Solo 401(k) vs SEP IRA: Which Saves a Self-Employed Person More

The most powerful tax tool a freelancer has is the retirement contribution. A self-employed person can sock away tens of thousands of dollars in pre-tax money every year, drop their taxable income by the same amount, and let it compound for decades. The two main vehicles for doing so are the Solo 401(k) and the SEP IRA, and which one is right for you depends almost entirely on your income level. This guide is the side-by-side comparison with the actual numbers.

The basic mechanics

Both plans let a self-employed person contribute money to a retirement account that grows tax-deferred (or tax-free in the Roth case). Both reduce current-year federal income tax. Both are easy to open at any major brokerage (Fidelity, Schwab, Vanguard, eTrade). Both must be funded by your tax-filing deadline plus extensions.

Where they differ is the formula for how much you can put in.

SEP IRA: simple, capped at 25% of net earnings

A SEP IRA (Simplified Employee Pension) lets you contribute up to 25% of net self-employment earnings, capped at the annual limit. For 2025 that cap is $70,000; for 2026 it is $72,000 (estimated; verify against the IRS Notice each fall).

The 25% is computed AFTER the half-SE deduction, so the effective rate on Schedule C net profit is closer to 20%. The math is annoying but the IRS publishes a simplified worksheet.

The strengths: trivial to open (one form at any brokerage), no annual filing with the IRS, no per-participant fees, no 5500-EZ once balances cross $250k. Just a regular IRA-style account that happens to accept big employer contributions.

The weaknesses: low earners cannot put much in (because 25% of $30,000 is only $7,500), no Roth option directly, no loan feature, no employee-deferral component.

Solo 401(k): two-bucket structure, more total room

A Solo 401(k) (also called Individual 401(k) or Self-Employed 401(k)) gives you TWO ways to contribute to the same account:

Employee deferral. Up to $23,500 (2025) / $24,500 (2026 estimated) regardless of income, IF you have at least that much in self- employment compensation. People 50+ can add a $7,500 catch-up. People 60-63 can add a higher catch-up (~$11,250 in 2025) under the SECURE 2.0 super-catch-up rule.

Employer profit-sharing. Up to 25% of net self-employment earnings — same formula as the SEP. This stacks ON TOP of the employee deferral.

Combined limit (employee + employer) caps at the same $70,000 / $72,000 figure that limits the SEP. So at very high incomes, both plans hit the same ceiling. At lower incomes, the Solo 401(k) wins because the $23,500 employee deferral is independent of the 25% cap.

The Solo 401(k) also offers:

A Roth bucket — you can split your employee deferral between traditional and Roth, gaining tax-free growth on a portion.
A loan feature — you can borrow up to 50% of your balance (capped at $50,000) and pay yourself back with interest. Useful in emergencies; not a substitute for an emergency fund.
Mega-backdoor Roth potential at high incomes if your plan supports after-tax non-Roth contributions and in-plan Roth conversions.

The trade-off: more paperwork. The IRS requires Form 5500-EZ once your balance exceeds $250,000. Setting up takes a few more clicks at the brokerage. And you have to elect employee-deferral by December 31 (the cash itself can flow until tax day).

Side-by-side at three income levels

The single most useful comparison is what each plan lets you contribute at common income levels. Numbers are for 2025; 2026 limits are slightly higher.

Net SE profit of $40,000:

SEP IRA: ~$7,400 (about 18.6% effective)
Solo 401(k): $23,500 deferral + ~$7,400 employer = ~$30,900
Solo 401(k) wins by ~$23,500. A massive difference at this income.

Net SE profit of $80,000:

SEP IRA: ~$14,870
Solo 401(k): $23,500 deferral + ~$14,870 employer = ~$38,370
Solo 401(k) wins by $23,500. Still a huge gap.

Net SE profit of $200,000:

SEP IRA: ~$37,180
Solo 401(k): $23,500 deferral + ~$37,180 employer, capped at $70,000 = $60,680
Solo 401(k) wins by ~$23,500 until you hit very high incomes where both max out at $70k.

