Retirement
SEP IRA vs Solo 401(k): Retirement Plans for Freelancers
Both accounts let a one-person business save far more than a typical employee 401(k) allows. The right one for you comes down to how much you want to contribute and how much paperwork you're willing to manage.
Freelancers often assume retirement accounts are an employee benefit they've lost access to. In reality, the accounts available to the self-employed are among the most generous in the tax code — the challenge is simply that no one sets them up automatically.
SEP IRA: simple and flexible
A Simplified Employee Pension (SEP) IRA lets you contribute up to 25% of net self-employment earnings (after certain adjustments), up to an annual dollar cap the IRS sets each year. It's easy to open through almost any brokerage, requires no annual filing in most cases, and contribution amounts can flex year to year — contribute more in a strong year, skip or reduce in a lean one.
Solo 401(k): higher ceilings, more moving parts
A Solo (or "one-participant") 401(k) is available to self-employed people with no full-time employees other than a spouse. It allows two layers of contribution: an employee deferral (up to the standard annual 401(k) employee limit, same as a company plan) plus an employer profit-sharing contribution (up to 25% of compensation), subject to a combined annual cap.
Because of that two-layer structure, a Solo 401(k) usually allows meaningfully higher total contributions than a SEP IRA at the same income level — especially at moderate income, where the flat 25% SEP formula alone wouldn't reach the combined Solo 401(k) cap.
Side by side
| SEP IRA | Solo 401(k) | |
|---|---|---|
| Contribution structure | Employer-style only, up to 25% of net earnings | Employee deferral + employer profit-sharing |
| Typical max at moderate income | Lower | Higher |
| Roth option | Not traditionally, though some providers now support it | Often available directly |
| Setup complexity | Simple — usually a single form | Requires a plan document |
| Annual filing | Generally none required | Form 5500-EZ once assets exceed $250,000 |
| Loan option | No | Many providers allow loans against the balance |
How to decide
Choose a SEP IRA if you want the simplest possible setup, your income is variable and you like the flexibility to skip contributions in lean years, or your contribution amount comfortably fits under the SEP's 25% formula anyway.
Choose a Solo 401(k) if you want to maximize contributions at a moderate income level, want a Roth option, or think you might want to borrow against the balance someday. The added setup effort is a one-time cost; the higher contribution ceiling compounds every year after.
Frequently asked questions
Free Agent Finance Editorial Team
Contribution limits change annually — always confirm the current year's caps at IRS.gov before contributing. Have a correction? Let us know.
