The two most powerful retirement accounts available to self-employed people are the SEP-IRA and the Solo 401(k). Both offer substantially higher contribution limits than a regular IRA. Both reduce your taxable income dollar for dollar. But they work differently, and the right choice depends on your income level, whether you want a Roth option, and how much administrative complexity you can stomach.
Here is the complete comparison.
The Contribution Mechanics
SEP-IRA (Simplified Employee Pension): You can contribute up to 25% of net self-employment compensation, capped at $69,000 for 2024. The net SE compensation figure is your Schedule C net profit minus the deductible half of SE tax — a number roughly equal to 92.35% of your net profit, with 25% applied to the resulting figure.
The practical maximum at various income levels:
- $80,000 net SE income → ~$14,870 contribution
- $100,000 → ~$18,587
- $150,000 → ~$27,881
- $200,000 → ~$37,174
- $276,000+ → $69,000 (max)
Solo 401(k): The Solo 401(k) has two contribution buckets:
Employee elective deferrals: Up to $23,000 in 2024 ($30,500 if age 50+). This is the same limit that applies to W-2 employees contributing to their employer's 401(k). You can contribute up to 100% of your net SE income here, dollar for dollar, up to the limit.
Employer profit-sharing: Up to 25% of net SE compensation (same calculation as the SEP-IRA), capped so total contributions don't exceed $69,000.
On $80,000 net SE income: $23,000 (employee) + ~$14,870 (employer) = $37,870 total — more than double what a SEP-IRA allows at the same income level.
This is the defining advantage of the Solo 401(k) at lower and middle income levels. Below approximately $200,000 in net SE income, the Solo 401(k) almost always allows a higher total contribution. The crossover point where they become roughly equal is around $260,000–$280,000, where the 25% employer contribution alone hits the $69,000 ceiling.
Use the Self-Employed Retirement Account Calculator to compare both accounts side-by-side for your exact income.
The Roth Option
This is one of the most important distinguishing factors.
SEP-IRA: Traditional only. All contributions are pre-tax, reducing your current-year taxable income. Withdrawals in retirement are taxed as ordinary income. There is no Roth SEP-IRA option (though a 2023 SECURE 2.0 provision technically created one, it is not yet widely available from most custodians).
Solo 401(k): Most major custodians (Fidelity, Vanguard, Charles Schwab, TD Ameritrade) offer a Roth option for employee deferrals. You can designate up to $23,000 of your deferral as Roth — paid with after-tax dollars now, growing tax-free forever, with no required minimum distributions.
If you expect to be in a higher tax bracket in retirement than you are now, the Roth component of a Solo 401(k) is a significant advantage. Many early-career freelancers and those in growth phases benefit from a split strategy — taking the employer profit-sharing contribution as traditional (reducing current taxes) while making Roth employee deferrals.
Deadlines
SEP-IRA:
- Account must be opened and funded by your tax filing deadline, including extensions
- For sole proprietors: April 15, or October 15 with an extension
- This is the most generous deadline of any retirement account — you can wait until literally the day you file (or the extension deadline) to make the contribution
Solo 401(k):
- Account must be opened by December 31 of the tax year you want contributions to count for
- Employee deferrals must be contributed by December 31 (or by your filing deadline for self-employed individuals, per IRS guidance — but check with your custodian, as policies vary)
- Employer profit-sharing contributions can be made up to the filing deadline, including extensions
The key takeaway: if you missed December 31 without opening a Solo 401(k), you cannot open one for that tax year. The SEP-IRA can still be opened and funded retroactively through the filing deadline.
Administrative Complexity
SEP-IRA: Extremely simple. Open the account online at any major brokerage. Contribute. No annual IRS filing required for most self-employed individuals (no Form 5500). No plan documents required beyond the IRS model form (Form 5305-SEP).
Solo 401(k): Slightly more complex. You must adopt a formal plan document (most brokerages handle this when you open the account). If your plan assets exceed $250,000 at year-end, you must file Form 5500-EZ annually. No other employees allowed except a spouse.
Which One to Choose
Choose the Solo 401(k) if:
- Your net SE income is below $200,000 (higher contribution limit for same income)
- You want a Roth option
- You want to maximize contributions at lower income levels early in your career
- You have no employees (required — you and your spouse only)
Choose the SEP-IRA if:
- You have employees (the SEP requires you to contribute the same percentage for all eligible employees, which makes it workable; a Solo 401(k) is only available if you have no employees other than your spouse)
- You need the extended deadline flexibility
- You want zero administrative overhead
Both if:
- You can only have one type of Solo 401(k) plan at a time per business, but you can have a SEP at a different employer simultaneously. Some freelancers who also have a W-2 job use a Solo 401(k) for their freelance income and participate in their employer's 401(k) — the employee deferral limit is shared across all plans, but the employer contribution limits are separate.
The Tax Math at $100,000
At $100,000 net SE income, here is what each account delivers:
SEP-IRA: ~$18,587 contribution, reducing taxable income by $18,587. At the 22% federal bracket: ~$4,089 in immediate tax savings.
Solo 401(k) traditional: ~$41,587 total contribution ($23,000 employee + ~$18,587 employer), reducing taxable income by $41,587. At 22%: ~$9,149 in immediate tax savings.
The Solo 401(k) saves more than twice as much in taxes at this income level — and builds your retirement balance more than twice as fast.
The Self-Employed Retirement Account Calculator shows you the projected balance at retirement across both accounts with your specific numbers.
Opening Each Account
SEP-IRA: Available at Fidelity, Vanguard, Charles Schwab, TD Ameritrade, and most online brokerages. Takes 15 minutes online. No plan document beyond the standard IRS form.
Solo 401(k): Fidelity offers a free Solo 401(k) with no annual fees and Roth capability. Vanguard's Solo 401(k) is traditional-only. Schwab and TD Ameritrade offer full-featured plans. You will need an EIN (Employer Identification Number) — free to get at IRS.gov, takes 5 minutes.
The bottom line: for most self-employed people with no employees and income below $250,000, the Solo 401(k) wins on contribution limits and flexibility. Open it before December 31 of the first year you want to use it.