Solo 401(k) vs SEP IRA for Freelancers: Which Saves More?

What's the Contribution Limit Difference?

The overall 2026 cap is the same for both plans: $72,000 under the IRS §415(c) limit, or $79,500 if you're 50 or older and add the $7,500 catch-up (solo 401(k) only — SEP IRAs have no catch-up provision).[1][2]

Where they diverge is how you get there. A SEP IRA's contribution is entirely an "employer" contribution: up to 25% of your net self-employment income (after the self-employment tax adjustment), capped at $72,000. A solo 401(k) lets you stack two pieces — an employee deferral of up to $24,500 (your own money, dollar for dollar, regardless of income) plus an employer contribution of up to 25% of net self-employment income — and the two together are capped at $72,000.

That employee deferral is the real advantage. It means a solo 401(k) reaches meaningful contribution levels on far less income than a SEP IRA does, because the first $24,500 doesn't depend on the 25% formula at all.

Can You Do a Roth Version?

Solo 401(k)s offer a Roth option on the employee-deferral piece, letting you contribute after-tax dollars and withdraw tax-free in retirement. SEP IRAs are traditional-only — there is no separate "Roth SEP IRA," though as of 2023 SECURE 2.0 permits SEP contributions to be designated Roth if the provider supports it (most brokerages still don't).[3] If you're young and expect future tax brackets to be higher, the Roth solo 401(k) deferral is the more broadly available advantage.

What About Loans?

Solo 401(k)s let you borrow up to 50% of your account balance (max $50,000) and repay it over 5 years.[4] SEP IRAs prohibit loans entirely — the closest you can get is a 60-day IRA rollover, which is not a loan and carries real risk if you miss the deadline. If you need emergency access to your retirement savings, a solo 401(k) provides a safety valve a SEP IRA cannot.

Which Has Lower Admin Burden?

SEP IRAs win on simplicity. Setup is minimal, paperwork is light, and you can open one anytime before your tax filing deadline. Solo 401(k)s require more documentation, annual Form 5500 filings if assets exceed $250,000, and ongoing compliance.[5] If you hate paperwork, a SEP IRA saves time.

Solo 401(k) Administration Costs

Solo 401(k)s typically cost $200-500 annually to maintain, depending on your provider — some major brokerages (Fidelity, Schwab) waive the fee entirely for a plain solo 401(k) with no loan feature.[1] SEP IRA fees average $50-100 per year. The trade-off: spend more (or pick a fee-free provider) to get loan access and the Roth deferral.

How Much Income Do You Need to Max Out Each?

To max a SEP IRA at $72,000, you need roughly $288,000-$360,000 in net self-employment income, since the contribution is capped at 25% of that net figure.[2] A solo 401(k) requires far less: you can hit $72,000 total with around $115,000-$150,000 in net earnings, because the first $24,500 comes from you as an employee — no 25% formula attached — before the employer share even starts stacking.

Variable Income Years: Which Flexes Better?

SEP IRAs force you to contribute the same percentage of income every year, which can be punishing in high-income years but painless in slow years. Solo 401(k)s let you vary contributions annually—if you have a great year, maximize contributions; if it's slow, contribute minimally.[3]

Tax Deduction: Both Are Immediate

Both plans give you a full tax deduction for contributions in the year made. A solo 401(k) contribution of $50,000 reduces taxable income by $50,000 in 2026.

Investment Control

Solo 401(k)s typically offer broader investment options: stocks, bonds, mutual funds, ETFs, and even self-directed investments like real estate or private equity (with proper custodians).[4] SEP IRAs have more limited menus, though most providers offer standard stocks and funds.

Spousal Income Considerations

Both solo 401(k)s and SEP IRAs let you contribute based on your spouse's self-employment income if you file jointly. A married couple with a joint business can use either plan and multiply contribution limits.

A Worked Example

Jordan freelances full-time and nets $90,000 in self-employment income after expenses (about $83,700 after the self-employment tax adjustment). With a SEP IRA, Jordan can put in 25% of that adjusted figure — about $20,925. With a solo 401(k), Jordan can put in the full $24,500 employee deferral, plus 25% of the adjusted net income as the employer share (about $20,925), for a combined $45,425 — more than double the SEP IRA's ceiling, on the exact same income. That gap only closes as income climbs into the high six figures, where both plans eventually hit the shared $72,000 cap.

Which One Should You Actually Open?

If your net self-employment income is under roughly $150,000 and you want to save aggressively, a solo 401(k) wins on the math alone — the employee deferral does the heavy lifting a SEP IRA's percentage-only formula can't match. If you hate paperwork, only expect to contribute in good years, or run a side business alongside a W-2 job that already has a 401(k), a SEP IRA's near-zero setup and maintenance is worth the lower ceiling. And if you're not sure yet, know this: a SEP IRA can be opened as late as your tax filing deadline (including extensions) for the prior year, while a solo 401(k) generally must be established by December 31 of the year you want it to count for employee deferrals — so waiting to decide can quietly take the better option off the table.

Recommended Calculators

• Freelance Rate Calculator — Estimate net self-employment income before applying either plan's contribution formula
• Retirement Calculator — Project how a solo 401(k) or SEP IRA balance grows to retirement
• Savings Goal Calculator — Work out the monthly contribution needed to hit a target retirement balance

Frequently Asked Questions

Can I have both a solo 401(k) and a SEP IRA? Not for the same self-employment income in the same year in a way that lets you double-dip on limits — the $72,000 §415(c) cap applies per employer across any plans you control. You can switch which plan you use from year to year if your circumstances change.

What if I have W-2 income and freelance income? You can contribute to an employer 401(k) through your W-2 job separately, but your $24,500 employee-deferral limit is shared across every 401(k) you contribute to, including a solo 401(k) on your freelance side. For your freelance income beyond that, a solo 401(k)'s employer share or a SEP IRA are both still available.

Can I set up a solo 401(k) if I have employees? No. A true solo 401(k) is only for a business with no employees other than a spouse. Hire a single non-spouse W-2 employee who works enough hours to be eligible, and you must cover them in the plan too, which usually means switching to a standard 401(k).

Which plan do most freelancers choose? Solo 401(k)s are more popular among freelancers who want to save aggressively on moderate income and value the loan and Roth-deferral options. SEP IRAs remain common among freelancers who prioritize simplicity or who run the business alongside other retirement accounts.

Sources

[1] Internal Revenue Service. "One-Participant 401(k) Plans." https://www.irs.gov/retirement-plans/one-participant-401k-plans

[2] Internal Revenue Service. "Simplified Employee Pension Plan (SEP)." https://www.irs.gov/retirement-plans/simplified-employee-pension-plan-sep

[3] Internal Revenue Service. "Retirement Topics — 401(k) and Profit-Sharing Plan Contribution Limits." https://www.irs.gov/retirement-plans/retirement-topics-401k-and-profit-sharing-plan-contribution-limits

[4] Internal Revenue Service. "Retirement Topics — Plan Loans." https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-plan-loans

[5] Internal Revenue Service. "Form 5500 Corner." https://www.irs.gov/retirement-plans/form-5500-corner