If you're self-employed — whether as a sole proprietor, freelancer, consultant, or small business owner without employees — you have access to retirement accounts far more powerful than what most employees ever see. The two most commonly compared options are the SEP IRA and the Solo 401(k). Both offer substantial tax advantages. But they work differently, have different contribution limits, and suit different situations.
The SEP IRA: Simple and Flexible
The Simplified Employee Pension (SEP) IRA is the simplest retirement account for the self-employed. It requires almost no administration, can be opened quickly at most custodians, and allows substantial contributions.
Contribution limit: Up to 25% of net self-employment income, capped at $70,000 in 2025. For a sole proprietor, "25% of net self-employment income" actually works out to roughly 20% of net profit after the self-employment tax deduction — so a business generating $200,000 in net profit allows approximately $40,000 in SEP IRA contributions.
Key features:
- No employee deferrals — only employer contributions (you, contributing as the employer)
- No catch-up contributions for those 50+
- Must contribute equally for all eligible employees if you have any — this makes SEP IRAs expensive once you hire
- Can be opened as late as your tax filing deadline (including extensions) for the prior year
- Essentially no administrative burden — no Form 5500, no annual testing
The Solo 401(k): More Powerful, More Complex
The Solo 401(k) — also called an Individual 401(k) or Self-Employed 401(k) — is available to self-employed individuals and business owners with no full-time employees other than a spouse. It combines the features of a standard 401(k) with the flexibility of a self-employed plan.
Contribution structure: Two separate contribution sources:
- Employee deferral: Up to $23,500 in 2025 (plus $7,500 catch-up for age 50+, or $11,250 catch-up for ages 60-63 under SECURE 2.0)
- Employer contribution: Up to 25% of net self-employment income
- Combined limit: $70,000 ($77,500 with standard catch-up; $81,250 for ages 60-63)
The employee deferral component is what makes the Solo 401(k) dramatically more powerful for lower-income self-employed workers: you can contribute $23,500 in employee deferrals regardless of business income — a contribution level the SEP IRA cannot match until net profit exceeds approximately $117,500.
| Net Self-Employment Income | Max SEP IRA | Max Solo 401(k) (under 50) |
|---|---|---|
| $50,000 | ~$9,293 | $33,293 |
| $100,000 | ~$18,587 | $41,087 |
| $150,000 | ~$27,880 | $50,880 |
| $200,000 | ~$37,174 | $60,174 |
| $300,000+ | $70,000 (cap) | $70,000 (cap) |
Roth Option
Solo 401(k) plans can include a Roth contribution option — allowing you to make after-tax employee deferrals that grow and are withdrawn tax-free. SEP IRAs are always traditional (pre-tax). For self-employed individuals in lower income years who expect higher taxes in retirement, the Roth Solo 401(k) is a significant advantage.
Loan Feature
Solo 401(k) plans can allow loans — up to 50% of the vested balance or $50,000, whichever is less. SEP IRAs do not permit loans. For business owners who occasionally need liquidity from their retirement savings, this can be a meaningful practical advantage.
When to Choose Each
Choose SEP IRA When...
You want maximum simplicity. You have (or expect to have) employees. You're a high earner where the 25% employer contribution approaches the $70,000 cap anyway. You want to set up quickly before a tax filing deadline.
Choose Solo 401(k) When...
You have no employees (other than a spouse). Your income is moderate and you want to maximize contributions regardless. You want a Roth option. You want catch-up contributions. You're willing to handle slightly more administration.
The Deadline Difference
SEP IRAs can be opened and funded up until your tax filing deadline including extensions — meaning you can open and fund a SEP IRA for 2025 as late as October 2026 if you file an extension. Solo 401(k) plans must be established by December 31st of the tax year — you cannot open a Solo 401(k) in 2026 and fund it for 2025. Plan ahead.
The Bottom Line
For most self-employed individuals without employees, the Solo 401(k) is the more powerful option — particularly at moderate income levels where the employee deferral component allows far larger contributions than a SEP IRA permits. The SEP IRA wins on simplicity and flexibility around timing. High earners approaching the $70,000 combined limit will reach similar numbers either way. If you're self-employed and not maximizing one of these accounts, you're leaving significant tax deferral on the table — and potentially hundreds of thousands of dollars in long-term wealth accumulation.