Retirement plans for freelancers: choosing between a SEP IRA and a Solo 401(k)

Updated 2026-09-02

Self-employed retirement planning has an unusual property: the accounts available to you are better than anything an employee gets, and the decision is still usually made badly. Not because it is hard, but because the most-repeated advice online mixes up two different percentages and quietly produces the wrong number.

This guide covers the three accounts worth considering, which one fits which situation, and the deadline that invalidates the whole decision if you miss it.

The uncomfortable starting point

Nobody starts freelancing because they are excited about retirement plan administration. It arrives as an afterthought, usually in the third or fourth year, once there is finally some profit to shelter — and by then a few years of contribution room have been permanently lost. You cannot go back and fund a prior tax year.

The good news is that the self-employed have access to better retirement vehicles than almost any employee. The bad news is that there are three of them, the rules interact, and the most common advice online conflates two different percentages in a way that produces the wrong number.

Your three real options

Strip away the marketing and there are three accounts worth considering as a solo operator.

SEP IRA

The low-friction option. Your business contributes up to 20% of your net earnings from self-employment, capped at $70,000 for 2025. There is no employee deferral, no Roth version, and essentially no administration — you can open one at any brokerage and fund it right up to your tax filing deadline, extensions included. If you are deciding in March about the previous year, this is the only plan that still works.

Solo 401(k)

The high-capacity option. Two contributions stack: an employee deferral of $23,500 ($31,000 at 50+) and the same 20% employer contribution on top. That structure is why it wins at moderate incomes — the deferral is a flat dollar amount, not a percentage of profit, so it is worth proportionally far more when you are earning $70,000 than when you are earning $400,000.

Simple IRA

Rarely the right answer for a genuine solo business. It exists mainly for small employers with staff. The contribution limit is far lower than the other two, and it comes with a two-year withdrawal penalty that is unusually harsh. Mentioned here only so you can rule it out.

The 20 versus 25 confusion

This is the single most common error in articles about SEP IRAs, and it is worth five minutes because it changes your number by 25%.

20% applies to net earnings from self-employment — what a sole proprietor or single-member LLC reports. 25% applies to W-2 compensation — what an S-corp owner-employee receives as salary.

They are the same contribution expressed against two different bases, reconciled by the deduction for half of your self-employment tax. Net earnings are profit minus that deduction, so a contribution equal to 25% of compensation works out to 20% of net earnings. Neither figure is wrong; they just belong to different entity types.

If you are a Schedule C filer — which is most freelancers — use 20% of net earnings. If you pay yourself a salary from an S-corp, use 25% of that salary and get proper advice, because the S-corp analysis has a second layer: setting salary too low to save on employment tax is a well-known audit target.

So which one should you open?

The decision is mostly about income level and how much administration you will tolerate.

Run your own figures through the SEP IRA vs Solo 401(k) calculator before deciding — the crossover point depends on your specific profit, and the difference at moderate incomes is often five figures.

The deadline that catches everyone

A Solo 401(k) must be established by December 31 of the tax year you want to contribute for. The money can arrive later, up to your filing deadline, but the plan document has to exist before the year ends. A SEP IRA has no such constraint — you can open and fund one in April, or in October if you filed an extension.

Every January, a meaningful number of freelancers discover that the plan they meant to open for the previous year cannot be opened at all. If you are reading this in the fourth quarter, this is the one action item on the list.

What contributions do and do not do

Contributions reduce your income tax. They do not reduce your self-employment tax — that is calculated on net earnings before any retirement deduction. There is no retirement account that shelters the 15.3%, and any source claiming otherwise is wrong. Understanding this prevents a specific and common disappointment: contributing a large sum and then finding the SE tax line completely unchanged.

The second thing to internalise is that a contribution is a deferral, not a saving. You will pay tax on withdrawal. The benefit comes from three places — paying at a lower rate in retirement, decades of tax-free growth inside the account, and in many cases a lower rate now because the deduction moves you down a bracket. That third one is worth checking with the self-employment tax calculator, because dropping a bracket changes the arithmetic more than people expect.

How much should you actually contribute?

The theoretically optimal answer is "as much as you can afford to lock up", which is useless in practice. A more workable sequence:

1. One month of essential expenses in cash first. Retirement accounts are inaccessible without penalty, and raiding one is expensive. Do not fund a 401(k) while carrying the risk of a slow month.
2. Then contribute enough to get any employer-style benefit — not applicable solo, so skip to the next step.
3. Then build towards 10–15% of net profit as a sustainable baseline. For most freelancers this is achievable without austerity and compounds into something substantial over a decade.
4. Then max out if profit allows and you have a buffer. The emergency fund calculator helps decide whether "profit allows" is true.

Notice the ordering. Freelancers who max out a retirement account while holding no cash buffer end up taking a penalty withdrawal the first time a client goes quiet, which is the worst of both outcomes.

One structural advantage worth using

Because you control both the timing and the amount, retirement contributions are one of the few remaining tax levers you can pull after the year has ended. If April arrives and the tax bill is larger than expected, a SEP contribution can still reduce it — sometimes substantially. Employees lost this ability decades ago; Sole proprietors filing Schedule C still have it, and it is worth knowing before you file.