SEP-IRA vs Solo 401(k): Which Should You Pick?

Without an employer 401(k) match, retirement saving is on you. The upside: the accounts built for the self-employed have far higher limits than a regular IRA, and they cut your tax bill now. The two main choices are the SEP-IRA and the Solo 401(k). Here's how to pick.

The quick answer

For most one-person businesses, the Solo 401(k) lets you save more at the same income — because it allows two types of contribution. The SEP-IRA wins on pure simplicity. If you have no employees and want to maximize savings, the Solo 401(k) is usually the better tool.

SEP-IRA: simple and flexible

A SEP-IRA is about as easy as retirement accounts get. You contribute up to 25% of your net self-employment earnings, up to an annual cap (in the mid-$70,000s for recent years, indexed upward). Contributions are tax-deductible, the money grows tax-deferred, and you can open one at almost any brokerage in minutes.

The catch: it's a single bucket. Your contribution is purely a percentage of profit, so at lower incomes you can't save as much as the Solo 401(k) allows.

Solo 401(k): two ways to contribute

A Solo 401(k) is for businesses with no employees other than you (and a spouse). It lets you contribute as both employee and employer:

• As the employee: up to the annual elective deferral limit (in the low-to-mid $20,000s, indexed), regardless of your business's size.
• As the employer: up to 25% of your net earnings, like the SEP.

Because of the employee piece, you can reach the maximum at a much lower income than a SEP allows. Many plans also offer a Roth option for the employee portion — pay tax now, withdraw tax-free later — which a SEP doesn't.

The trade-off: a bit more paperwork. Once the account passes $250,000, you file a simple annual form (5500-EZ).

A quick example

Say you net $60,000:

• SEP-IRA: roughly 20% of net (after the self-employment tax adjustment) ≈ $11,000–$12,000.
• Solo 401(k): the same employer portion plus your full employee deferral — often more than double the SEP at this income.

At very high incomes the two converge, since both top out near the same overall cap. The Solo 401(k)'s advantage is biggest for low-to-middle freelance incomes.

Both lower this year's tax

Contributions to either are deductible, which trims the taxable income your income tax and QBI deduction are figured on. Retirement saving and tax planning are the same move here.

Treat your retirement contribution as a fixed cost of being your own employer — and price it in. Our rate & take-home calculator has a retirement field so the rate it suggests already funds your future self.

---

This is general information, not financial or tax advice. Contribution limits are indexed annually and the right account depends on your income, structure, and goals — confirm current limits and your choice with a qualified financial or tax professional.