SEP-IRA vs Solo 401(k): Which Is Best for Freelancers?
Two retirement accounts dominate the freelancer world: SEP-IRA and Solo 401(k). Both let you shelter much more than a standard IRA ($7,000) — up to $70,000+ per year. But they have very different mechanics. This article walks through both, with side-by-side math.
The 30-second answer
- Income under $40k net SE: SEP-IRA is fine, simpler.
- Income $40k–$100k: Solo 401(k) usually wins — you can contribute more.
- Income $100k+: Solo 401(k) almost always wins, especially if you want Roth contributions.
- Want maximum simplicity: SEP-IRA. One form, no annual filing.
- Have employees: Things get more complex. Solo 401(k) requires you have NO non-spouse employees.
SEP-IRA: how it works
SEP stands for Simplified Employee Pension. As a freelancer, you contribute up to 25% of your net SE income (technically 20% of net earnings due to half-SE-tax math), capped at $70,000 in 2025.
Pros:
- Open it with one form (Form 5305-SEP, file in your records).
- No annual administration. No tax filings.
- Available at every brokerage (Fidelity, Schwab, Vanguard).
- Contribution deadline: tax filing deadline (April 15) plus extensions (October 15) — gives you time to decide after year-end.
Cons:
- No Roth option. All contributions are pre-tax.
- No catch-up contributions for age 50+.
- No loan provisions.
- Contribution % must be the same for you and any employees — if you have employees and contribute 20% for yourself, you must contribute 20% of their pay too. Expensive.
Solo 401(k): how it works
A Solo 401(k) is a 401(k) plan for a one-person (or owner-and-spouse) business. You contribute as both employer AND employee.
Two contribution buckets:
- Employee deferral: Up to $23,500 in 2025 ($31,000 if 50+). This is dollar-for-dollar — you can defer up to the limit regardless of income.
- Employer profit share: Up to 25% of net SE income (about 20% effective). Same as SEP-IRA limit on the employer side.
- Combined cap: $70,000 in 2025 ($77,500 if 50+).
Pros:
- Higher contributions at lower income levels (the employee deferral piece doesn't depend on income).
- Roth option on the employee deferral side — pay tax now, withdraw tax-free in retirement.
- Loans allowed (up to $50,000 or 50% of balance).
- Catch-up contributions for 50+.
Cons:
- Must establish by December 31 of the contribution year (not April 15 like SEP).
- Form 5500-EZ required once balance exceeds $250,000.
- Cannot have non-spouse W-2 employees in your business.
- Slightly more setup paperwork than SEP-IRA.
Side-by-side: contribution limit at different income levels
| Net SE income | Max SEP-IRA | Max Solo 401(k) | Solo advantage |
|---|---|---|---|
| $30,000 | ~$5,580 | ~$29,080 | +$23,500 |
| $50,000 | ~$9,300 | ~$32,800 | +$23,500 |
| $80,000 | ~$14,880 | ~$38,380 | +$23,500 |
| $120,000 | ~$22,320 | ~$45,820 | +$23,500 |
| $200,000 | ~$37,200 | ~$60,700 | +$23,500 |
| $350,000+ | $70,000 (cap) | $70,000 (cap) | $0 (both maxed) |
The Solo 401(k) advantage is essentially the $23,500 employee deferral that SEP-IRA doesn't have. Once your income is high enough that the 25% employer contribution alone hits $70,000, the two are equal.
Tax savings example
Freelancer in California with $100,000 net SE income, single, in the 24% federal bracket plus 9.3% CA bracket.
- Without retirement contributions: federal + state + SE = ~$32,000
- With $18,600 SEP-IRA contribution: tax savings of ~$6,200 (33.3% combined marginal rate)
- With $42,100 Solo 401(k) contribution ($23,500 deferral + $18,600 employer): tax savings of ~$14,000
Solo 401(k) saves $7,800 more in taxes per year, on top of getting more dollars into retirement. This stacks every year.
Roth Solo 401(k) — the high-income freelancer's secret
Above the Roth IRA income limit ($165k single in 2025), regular Roth IRA contributions phase out. Roth Solo 401(k) has NO income limit — you can contribute up to $23,500 in Roth dollars even at $500k income. The trade-off is no tax deduction now, but tax-free growth and tax-free withdrawals in retirement.
Smart move: split your employee deferral between traditional and Roth based on whether you expect higher tax rates now or in retirement.
Where to open one
Most major brokerages offer both SEP-IRA and Solo 401(k):
- Fidelity: No setup or annual fees. Solid choice. Roth Solo 401(k) supported.
- Schwab: Same — no fees. Roth Solo 401(k) supported.
- Vanguard: Now charges some fees but has solid index funds.
- E*TRADE: No fees, supports loans.
Avoid third-party Solo 401(k) administrators charging $1,000+/year unless you specifically need a checkbook control plan.
Combining with HSA
If you also have a high-deductible health plan, max out an HSA ($4,300 single / $8,550 family in 2025) before doing additional retirement contributions. HSA has the best tax treatment of any account: deductible going in, tax-free growth, tax-free withdrawals for medical. After 65 it functions like a traditional IRA for any purpose.
The bottom line
For most freelancers under $300k, Solo 401(k) wins by $20k+/year in contribution capacity. The setup is one weekend of paperwork, then it's set-and-forget. Open one before December 31 of the year you want to start contributing.