The pattern: at almost every income level a self-employed person realistically hits, the Solo 401(k) provides $23,500 more contribution room. That is the employee deferral that the SEP simply does not have.

The tax savings, in real dollars

A $23,500 contribution at a 22% federal income-tax marginal rate saves $5,170 in federal income tax this year. Add 5% state tax and you are at $6,345 in immediate cash savings — for a single year of contributions you would have made anyway if you wanted to save for retirement.

The contribution does NOT reduce SE tax. Both SE tax and the 92.35% factor happen before retirement contribution adjustments on Schedule 1.

Plug your own numbers into the SE Tax Calculator with and without your retirement contribution to see the federal-income-tax delta on your situation.

Roth, traditional, or both?

The simple rule: if you expect to be in a HIGHER tax bracket in retirement than today, contribute to Roth (taxed now, tax-free in retirement). If you expect a LOWER bracket in retirement, contribute to Traditional (tax-deductible now, taxed in retirement).

For most freelancers in their 20s and 30s, mid-bracket today, the Roth Solo 401(k) is attractive — current marginal rate likely lower than retirement bracket once compounded for 30 years. For high earners in their 40s and 50s approaching peak income, traditional is usually right.

The SEP IRA is traditional-only. The Solo 401(k) lets you split: e.g., $11,750 Roth deferral + $11,750 traditional deferral + $14,870 traditional employer contribution. Maximum flexibility.

Setup logistics

SEP IRA. Open at Fidelity, Schwab, Vanguard or any major brokerage in about 15 minutes. Form 5305-SEP gets filed with the brokerage, not with the IRS. No annual filing requirement. Contributions can be made until your tax-filing deadline plus extensions (so up to October 15 of the following year if you extend).

Solo 401(k). Open at the same brokerages — Fidelity offers traditional only, Schwab and eTrade offer Roth options. The plan must beestablished by December 31 of the tax year (you cannot create a Solo 401(k) for 2025 in March 2026). The contributions themselves can flow until your tax-filing deadline. Form 5500-EZ once balance exceeds $250,000. No annual fees at the major brokerages.

Common mistakes

Waiting until April to open a Solo 401(k) for the prior year. Plan must be established by Dec 31.
Confusing the 25% rule. It is 25% of net SE earnings AFTER the half-SE deduction, not 25% of revenue.
Hitting the limit by accident if you also have a W-2 job with a 401(k) — the $23,500 employee deferral cap is per person across ALL plans, so coordinate.
Putting the contribution on Schedule C line 19. Wrong line — it goes on Schedule 1 line 16.
Not contributing because you ran out of cash by Dec 31. You can still open the Solo 401(k) by Dec 31 with $0, and fund it before tax day.
Not choosing Roth in your 20s or 30s. The compounding tax-free growth advantage is enormous over 30 years.

The simple decision tree

Net SE profit under $30k: Solo 401(k) — the deferral is most of your retirement contribution.
Net SE profit $30k-$200k: Solo 401(k) — employee deferral + employer is $23,500 more than SEP at every level.
Net SE profit over $200k: still Solo 401(k), both hit the cap but Solo gives you Roth, loans and mega-backdoor optionality.
You hate paperwork or balance will stay under $250k forever: SEP IRA — slightly less to put in, but zero administrative friction.
You have or might have W-2 employees: SEP IRA — a Solo 401(k) requires you to be solo or employ only your spouse.

Sources and methodology

Contribution limits cited come from IRS Notice 2024-80 (2025 limits) and projected 2026 figures from IRS announcements; verify against the most recent Rev. Proc. before final filing decisions. SECURE 2.0 super-catch-up details from the relevant statute. Federal works are public domain (17 U.S.C. § 105).

Disclaimer: This is not investment or retirement advice. Plan eligibility has edge cases (controlled-group rules, spouse-employee considerations, prior 401(k) coordination) that need a CPA or financial advisor review for non-trivial situations.