Retirement Accounts for the Self-Employed: SEP IRA vs. Solo 401(k)
Compare the SEP IRA and Solo 401(k), learn how contribution limits work for business owners, and pick the right account for your situation.
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Published by ClearCalc Editorial Team
ClearCalc Editorial Team
Our editorial team creates clear, practical explanations of personal finance, with an emphasis on transparent assumptions and useful next steps.
Key takeaways
- Both accounts allow far higher contributions than a traditional or Roth IRA.
- A Solo 401(k) usually lets lower and middle earners save more because of the employee deferral.
- A SEP IRA is simpler to open and maintain, and works if you may hire staff later.
Life without an employer plan
Leaving a salaried job usually means leaving behind an employer 401(k) and any matching contributions. The good news is that the tax code offers self-employed people some of the most generous retirement accounts available, provided you choose the right one and fund it consistently.
The two most common options are the Simplified Employee Pension (SEP) IRA and the Solo 401(k), sometimes called an individual 401(k). Both offer tax-deferred growth, and both can be opened at most major brokerages at little or no cost.
How the SEP IRA works
A SEP IRA only accepts employer contributions. As a sole proprietor, you are the employer, and you can contribute up to roughly 20% of your net self-employment earnings (25% of compensation for incorporated owners), subject to an annual dollar cap set by the IRS.
The appeal is simplicity. There's no annual filing requirement for most accounts, and you can decide how much to contribute — or whether to contribute at all — right up until your tax filing deadline, including extensions. The catch is that if you hire eligible employees, you must contribute the same percentage for them.
Self-Employment Tax Calculator
Business income minus deductible business expenses — the figure from Schedule C line 31.
- Total to set aside for 2026
- $20,559
- Each quarterly payment
- $5,140
- Share of profit to set aside
- 24.19%
How the Solo 401(k) works
A Solo 401(k) is available to business owners with no employees other than a spouse. You contribute in two roles. As the employee, you can defer up to the standard 401(k) limit, plus catch-up contributions if you're 50 or older. As the employer, you can add a profit-sharing contribution of up to about 20% of net self-employment earnings.
Because the employee deferral isn't tied to a percentage of income, a Solo 401(k) can let someone earning $60,000 save dramatically more than a SEP IRA would allow. Many providers also offer a Roth option for the employee portion.
The trade-off is a bit more paperwork. Once plan assets exceed $250,000, you'll need to file Form 5500-EZ each year, and the plan generally needs to be established by the end of the tax year for employee deferrals to count.
Choosing between them
If you want the largest possible contribution on a modest or moderate income, the Solo 401(k) usually wins. If you value simplicity, are a high earner who will hit the dollar cap either way, or expect to hire employees, a SEP IRA may be the cleaner choice.
Whichever you pick, automate it. Treat a retirement contribution like a business expense you pay every month, and you'll avoid the scramble of trying to find a large sum at tax time.
Frequently asked questions
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