The default is leaving money on the table: Most freelancers who save for retirement open a SEP-IRA because it's simple. At $80,000 in net income, a SEP-IRA allows a $14,870 contribution. A Solo 401(k) allows $33,670 — $18,800 more in pre-tax savings and $4,136 more in federal tax savings in the same year.
Leaving a W-2 job means losing retirement benefits most people never priced: employer 401(k) matching, automatic payroll contributions, and the psychological anchor of a pre-tax savings system you never had to think about. As a freelancer, you now control 100% of your retirement funding — and the IRS gives you tools to do it more efficiently than most employees can.
There are two plans that matter for self-employed workers without W-2 employees: the SEP-IRA and the Solo 401(k). Both reduce your taxable income dollar-for-dollar. The SEP-IRA is simpler to open and administer. The Solo 401(k) consistently allows larger contributions, especially at income levels below $200,000. Understanding the mechanics of each takes about 15 minutes. The tax savings over a career can be substantial.
How Each Plan Works
The SEP-IRA "25%" rule for self-employed is actually 20%: The 25% figure applies to W-2 wages paid by an employer. For self-employed individuals, the IRS uses a circular calculation (the deduction reduces the income it's based on) that resolves to an effective rate of approximately 20% of net self-employment income. The contribution tables in IRS Publication 560 provide the exact factors — when in doubt, use 20% as a conservative planning estimate and verify with your tax preparer.
The Math at Three Income Levels
The following calculations use IRS-standard methodology: gross income minus half of self-employment tax equals adjusted net SE income, then applying the effective 20% rate for SEP-IRA or the $23,500 employee deferral (2025 limit; verify the current year's limit at IRS.gov) plus 20% of the remainder for Solo 401(k). All figures are Python-verified against the IRS calculation method.
| Gross Freelance Income | SEP-IRA Max | Solo 401(k) Max | Solo Advantage | Extra Tax Savings (22% bracket) |
|---|---|---|---|---|
| $50,000 | $9,294 | $28,094 | +$18,800 | +$4,136/yr |
| $80,000 | $14,870 | $33,670 | +$18,800 | +$4,136/yr |
| $120,000 | $22,304 | $41,104 | +$18,800 | +$4,512/yr (24% bracket) |
Note: The Solo 401(k) advantage is consistently $18,800 at lower income levels because the $23,500 employee deferral drives the gap. At very high incomes (above approximately $280,000), SEP-IRA contributions approach the $70,000 annual cap and the advantage narrows.
Why the advantage is always +$18,800 at these income levels
A SEP-IRA is employer-contribution only. At $80,000 gross income, the SEP employer contribution is approximately 20% × $74,348 (adjusted net income) = $14,870. There is no employee deferral component.
A Solo 401(k) adds an employee elective deferral of up to $23,500 in 2026 — entirely separate from the employer contribution. So the comparison is: $14,870 (SEP, employer only) vs. $23,500 (Solo employee) + $10,170 (Solo employer) = $33,670. The $18,800 difference is entirely explained by the $23,500 employee deferral that a SEP-IRA simply does not have.
Worked Example: $80,000 Gross Income
| Line Item | SEP-IRA | Solo 401(k) |
|---|---|---|
| Gross freelance income | $80,000 | $80,000 |
| Self-employment tax (15.3% × 92.35%) | $11,304 | $11,304 |
| SE tax deduction (half of SE tax, above-the-line) | ($5,652) | ($5,652) |
| Adjusted net SE income | $74,348 | $74,348 |
| Employee elective deferral | — | $23,500 |
| Employer profit-sharing contribution | $14,870 (20% × $74,348) | $10,170 (20% × $50,848) |
| Total retirement contribution | $14,870 | $33,670 |
| Federal income tax savings (22% bracket) | $3,271 | $7,407 |
Which Account to Choose: The Decision Ladder
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Under $20K net
Roth IRA first ($7,000 limit)
At low income levels, a SEP-IRA contribution (approximately $3,700 at $20K gross) is less than the $7,000 annual Roth IRA limit. A Roth IRA grows tax-free, is available at any broker with no plan setup, and has no required minimum distributions. Open a Roth IRA before anything else at this income level.
