but hiring non-spouse employees disqualifies you from solo status entirely.
- Deadlines. A Solo 401(k) must be established by December 31 of the tax year to count for that year (contributions can often be made until the filing deadline). A SEP IRA can be opened and funded up until your tax filing deadline, including extensions. If it's already December and you haven't set anything up, the SEP is your safety net.
How to open one this week: 4 steps, no jargon
- Pick an account using the table above. Over ~$40k net and no employees? Solo 401(k). Under that or want dead simple? SEP IRA.
- Choose a major brokerage — Fidelity, Schwab, Vanguard, and others all offer both accounts with no setup fees and low-cost index funds. Open the account online in about 20 minutes.
- Fund it with a transfer from your business savings. You can contribute in a lump sum or set up monthly transfers — a $500/month automatic transfer is $6,000/year without thinking about it.
- Invest it. Contributions sitting in cash aren't compounding. A target-date fund matching your expected retirement year is a fine default.
FAQ
Can I have both a SEP IRA and a Solo 401(k)?
Yes, but contributions across all your employer plans share the $72,000 combined cap. Most freelancers are better off picking one and maxing it.
What if I also have a W-2 job with a 401(k)?
The $24,500 employee deferral limit is shared across all your 401(k)s. If you already deferred $15,000 at your day job, you can only defer $9,500 more in your Solo 401(k). The employer-side 25% is calculated separately per business.
Can I switch from a SEP IRA to a Solo 401(k) later?
Yes. Open the Solo 401(k) in the new year and roll your SEP IRA funds into it. Many freelancers start with a SEP for simplicity and upgrade as income grows — there's no penalty for doing so.
What happens to my old employer's 401(k) when I go freelance?
Four options: leave it, roll it into your Solo 401(k), roll it into an IRA, or cash it out (don't — taxes plus a 10% early-withdrawal penalty before 59½). Rolling into your Solo 401(k) keeps everything in one place.
Keep reading
- The Freelancer's Tax Playbook: Quarterly Taxes, Deductions, and Retirement in Plain English
- Quarterly Estimated Taxes Explained: How to Calculate and Pay Them Without the Panic
- 21 Tax Deductions Freelancers Miss Every Year (With Real Examples)
- The Percentage Budget: How to Budget When Your Income Changes Every Month
- The 7 Best Invoicing Software for Freelancers, Compared and Tested