Retirement Accounts for the Self-Employed: SEP IRA and Solo 401(k)

Without an employer offering a 401(k), freelancers, independent contractors, and small business owners still have strong options for tax-advantaged retirement savings — often with higher contribution limits than a standard employee plan.

Why self-employed retirement accounts matter

Self-employed individuals don’t automatically have access to an employer-sponsored plan, but the tax code offers several account types specifically designed to fill that gap, some of which allow considerably higher contribution limits than a standard IRA, given that self-employed individuals act as both “employer” and “employee” for contribution purposes.

SEP IRA (Simplified Employee Pension)

A SEP IRA is a relatively simple retirement account designed for self-employed individuals and small business owners, including those with employees.

Key features:

• Contributions are made by the “employer” (which, for a self-employed individual, is you) as a percentage of compensation.
• Contribution limits are considerably higher than a standard IRA, calculated as a percentage of net self-employment income, up to an annual dollar cap that’s adjusted periodically.
• Relatively simple to set up and maintain, with fewer administrative requirements than some other options.
• If you have employees, you’re generally required to contribute proportionally on their behalf too, which is an important consideration for business owners with staff.

Solo 401(k) (also called an Individual 401(k))

A Solo 401(k) is designed specifically for self-employed individuals with no employees other than a spouse.

Key features:

• Allows contributions in two capacities: as the “employee” (similar to a standard 401(k) employee contribution) and as the “employer” (a profit-sharing-style contribution based on business income) — potentially allowing higher total contributions than a SEP IRA in some situations, particularly for those with more moderate self-employment income.
• Available in both Traditional and Roth versions for the “employee” contribution portion, offering the same tax-treatment choice covered in our Traditional vs. Roth 401(k) guide.
• Some plans allow loans against the account balance, a feature not typically available with a SEP IRA.
• Generally requires a bit more administrative setup than a SEP IRA, and additional annual reporting once the account balance grows beyond a certain threshold.

SEP IRA vs. Solo 401(k): which contributes more?

The comparison depends heavily on your specific income level: at lower to moderate self-employment income, a Solo 401(k) often allows a higher total contribution than a SEP IRA, due to the additional “employee” contribution component. At higher income levels, the two options tend to converge more closely toward the same overall contribution cap. Because the specific calculations are relatively complex and depend on your exact net self-employment income, working through the actual numbers (or consulting a tax professional) for your specific situation is worthwhile before assuming one option is definitively better.

Other options worth knowing about

• Traditional or Roth IRA: Available to self-employed individuals just like anyone else, though with lower contribution limits than a SEP IRA or Solo 401(k), as covered in our Roth vs. Traditional IRA guide.
• SIMPLE IRA: Another option designed for small businesses, generally simpler to administer than a Solo 401(k) but with lower contribution limits, more commonly used by businesses with a small number of employees rather than solo self-employed individuals.

Factors to consider when choosing

• Do you have any employees (other than a spouse)? This can rule out a Solo 401(k), which is specifically designed for those without additional employees.
• How much do you want to contribute relative to your income? Running the actual numbers for your specific income level helps clarify which option allows a higher contribution.
• Do you want a Roth contribution option? A Solo 401(k) offers this for the employee contribution portion; a standard SEP IRA does not.
• How much administrative complexity are you comfortable with? A SEP IRA is generally simpler to set up and maintain than a Solo 401(k).

Key takeaways

• Self-employed individuals have access to retirement accounts, like the SEP IRA and Solo 401(k), that often allow considerably higher contributions than a standard IRA.
• A Solo 401(k) is available only to those without employees (other than a spouse) but often allows higher contributions at moderate income levels and offers a Roth option.
• A SEP IRA is simpler to administer and works even if you have employees, though it requires proportional contributions for them too.
• Given the complexity of exact contribution limit calculations, working through your specific numbers or consulting a tax professional is worthwhile before choosing.

Nothing here is personalized financial advice — just general education. Read our full disclaimer for the details.