Retirement Planning for the Self-Employed: SEP-IRA vs Solo 401(k)

Last updated July 2, 2026

Self-employed workers face a retirement savings challenge that employees with workplace 401(k) plans do not: no automatic contributions, no employer match, and a bewildering array of plan options to sort through. The two primary tax-advantaged retirement accounts available to the self-employed are the SEP-IRA and the Solo 401(k), and the contribution limits are generous. For 2026, a Solo 401(k) allows contributions of up to $24,500 as the employee deferral plus 25 percent of net self-employment income as the employer contribution, up to a combined maximum of $70,000. A SEP-IRA allows up to 25 percent of net self-employment income, capped at $70,000, with no employee deferral component.

The Solo 401(k) is usually the superior choice for high earners because of the employee deferral component. A self-employed person with $60,000 in net income can contribute the full $24,500 employee deferral to a Solo 401(k) plus 25 percent of $60,000 ($15,000 employer contribution) for a total of $39,500. The same person can contribute only $15,000 to a SEP-IRA. At lower income levels, the SEP-IRA is simpler and nearly as effective. The Solo 401(k) also allows Roth contributions, which are not available in a SEP-IRA, and allows participant loans, which the SEP-IRA does not.

If you are self-employed with net income above $40,000 per year and want to maximize retirement contributions, open a Solo 401(k) rather than a SEP-IRA. The employee deferral component allows substantially higher contributions at moderate income levels. Contributions reduce both federal income tax and self-employment tax on the employer contribution portion, making the tax efficiency of these plans exceptional for self-employed workers.