Solo 401(k) vs. SEP IRA: Which Retirement Plan Fits Self-Employed Income?

A SEP IRA only allows employer contributions. For a self-employed person, that contribution is capped at roughly 20% of net self-employment earnings (after subtracting half of self-employment tax), up to an annual dollar limit. Setup is simple, most brokerages offer one, and there is generally no annual filing requirement for the plan itself.

A Solo 401(k) lets you contribute in two roles. As the employee, you can make elective deferrals up to the annual 401(k) limit, regardless of your income percentage, as long as you have that much in earnings. As the employer, you can add a profit-sharing contribution of about 20% of net self-employment earnings. Both combine up to the same overall annual cap that applies to the SEP.

Because the employee deferral is not a percentage of income, a Solo 401(k) lets someone with modest self-employment profit contribute far more than a SEP would. At high incomes, the two plans tend to converge toward the same overall cap. The difference matters most for side-gig earners and freelancers in their first few years.

Contribution room is not the only factor.

The right answer depends on your net earnings, whether you have a workplace 401(k) elsewhere (the employee deferral limit is shared across plans), and how much paperwork you want. Plugging your expected net profit into a Solo 401(k) calculator shows your maximum contribution under each plan side by side.