Self-employed people have more retirement plan options than W-2 employees, and choosing between the two most common ones — a Solo 401(k) and a SEP-IRA — can meaningfully change how much you're able to contribute at the same income level.

SEP-IRA: Simple, Employer-Contribution-Only

A Simplified Employee Pension IRA lets you (as your own employer) contribute up to 25% of your net self-employment earnings (after the deduction for half your self-employment tax), capped at the same overall dollar limit that applies to defined contribution plans generally. There's no separate "employee" contribution — the entire contribution comes from the employer side of the calculation, which is a meaningful distinction from a Solo 401(k), described next.

Solo 401(k): Employee Deferral Plus Employer Contribution

A Solo 401(k) (also called an individual or one-participant 401(k)) lets you contribute in two capacities: as an "employee," you can defer up to the standard 401(k) employee limit ($24,500 for 2026, plus a $8,000 catch-up if 50 or older), and separately, as the "employer," you can contribute up to 25% of your net self-employment earnings — subject to the same overall combined dollar cap that applies to SEP-IRAs and other defined contribution plans.

💡 This two-part structure is exactly why a Solo 401(k) often allows a larger total contribution than a SEP-IRA at lower to moderate self-employment income levels: the employee deferral portion doesn't depend on your profit margin the way the employer contribution does, so even a modestly profitable year can support a meaningful contribution through the employee-deferral side alone.

Roth Option: Solo 401(k) Only

A Solo 401(k) can generally include a Roth option for the employee-deferral portion, letting you contribute after-tax dollars that grow and can be withdrawn tax-free in retirement, the same as a Roth 401(k) available through an employer plan. A traditional SEP-IRA doesn't offer a Roth version in the same way, though a Roth SEP option has become available under recent legislation at some providers — check with your specific plan administrator, since availability varies.

Administrative Differences

A SEP-IRA is notably simpler to set up and maintain — minimal paperwork, no annual filing requirement in most cases. A Solo 401(k) requires more setup (a formal plan document) and, once the account balance exceeds $250,000, an annual Form 5500-EZ filing requirement that a SEP-IRA doesn't have. A Solo 401(k) can also offer a loan provision (borrowing against your own balance under specific IRS rules), which a SEP-IRA cannot.

Deadlines Matter

A Solo 401(k) generally must be established by December 31 of the tax year you want to contribute for (though the actual employee-deferral contribution can sometimes be made afterward, up to the tax filing deadline), while a SEP-IRA can be established and funded as late as your tax filing deadline (including extensions) for the prior year — giving you more flexibility if you're deciding late in the year, or after it's already ended, how much to contribute.

A Worked Comparison

A sole proprietor with $80,000 in net self-employment earnings (after the SE tax deduction) could contribute roughly 20% of that to a SEP-IRA (the effective employer-contribution rate after certain calculation adjustments), or roughly $16,000. Through a Solo 401(k), the same person could defer $24,500 as the employee, plus up to the same ~20% employer contribution on top — potentially allowing a total contribution well above what the SEP-IRA alone would permit, up to the shared overall dollar cap.

Common Questions

Can I have employees and still use a Solo 401(k)? Generally no — a Solo 401(k) is designed for a business with no employees other than the owner (and a spouse, in some structures); if you hire employees, you'll typically need to transition to a different type of retirement plan that covers them too.

Which is better if my income varies significantly year to year? A SEP-IRA's contribution flexibility (you can contribute a different percentage, or nothing, each year) can be simpler for genuinely unpredictable income, though a Solo 401(k) offers similar flexibility on the employer-contribution side while adding the more stable employee-deferral option on top.

Do these reduce my self-employment tax too? No — contributions to either plan reduce your income tax by lowering taxable income, but they don't reduce the SE tax itself, which is calculated on your net self-employment earnings before this retirement contribution.

💡 Run your self-employment numbers through the Self-Employment preset first to know your net earnings, then apply either plan's contribution formula to that figure.