As a freelancer, you don’t have an employer-sponsored 401(k), but that doesn’t mean you have to miss out on retirement savings. Two powerful options stand out: the SEP IRA and the Solo 401(k). Both offer significant tax advantages, but they work differently. This guide breaks down every key difference—contribution limits, eligibility, Roth options, and administrative burden—so you can pick the best plan for your freelance business.
What Are SEP IRA and Solo 401(k)?
SEP IRA (Simplified Employee Pension) is a retirement plan that allows you, as a self-employed individual, to contribute a percentage of your net earnings each year. It’s designed for simplicity—no annual filing, low maintenance, and easy to set up with most brokerages.
Solo 401(k), also known as an Individual 401(k), is designed for business owners with no employees (other than a spouse). It allows you to contribute as both employee (elective deferrals) and employer (profit-sharing), potentially giving you much higher contribution limits.
Both accounts grow tax-deferred, but the Solo 401(k) also offers a Roth option. Which one is right for your freelance business? Let’s dive deeper.
Contribution Limits Comparison
SEP IRA: For 2026, you can contribute up to the lesser of 25% of your net self-employment income or $66,000. Contributions are made only by the employer (you as a business entity). You can change the percentage each year.
Solo 401(k): You contribute as both employee and employer. As an employee, you can defer up to $23,000 (or $30,500 if age 50+). As an employer, you can contribute up to 25% of compensation, with a total combined limit of $66,000 (or $73,500 if age 50+). That means with a Solo 401(k), you could potentially contribute much more than with a SEP IRA.
For example, if your net income is $150,000, a SEP IRA maxes at 25% = $37,500. With a Solo 401(k), you can contribute $23,000 as employee + 25% as employer ($37,500) = $60,500. That’s a big difference!
Key Differences: Eligibility, Roth, and Loans
Eligibility: SEP IRA has no restrictions—any self-employed person can use it, even with employees (though you must include eligible employees). Solo 401(k) requires that you have no employees (except a spouse who works for the business). If you hire even one part-time employee, you lose Solo 401(k) eligibility.
Roth Option: SEP IRA does not allow Roth contributions. Solo 401(k) does—you can designate some or all of your employee deferrals as Roth (after-tax) contributions. This is a huge advantage if you expect to be in a higher tax bracket in retirement.
Loans: Solo 401(k) allows you to borrow up to $50,000 or 50% of the account value. SEP IRA does not permit loans. If you think you might need access to funds before retirement, Solo 401(k) gives you flexibility.
Read our Freelance Tax Guide for more details on tax implications of different retirement accounts.
Which Account Should You Choose?
Choose SEP IRA if:
- You want the simplest possible account with zero paperwork
- You have employees and don’t want to fund their accounts
- You’re a lower earner who can’t max out the Solo 401(k) anyway
Choose Solo 401(k) if:
- You want to contribute the maximum possible amount
- You want a Roth option to diversify taxes
- You might need a loan from your retirement account
- You have no employees (or only a spouse)
If you’re still unsure, consider starting with a SEP IRA (it’s easier to set up) and later roll it into a Solo 401(k) if your income grows. And don’t forget to track your contributions using our Freelance Expense Tracking Guide.
How to Set Up and Manage Each Account
SEP IRA Setup: Open an account at any major brokerage (Fidelity, Vanguard, Schwab). Complete a one-page agreement. You can fund it up until your tax filing deadline (including extensions). No annual IRS filing required.
Solo 401(k) Setup: You’ll need a plan document. Many brokerages offer free Solo 401(k) accounts (e.g., E*Trade, Fidelity). You must adopt a written plan, get an Employer Identification Number (EIN), and submit annual Form 5500-EZ when assets exceed $250,000. The setup is slightly more involved but still manageable.
For both plans, consider using payroll software to automate contributions. PayrollFixPro can handle payroll, tax filings, and retirement plan contributions for freelancers, simplifying the entire process.
Also, see our guide on Quarterly Taxes for Freelancers to avoid penalties while funding your retirement.
Pro Tips for Maximizing Retirement Savings
1. Contribute early and consistently. Even if you can’t max out, start as soon as possible. Compounding works best over time.
2. Combine with a health savings account (HSA) if eligible. HSAs offer triple tax advantages and can be invested for retirement.
3. Use a backdoor Roth strategy. If you have a Solo 401(k) with a Roth option, you can contribute after-tax dollars and grow them tax-free.
4. Consider a SEP IRA if you expect variable income. Since contribution rates are flexible, SEP IRA lets you contribute 0% in lean years and the max in good years.
5. Automate everything. Use a payroll service like PayrollFixPro to set up automatic transfers from your business account into your retirement account. This ensures you never miss a contribution.
Conclusion & Next Steps
Both SEP IRA and Solo 401(k) are excellent vehicles for freelancers to save for retirement while reducing taxable income. The best choice depends on your income, desire for simplicity, and whether you have employees. For most solo freelancers with high income, the Solo 401(k) wins due to higher limits and the Roth option. But if you value simplicity or have employees, the SEP IRA is a solid choice.
Take action today: open an account with a brokerage, set a contribution percentage, and start building your retirement nest egg. For help managing your business finances and retirement contributions, check out PayrollFixPro. And don’t forget to read our Best Accounting Software for Freelancers article to keep your finances in order.