Last reviewed 2026-09-13 · 8 min read
Once freelance income becomes steady, retirement savings often becomes the next planning question — and two of the most common vehicles people compare are the SEP IRA and the solo 401(k) (also called an individual 401(k) or one-participant 401(k)). Both let self-employed people contribute more than a standard IRA allows, and both offer tax-deferred (or, for some solo 401(k)s, Roth) growth. They're structured differently, though, and the right choice depends on your income level, whether you have employees, and how much administrative complexity you're willing to take on.
This is a general comparison to help frame the conversation with a financial advisor or tax professional — it isn't personalized retirement advice, and contribution limits and rules should always be confirmed against current IRS guidance before you commit to a contribution amount.
How SEP IRA contributions work
A SEP IRA (Simplified Employee Pension) lets a self-employed person contribute a percentage of net self-employment earnings, up to a dollar cap that the IRS adjusts periodically. Contributions come only from the 'employer' side — there's no employee salary-deferral component — which makes the plan simple to administer but means your total contribution is directly tied to that percentage-of-earnings formula.
SEP IRAs are popular for their low setup cost and flexibility: you can generally decide how much to contribute (up to the limit) each year, including contributing nothing in a lean year, and the paperwork to establish one is minimal compared to a 401(k).
How solo 401(k) contributions work
A solo 401(k) is available to self-employed people with no employees other than a spouse. It lets you contribute in two capacities: as the 'employee,' through an elective deferral up to the annual limit the IRS sets for 401(k) plans, and as the 'employer,' through a profit-sharing-style contribution based on a percentage of compensation or net self-employment earnings, subject to an overall combined cap.
Because you can contribute in both roles, a solo 401(k) can sometimes allow a larger total contribution at a given income level than a SEP IRA, particularly at lower to moderate income levels where the employee deferral makes up a proportionally bigger piece of the total. At higher income levels the two plans can converge because both are ultimately bounded by the same overall annual addition limit.
A simplified comparison at a lower income level
Consider a freelancer with $50,000 in net self-employment earnings after the deduction for one-half of self-employment tax. Under a SEP IRA, the contribution is a percentage of that figure, subject to the formula and cap in place for the year. Under a solo 401(k), the same person could potentially make an employee deferral up to that year's 401(k) deferral limit and add an employer contribution on top, subject to the combined cap — which in many cases lets them set aside more of that $50,000 than the SEP formula alone would allow.
This is illustrative only; actual percentages, deferral limits, and combined caps change and have specific calculation rules for self-employed individuals (net earnings from self-employment aren't the same as gross revenue). Run the actual numbers with a preparer or plan provider before deciding.
Roth options
Many solo 401(k) providers offer a Roth option for the employee-deferral portion, letting you pay tax now in exchange for tax-free qualified withdrawals later. Traditional SEP IRAs are typically pre-tax only, though some custodians now offer SEP Roth options under newer rules — availability varies by provider, so check before assuming.
Administrative differences
SEP IRAs require almost no ongoing paperwork — no annual filing requirement in most cases, and setup is often just an account application with a brokerage. Solo 401(k)s require more setup (a plan document) and, once plan assets cross a certain threshold, an annual Form 5500-EZ filing with the IRS. If you value simplicity over maximizing contribution room, that administrative gap matters.
Solo 401(k)s also generally must be established by a deadline tied to the tax year (often by the end of the calendar year for elective deferrals, though funding deadlines can extend further), whereas SEP IRAs can typically be opened and funded up until your tax filing deadline including extensions. That timing difference can matter if you're deciding late in the year.
What if you have employees
A solo 401(k) is only available if you have no eligible employees besides a spouse. A SEP IRA can accommodate employees, but if you have staff, you're generally required to make comparable contributions for eligible employees using the same formula you use for yourself — which can turn a low-cost plan into a meaningfully more expensive one once you're not the only person on payroll.
Loans and access to funds
Some solo 401(k) plans allow participant loans, which SEP IRAs do not offer (IRAs generally can't be borrowed against). That flexibility can matter to some freelancers as a fallback source of short-term liquidity, though borrowing from retirement savings has its own tradeoffs worth weighing carefully.
Putting it together
Neither plan is universally better — SEP IRAs win on simplicity and flexible year-to-year commitment, solo 401(k)s can win on total contribution room at moderate income levels and offer a Roth option and loan feature some people want. TaxStow's tools can help you see how a planned retirement contribution might affect the taxable income you're setting aside for, but they don't calculate contribution limits or recommend a plan — that's best worked out with a financial advisor familiar with current-year limits and your specific earnings.
Takeaways
- ·SEP IRAs use a single employer-style contribution formula based on a percentage of net self-employment earnings, with minimal paperwork.
- ·Solo 401(k)s combine an employee deferral and an employer contribution, which can allow a larger total at moderate income levels.
- ·Solo 401(k)s are only available if you have no eligible employees other than a spouse; SEP IRAs can accommodate employees but require comparable contributions for them.
- ·Filing and deadline requirements differ: solo 401(k)s can require Form 5500-EZ once assets grow, and often need to be established earlier in the year than a SEP IRA.
- ·Contribution limits and formulas change and should be confirmed on IRS.gov or with a plan provider before you commit to a number.
Sources and further reading
Federal tax planning information only. TaxStow is not a tax preparer and this is not tax advice. State and local rules are separate, and a qualified professional can account for details this page cannot.