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SEP IRA vs Solo 401k for the Self-Employed
A freelancer clearing $120,000 can shelter about $27,400 in a SEP IRA — or roughly $34,300 in a solo 401(k) with the same profit. Both plans are free to open, have no IRS filing requirement under most thresholds, and the better choice depends almost entirely on one thing: how much of the contribution you want to be employee money.
The Contribution Structures
Both plans allow an employer contribution of about 20% of net self-employment income (up to $72,000 combined for 2026). The solo 401(k) adds an employee elective deferral of $24,500 on top, while the SEP does not. That is the whole gap: at low income the SEP matches the solo plan; at higher income the solo 401(k) pulls ahead because employee deferral dollars stack on the 20% employer piece.
- Net profit $50,000: SEP about $9,100; solo 401(k) about $33,600 (with the full deferral).
- Net profit $120,000: SEP about $23,800; solo 401(k) about $48,300.
- Side income $15,000 with a day job 401(k): the deferral is shared across jobs, so the SEP frequently wins here.
The Practical Differences
Solo 401(k)s offer Roth deferrals — rare among employer plans and valuable for high-earning freelancers — plus the mega backdoor possibility if the plan documents after-tax contributions. SEPs cannot accept Roth employee money at all. On the administrative side, the SEP is simpler: one form, done. A solo 401(k) requires a plan document (free to cheap online) and, once combined balances pass $250,000, Form 5500-EZ with the IRS. Adding a spouse as an employee is fine in both; hiring non-spouse employees changes everything, since a solo 401(k) then requires coverage testing that usually kills the plan.
Which One Fits
Maximize savings with above-median self-employment profit and want Roth space: solo 401(k). Keep paperwork near zero, contribute a flat percentage, or have a day-job 401(k) already taking the deferral: SEP IRA. Many consultants run the SEP for simplicity and later switch to a solo 401(k) as profit grows — plans can coexist in a year, with combined limits applying, so the move is not all-or-nothing.
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