Solo 401(k) vs SEP IRA: Which Is Better for Freelancers?
Both let you save more than a regular IRA. One is simpler. The other lets you save more. Here's how to choose.
Being self-employed means you don't get a 401(k) match, a pension, or a retirement plan someone else set up for you. You get to build your own. For most freelancers, that comes down to two options: the SEP IRA and the solo 401(k). Both are perfectly good. Both are very different. And the difference is worth about a decade of compound interest.
The quick version
A SEP IRA is the simpler plan: you, the employer, contribute up to roughly a quarter of your net self-employment earnings, capped at the annual limit, into an IRA in your name. One account, one set of rules, no ongoing paperwork. A solo 401(k) lets you wear two hats. As the employee, you can make elective deferrals up to the standard 401(k) limit. As the employer, you can add profit-sharing on top.
How contributions actually work
The employee side of a solo 401(k) is the big draw. The standard elective deferral limit applies — the same number W-2 workers get — plus a catch-up allowance once you're 50 or older. On top of that, the employer profit-sharing piece can push your total higher than a SEP allows in many cases. If your goal is to stuff the maximum into retirement accounts, the solo 401(k) usually gets you further.
The SEP keeps things simple but caps you at the employer side only: no employee deferrals, no catch-up. For someone whose income fluctuates and who doesn't want to think about retirement paperwork more than once a year, that simplicity has real value.
Where the solo 401(k) pulls ahead
Beyond contribution room, the solo 401(k) offers a Roth option (tax-free withdrawals later), the ability to borrow from your own plan in most cases, and a place to roll over old 401(k)s from previous employers so your retirement money isn't scattered across five accounts. It also avoids a quirk: SEP IRAs can complicate future backdoor Roth conversions if you ever need that strategy.
Where the SEP wins
The SEP wins on setup and maintenance. No annual filing requirements in most cases, no plan documents to keep current, and you can open and fund one right up to your tax filing deadline — extensions included. A solo 401(k) generally needs to exist by December 31 of the year you want to contribute for, though contributions can still land after New Year's.
The decision, in one paragraph
Choose the solo 401(k) if you want maximum contribution room, a Roth option, or a place to consolidate old accounts — and you don't mind a little paperwork. Choose the SEP if you value simplicity above all else and your contributions are modest. Either way, the actual investing is up to you; the plans just give you the tax-advantaged container.
Whichever you pick, set it up before you need it. Retirement accounts are the one place where being late costs you twice: the missed contribution and the missed growth.