Solo 401(k) and SEP-IRA: Retirement Account Options for the Self-Employed

Why Self-Employed Workers Need Dedicated Retirement Accounts

If you work a traditional job, your employer likely offers a 401(k) — complete with contribution matching and automatic payroll deductions. As a freelancer or independent contractor, you don't have that built-in structure. That doesn't mean you're without options — it means you need to build the structure yourself.

The two most widely used retirement accounts for self-employed individuals in the US are the Solo 401(k) (also called an Individual 401(k)) and the SEP-IRA (Simplified Employee Pension IRA). Both are IRS-recognized plans that let you defer taxes on contributions while growing your investments. For background on how employer 401(k)s work, see our 401(k) explainer.

Understanding the structural differences between these two accounts is the first step toward choosing the one that fits your income, tax situation, and future plans.

How Each Account Is Structured

The Solo 401(k) mirrors a traditional employer 401(k) but is designed for business owners with no full-time employees other than a spouse. You contribute in two roles simultaneously: as an employee (up to $23,000 in 2024, or $30,500 if age 50 or older) and as an employer (up to 25% of net self-employment compensation). Combined, total contributions cannot exceed $69,000 in 2024 ($76,500 with catch-up). Notably, many Solo 401(k) providers offer a Roth option, allowing after-tax contributions that grow tax-free.

The SEP-IRA works differently. You contribute only in the employer role — up to 25% of net self-employment income, capped at $69,000 in 2024. There is no employee contribution component and no Roth version. Setup is straightforward: you open the account through a brokerage and contributions are made annually, even as late as your tax filing deadline (including extensions).

Both accounts require you to have earned self-employment income. Contributions to either reduce your taxable income for the year, which is one of the core benefits covered in our article on holding investments inside retirement accounts.

Contribution Limits: Where the Real Difference Lies

The contribution mechanics create a meaningful gap at lower income levels. Consider a freelancer earning $60,000 in net self-employment income:

• Solo 401(k): Up to $23,000 as the employee, plus ~$11,195 as the employer (25% of net income after the self-employment tax deduction) — totaling roughly $34,000.
• SEP-IRA: Roughly $11,195 only (employer-side only).

At higher income levels — above roughly $305,000 in net self-employment income — both accounts reach the same dollar cap. Below that threshold, the Solo 401(k)'s employee contribution component almost always produces a higher allowable contribution. This gap is especially relevant for young professionals whose self-employment income is growing but hasn't yet reached high levels.

Administration, Eligibility, and Key Restrictions

The Solo 401(k) carries more administrative requirements. You must establish it by December 31 of the tax year in which you want to contribute. If your plan assets exceed $250,000, the IRS requires you to file Form 5500-EZ annually. You also cannot have full-time employees other than a spouse — if you hire W-2 employees in the future, you'll need to transition to a different plan type.

The SEP-IRA is simpler. There's no annual filing requirement regardless of balance, and it can technically cover employees if your business grows — though doing so means contributing equally for all eligible employees, which could significantly increase your costs.

Loan provisions are another distinction: Solo 401(k) plans may allow participant loans (depending on the plan provider), while SEP-IRAs do not. Early withdrawals from either account before age 59½ generally trigger a 10% penalty plus ordinary income tax — a risk worth understanding before treating either account as an emergency fund. For a full picture of these trade-offs, see Roth IRA vs. Traditional IRA for related withdrawal and tax considerations.

Choosing the Right Account for Your Situation

Neither account is the automatic winner — context matters. Ask yourself:

1. How much do I want to contribute? If your income is under ~$200,000 and you want to maximize contributions, the Solo 401(k) likely gives you more room.
2. Do I want a Roth option? Only the Solo 401(k) offers this.
3. How variable is my income? The SEP-IRA's employer-only structure is simpler and the contribution isn't locked in until you file taxes, giving more flexibility.
4. Will I hire employees? If so, the SEP-IRA scales to cover them — though at a cost. The Solo 401(k) cannot include non-spouse employees.
5. How much administration can I handle? The SEP-IRA has fewer ongoing requirements and no setup deadline pressure.

Both accounts are legitimate, IRS-approved tools that put self-employed workers on a path to retirement security. Consulting a licensed tax professional or financial adviser can help you evaluate which option aligns with your specific tax situation and income projections.

This article is for general informational and educational purposes only and does not constitute personalized financial, tax, or legal advice. Contribution limits and IRS rules are subject to change. Consult a qualified financial adviser or tax professional for guidance specific to your circumstances.