Solo 401(k) vs. SEP-IRA: The Freelancer Retirement Account Math

Most W-2 employees have retirement savings on autopilot. Their employer pulls a portion of every paycheck, parks it in a 401(k), and the rest is paperwork. The tax break arrives without effort.

When you're self-employed, none of that infrastructure exists. The IRS kept the tax break and made it larger: freelancers and 1099 contractors can contribute significantly more to tax-advantaged retirement accounts than W-2 workers. Most don't.

Two accounts do the heavy lifting for the self-employed: the Solo 401(k) and the SEP-IRA. Both are tax-deductible. Both have the same IRS maximum. The math behind each one is different.

The SEP-IRA

SEP stands for Simplified Employee Pension, and the mechanics match the name.

A SEP-IRA works like a traditional IRA with much higher contribution limits. As a sole proprietor or single-member LLC, you can contribute up to 20% of your net self-employment income per year, up to a maximum of $70,000 (2025 IRS limit — verify the current year's cap at IRS.gov before contributing).

The "20%" figure shows up in IRS publications as "25%," which causes confusion. The 25% figure applies to wages in a corporate structure. For sole proprietors, the math rounds to approximately 20% of Schedule C net profit. The IRS provides a worksheet in Publication 560 if you want the exact calculation.

On $80,000 of Schedule C income, that's $16,000. On $200,000, that's $40,000.

Two things make the SEP-IRA appealing: setup is fast (Fidelity, Vanguard, and Schwab all offer accounts with no fees and no minimums), and you can open and fund one up until your tax filing deadline, including extensions. Miss the Solo 401(k) window in December and you can still open a SEP-IRA the following April or October.

The trade-off is that it's percentage-only. Low-income year means a smaller max contribution. There's also no Roth option — all contributions are pre-tax.

The Solo 401(k)

The Solo 401(k) lets you make two separate contributions: one as the employee, one as the employer. That distinction changes the arithmetic.

As the employee, you can contribute up to $23,500 in 2025, regardless of your income level. As the employer, you can also contribute up to 20% of net self-employment income. The two stack, with a combined cap of $70,000.

At $80,000 of Schedule C income:

Employee contribution: $23,500
Employer contribution: approximately $11,000 (20% of net SE income after the SE tax deduction)
Total: approximately $34,500

The SEP-IRA allows $16,000 at the same income. The Solo 401(k) allows more than twice as much.

The gap shrinks as income rises. At $200,000, the SEP-IRA allows roughly $40,000 while a Solo 401(k) allows around $58,500. At $300,000-plus, both approaches start bumping against the $70,000 ceiling and the difference narrows.

The Solo 401(k) also offers a Roth option at most custodians. Contributions aren't deductible now, but withdrawals in retirement are tax-free. Whether that trade is worth making depends on where you expect your tax rate to land in the future.

The catch: you must establish the Solo 401(k) plan by December 31 of the tax year you want to use it. You can fund it later (up until the tax filing deadline), but the plan document has to exist before year-end.

A worked example at $80,000

Freelancer, $80,000 Schedule C net income, 22% federal marginal bracket.

| Account | Max contribution | Federal tax savings | |---|---|---| | Regular IRA | $7,000 | $1,540 | | SEP-IRA | $16,000 | $3,520 | | Solo 401(k) | $34,500 | $7,590 |

The Solo 401(k) saves roughly $4,000 more in federal income taxes than the SEP-IRA on an $80,000 income. These are federal-only figures. Most states follow the federal treatment for retirement contributions, which adds another layer of savings depending on your state rate.

The SE tax deduction also applies to the employer portion of Solo 401(k) contributions, which creates a modest secondary savings. The mechanics are covered in IRS Publication 560.

Which one to open

Open a SEP-IRA if:

You have employees other than a spouse (SEP contributions must be made proportionally for all eligible employees)
It's past December 31 and you didn't establish a Solo 401(k) plan in time
You want the simplest possible option with no annual plan document requirements

Open a Solo 401(k) if:

You have no employees other than a spouse
Your net self-employment income is under about $250,000 (the gap is largest in this range)
You want a Roth option
You want the ability to borrow against the account (some plan documents allow this)

For most solo freelancers, the Solo 401(k) wins. The flat $23,500 employee contribution floor means you can shelter a meaningful amount even in a slower year.

Where to open one

Fidelity, Schwab, and Vanguard all offer both accounts with no annual fees and no minimums. Fidelity is consistently recommended for the Solo 401(k) because the account opening process is straightforward and the plan documents are flexible. Vanguard works well for index fund purists but involves more friction when opening. All three are legitimate choices.

The one deadline that catches people

Solo 401(k): the plan must exist by December 31. You can fund it the following spring when you're filing taxes, but the paperwork has to be done in the calendar year.

SEP-IRA: no year-end deadline. You can open and fund one by your tax filing deadline, including extensions. That means October for many self-employed filers who request an extension.

If you're reading this in April and want to reduce last year's tax bill before filing, a SEP-IRA may still be an option if you haven't filed yet. Open one, contribute for that tax year, deduct it, and set up the Solo 401(k) before December 31 so the better math applies going forward.

For informational purposes only. Not financial, tax, or legal advice.