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$20K–$50K, no employees
Solo 401(k) wins on tax savings — SEP-IRA wins on simplicity
The math favors Solo 401(k) at every income level in this range: at $30K, a Solo 401(k) allows $24,376 vs. a SEP-IRA's $5,576. But $24,376 may exceed your tax comfort if income is still modest. Consider your cash flow: can you actually afford to defer $23,500 this year? If the simplicity of a SEP-IRA gets you saving when you otherwise might not, SEP-IRA is better than nothing.
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$50K+, no employees
Solo 401(k) — clear winner
Above $50,000 in net income, the $4,000+ additional annual tax savings from a Solo 401(k) is material enough to justify the minor additional complexity. Most major brokerages (Fidelity, Vanguard, Schwab, E*TRADE) offer free Solo 401(k) plans with no annual fees. The plan setup takes 30 minutes once and requires only an EIN (which you may already have).
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Has W-2 employees
SEP-IRA (Solo 401(k) not available)
A Solo 401(k) is restricted to owner-only businesses (the owner and their spouse). If you employ W-2 workers who meet the plan's eligibility requirements, you must include them — at that point a Solo 401(k) is no longer available. A SEP-IRA is the simplest compliant option for businesses with employees. Alternatively, establish a traditional 401(k) or SIMPLE IRA. The eligibility rules are plan-specific; consult a retirement plan specialist before establishing any plan once you have W-2 employees.
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Age 50+
Solo 401(k) — the catch-up advantage is decisive
Workers age 50 and older can add a $7,500 catch-up contribution to a Solo 401(k)'s employee deferral, bringing the employee total to $31,000. At $80,000 income, a 50+ freelancer can contribute $39,670 to a Solo 401(k) vs. $14,870 to a SEP-IRA. The SEP-IRA has no catch-up provision at any age. For anyone approaching retirement who wants to accelerate tax-deferred savings, the Solo 401(k) is the only tool that enables this.
Two More Differences Worth Knowing
The Roth option in a Solo 401(k)
Since SECURE 2.0 (enacted December 2022), Solo 401(k) participants can designate their employee deferral contributions as Roth — meaning you pay income tax now, but the money grows tax-free and qualified withdrawals are tax-free in retirement. Some providers now also allow Roth treatment on the employer contribution portion.
The SEP-IRA has no Roth option. All SEP-IRA contributions are pre-tax; all withdrawals are taxed as ordinary income. If you believe your tax rate will be significantly higher in retirement than today, the Roth Solo 401(k) path may be worth the lower current deduction. If you want maximum tax reduction today, the pre-tax Solo 401(k) deduction is equivalent to a traditional 401(k).
The deadline asymmetry
The Solo 401(k) plan document must be signed by December 31 of the year for which you want to make contributions. You can make the actual contribution the following spring (when you file), but the plan itself must exist before year-end. Miss the deadline and you cannot retroactively create a Solo 401(k) for that year.
A SEP-IRA can be opened and fully funded up to your tax filing deadline, including extensions — for most freelancers who file extensions, that is October 15 of the following year. If you did not open a retirement account in December and now it is February, a SEP-IRA is your only option for last year's income.
Practical rule: Open your Solo 401(k) before December 31 of every year — even if you are not sure how much you will contribute. The cost is zero (at Fidelity, Vanguard, or Schwab), and having the plan in place preserves all your options. An open Solo 401(k) you contribute nothing to is still better than scrambling to open one in January and finding out you missed the window.
How to Open Each Account
SEP-IRA (30 minutes)
- Choose a provider: Fidelity, Vanguard, Schwab, or any major brokerage. All offer SEP-IRAs with no annual fees.
- Fill out a short account application (Social Security number or EIN, basic business info).
- Adopt the plan document the provider supplies (IRS Form 5305-SEP or provider equivalent). Keep a copy.
- Fund the account up to your tax filing deadline (April 15 or October 15 with extension).
- Deduct the contribution on Schedule 1 of your Form 1040 (above-the-line deduction — no Schedule C involvement).
Solo 401(k) (60–90 minutes, one-time setup)
- Obtain an EIN for your business if you do not already have one (free at IRS.gov, takes 10 minutes).
- Choose a provider: Fidelity and Schwab offer free Solo 401(k) plans. E*TRADE and Vanguard also offer them. Verify the provider allows both traditional (pre-tax) and Roth contributions if you want that flexibility.
