Solo 401(k) vs SEP IRA: Which Retirement Plan is Best for Freelancers?

As a self-employed professional, you don't have an employer contributing to a 401(k) for you—but you actually have access to even better retirement options than most employees. The two most powerful are the Solo 401(k) and the SEP IRA.

Both let you save significantly more than a traditional IRA ($7,000 limit), but one of them could let you contribute $20,000+ more per year than the other. Let's break down exactly which one is right for your situation.

Quick Comparison: Solo 401(k) vs SEP IRA

The Critical Difference: How Much Can You Actually Contribute?

Here's where it gets interesting. While both plans have the same maximum contribution limit ($70,000 in 2026), the way you reach that limit is completely different—and it matters a LOT for most freelancers.

SEP IRA: Employer Contributions Only

With a SEP, you can contribute up to 25% of your net self-employment income. That's it. No employee deferrals.

To max out a SEP IRA at $70,000, you'd need to earn approximately $280,000 in net self-employment income.

Solo 401(k): Employee + Employer Contributions

With a Solo 401(k), you wear two hats:

• As employee: Contribute up to $23,500 (2026) regardless of income
• As employer: Contribute up to 25% of net SE income on top of that

This dual contribution is the game-changer for freelancers earning $60k-$200k.

Feature Comparison: Beyond Contribution Limits

Feature	Solo 401(k)	SEP IRA
Roth Contributions	✅ Yes — employee deferrals can be Roth (tax-free growth & withdrawals)	❌ Technically allowed since SECURE 2.0, but almost no providers offer it
Loan Provision	✅ Borrow up to $50,000 or 50% of balance (whichever is less)	❌ No loans allowed — early withdrawal = 10% penalty + taxes
Setup Deadline	December 31 of the tax year you want to contribute	Tax filing deadline including extensions (as late as Oct 15)
Contribution Deadline	Tax filing deadline (April 15 or Oct 15 with extension)	Tax filing deadline (April 15 or Oct 15 with extension)
Form 5500-EZ Filing	Required when assets exceed $250,000	Not required
Employees Allowed	Only owner + spouse (no other employees)	Can have employees (but must contribute equally for all)
Best Providers	Fidelity, Schwab, Vanguard (all free)	Fidelity, Schwab, Vanguard (all free)

The Roth Advantage (Solo 401(k) Only)

This is a huge benefit that often gets overlooked. With a Solo 401(k), you can designate your employee deferrals (up to $23,500) as Roth contributions.

What does that mean?

• You pay taxes on the contribution NOW (no immediate deduction)
• All growth is 100% tax-free
• All withdrawals in retirement are 100% tax-free

If you're a younger freelancer expecting to be in a higher tax bracket later, or you just want tax diversification in retirement, the Roth option is incredibly valuable. SEP IRAs don't offer this in practice.

When to Choose Each Plan

Real-World Example: $120,000 Freelance Consultant

Let's see how this plays out for a freelance consultant earning $120,000 net self-employment income:

Category	Solo 401(k)	SEP IRA
Net SE Income	$120,000	$120,000
Employee Deferral	$23,500	$0
Employer Contribution (25%)	~$27,800	~$27,800
Total Contribution	$51,300	$27,800
Tax Savings (32% bracket)	$16,416	$8,896
Extra Tax Savings	Solo 401(k) saves $7,520 more in taxes!

How to Set Up Each Plan

Setting Up a Solo 401(k)

1. Choose a provider: Fidelity, Schwab, and Vanguard all offer free Solo 401(k) plans
2. Complete the application: Takes about 15-30 minutes online
3. Get your EIN: You'll need an Employer Identification Number (free from IRS)
4. Adopt the plan by December 31 of the year you want to contribute
5. Make contributions by your tax filing deadline

Setting Up a SEP IRA

1. Choose a provider: Same providers work (Fidelity, Schwab, Vanguard)
2. Complete IRS Form 5305-SEP (one page)
3. Open the account: Can be done as late as your tax filing deadline
4. Make contributions by your tax filing deadline

Common Questions

Can I have both a Solo 401(k) and a SEP IRA?

Yes, but your combined employer contributions across both plans are limited. For most freelancers, it's better to pick one and maximize it.

What if I also have a W-2 job with a 401(k)?

Your employee deferral limit ($23,500) is shared across all 401(k) plans. But you can still make employer contributions to your Solo 401(k) from your self-employment income.

Can I switch from SEP IRA to Solo 401(k)?

Yes! You can roll your SEP IRA into your Solo 401(k). Just set up the Solo 401(k) first, then initiate the rollover.

What happens if I hire employees?

If you hire non-spouse employees who work 1,000+ hours/year, you can no longer use a Solo 401(k). You'd need to convert to a regular 401(k) or use a SEP IRA (but you'd have to contribute the same percentage for all employees).

The Bottom Line

For most freelancers earning between $60,000 and $200,000, the Solo 401(k) is the clear winner. The ability to make employee deferrals on top of employer contributions lets you save significantly more, reduce your tax bill further, and access Roth contributions for tax-free growth.

The SEP IRA's main advantage is simplicity and the ability to set it up retroactively. If you're past December 31 and need a retirement plan for the prior year, SEP is your only option.