- Sign the plan adoption agreement before December 31 of the year you want to use the plan.
- Make employee deferral contributions by December 31 (required for employee portion). Employer contributions can be made up to the tax filing deadline including extensions.
- File Form 5500-EZ when plan assets exceed $250,000 (annual IRS requirement at that threshold).
Both deductions are above-the-line (Schedule 1). Solo 401(k) and SEP-IRA contributions reduce your adjusted gross income — not just your taxable income. This means they can also reduce the income used to calculate ACA health insurance subsidies, which compounds the benefit for freelancers who use Healthcare.gov for coverage. If you are close to a subsidy cliff, maxing out a retirement account can meaningfully increase the subsidy you receive.
Quick Reference: Side-by-Side
| Feature | SEP-IRA | Solo 401(k) |
|---|---|---|
| Annual maximum contribution (2025) | $70,000 or ~20% net SE income (verify current limit at IRS.gov) | $70,000 total: $23,500 employee + employer (verify current limit) |
| Employee elective deferral | None | $23,500 in 2025 (pre-tax or Roth; indexed annually) |
| Age 50+ catch-up | None | +$7,500 ($31,000 employee total) |
| Roth option | No | Yes (employee deferral and, at some brokerages, employer portion) |
| Plan establishment deadline | Tax filing deadline + extensions | December 31 of tax year |
| Contribution deadline | Tax filing deadline + extensions | Employee: Dec 31. Employer: tax filing deadline. |
| W-2 employees allowed | Yes (must include eligible employees) | No (owner + spouse only) |
| Loan provision | No | Yes (50% of vested balance or $50,000) |
| Form 5500 filing | Not required | Required when assets exceed $250,000 |
| Setup complexity | Low (30 min) | Moderate (60–90 min, one-time) |
Can you have both? No — you cannot actively contribute to both a SEP-IRA and a Solo 401(k) for the same business in the same year. If you have an existing SEP-IRA, you can roll it into a Traditional IRA and then open a Solo 401(k) to switch. If you have two separate businesses (different EINs, each with genuine separate income), a plan per business may be possible, but the annual contribution caps still apply across all plans combined. Consult a tax professional before attempting a two-plan structure.
Track your freelance finances all year
The Freelancer Financial Command Center tracks income, quarterly taxes, deductions, and retirement contributions in one 11-tab spreadsheet — so you know your contribution capacity before December 31, not after.
Frequently Asked Questions
You cannot contribute to both a SEP-IRA and a Solo 401(k) in the same year for the same business. If you have an existing SEP-IRA, you can roll it into a Traditional IRA and then open a Solo 401(k) — but you cannot maintain active contributions to both simultaneously. Most advisors recommend establishing a Solo 401(k) if you qualify, as it allows both employee and employer contributions for greater deferral.
A Solo 401(k) plan must be established (the plan document signed) by December 31 of the tax year for which you want to make contributions. This is stricter than a SEP-IRA, which can be opened and funded all the way until your tax filing deadline including extensions (October 15 for most freelancers who file extensions). If you miss the December 31 deadline, you cannot retroactively create a Solo 401(k) for that year — use a SEP-IRA instead for contributions attributable to that year. Practically: open your Solo 401(k) before December 31 even if you haven't decided your contribution amount yet.
A Solo 401(k) is designed for self-employed individuals with no W-2 employees other than the owner and their spouse. If you have W-2 employees who meet the plan's eligibility requirements, they must be included — which eliminates the Solo 401(k) as an option. You would need a SEP-IRA, SIMPLE IRA, or a standard 401(k) plan instead. Eligibility rules are plan-specific and depend on hours worked, age, and tenure thresholds set in the plan document. Consult a retirement plan specialist or CPA before hiring your first W-2 employee to ensure your retirement plan structure remains compliant.
For 2025, the overall annual contribution limit for both SEP-IRAs and Solo 401(k)s is $70,000 (indexed annually — verify the current year's limit at IRS.gov before contributing). For a Solo 401(k), the employee elective deferral portion is separately capped at $23,500 in 2025, or $31,000 if age 50 or older ($7,500 catch-up). A SEP-IRA has no employee deferral component and no catch-up provision at any age. For most freelancers earning under approximately $280,000, the Solo 401(k) allows larger total contributions because of the employee deferral component.