Overview: which accounts are available?
If you're self-employed — freelancer, consultant, sole proprietor, LLC owner, or S-corp owner — you have access to retirement plans that can dramatically exceed what a typical W-2 employee can save. The three main options are:
- SEP IRA (Simplified Employee Pension): Easy to set up, high limits based on income percentage. Best for simplicity.
- Solo 401(k) (Individual 401k): Best overall limits for owner-only businesses — combines an employee deferral with a profit-sharing contribution, Roth option, and loan provision.
- SIMPLE IRA: Designed for small employers with employees. Mandatory employer contribution; simpler than a full 401(k).
You can also combine any of these with a traditional IRA or Roth IRA — your retirement plan contributions don't reduce your IRA eligibility, though high income may limit IRA deductibility.
SEP IRA: simple and high-limit
The SEP IRA (Simplified Employee Pension) is the simplest high-limit retirement plan available to the self-employed. There's no plan document, no IRS filing, and contributions are entirely discretionary — you contribute nothing in a bad year, or up to the maximum in a good year.
How SEP IRA contributions work
SEP contributions are made entirely by the employer (you). There are no employee deferrals. Contributions are the lesser of:
- $72,000 (2026 dollar limit), or
- 25% of W-2 compensation (if you have a corporation), or approximately 20% of net self-employment income (sole proprietor/LLC)
For sole proprietors: "net SE income" = (net business profit) − (½ of self-employment tax). The effective rate is ~20%, not 25%, because you're calculating 25% of net income after deducting the SEP contribution itself — a circular calculation that simplifies to ~20% of net SE income.
📊 SEP IRA at $100,000 net SE income
Pros: Easiest to set up (open at any brokerage), no annual filing, contribute up to tax deadline plus extensions, works for any level of employees (but must cover all eligible employees proportionally).
Cons: No employee deferral option — at lower income levels, the Solo 401(k) allows far more. No catch-up contributions for ages 50–59 or 64+ (only SECURE 2.0 super catch-up for 60–63). If you have employees, you must contribute the same percentage for them as for yourself.
Solo 401(k): maximum power for owner-only businesses
The Solo 401(k) — also called Individual 401(k) or One-Participant 401(k) — is available to self-employed individuals with no full-time non-spouse employees. It combines two contribution types:
- Employee elective deferral: Up to $24,500 (plus catch-up) — contributed as the employee wearing your "worker" hat
- Employer profit-sharing: Up to 25% of W-2 compensation or ~20% of net SE income — contributed wearing your "employer" hat
Combined, you can reach the total annual additions limit of $72,000. The key advantage over the SEP IRA: at lower income levels, the employee deferral allows you to contribute much more than the SEP's percentage-based limit.
📊 Solo 401(k) vs SEP IRA at $60,000 net SE income
Additional features of the Solo 401(k):
- Roth option: The employee deferral can be made as Roth (after-tax, tax-free growth)
- Loan provision: Borrow up to 50% of balance or $50,000 — no penalty if repaid
- Spouse participation: Your spouse can participate if employed by the business
- SECURE 2.0 super catch-up: Ages 60–63 get an extra $11,250 instead of $8,000
Limitations: Requires a plan document. Employee deferral election must be made by December 31 (not extendable). Form 5500-EZ required annually when plan assets exceed $250,000. Cannot have non-spouse full-time employees.
SIMPLE IRA: for businesses with employees
The SIMPLE IRA (Savings Incentive Match Plan for Employees) is designed for businesses with up to 100 employees. Employees can defer up to $17,000 ($18,100 for employers with ≤25 employees) in 2026, and the employer must make either a 3% matching contribution or a 2% non-elective contribution for all eligible employees.
Pros: Covers employees. No plan document needed (IRS Form 5304 or 5305-SIMPLE). No annual IRS filing. Employees can participate and save for retirement.
Cons: Much lower deferral cap than Solo 401(k). Mandatory employer contributions cannot be skipped. A harsh 25% early withdrawal penalty applies in the first 2 years of participation. Cannot roll over to a non-SIMPLE account until 2-year period is met. Cannot maintain both a SIMPLE IRA and another employer plan simultaneously.
Side-by-side comparison
| Feature | SEP IRA | Solo 401(k) | SIMPLE IRA |
|---|---|---|---|
| 2026 max contribution | $72,000 | $72,000 (employee + employer) | $17,000 employee + employer match |
| Employee deferral | No | Yes — $24,500 | Yes — $17,000 |
| Catch-up (50+) | None (ages 50–59, 64+) | +$8,000 | +$4,000 |
| Super catch-up (60–63) | +$11,250 | +$11,250 | +$5,250 |
| Roth option | No | Yes | Yes (SECURE 2.0) |
| Loan provision | No | Yes | No |
| Employees allowed | Yes (must contribute proportionally) | No (owner + spouse only) | Yes — up to 100 |
| Employer contribution required | No (discretionary) | No (discretionary) | Yes (3% match or 2% non-elective) |
| IRS annual filing | None | Form 5500-EZ if assets >$250k | None |
| Contribution deadline | Tax return + extensions | Employee: Dec 31; Employer: tax deadline | Per payroll / monthly |
| Best for | High-income earners who want simplicity | Owner-only with max savings goal | Small businesses with employees |
Contribution examples at different income levels
| Net SE Income | SEP IRA (~20%) | Solo 401(k) Employee Deferral | Solo 401(k) Employer (~20%) | Solo 401(k) Total |
|---|---|---|---|---|
| $30,000 | $6,000 | $24,500 | $6,000 | $30,500 |
| $60,000 | $12,000 | $24,500 | $12,000 | $36,500 |
| $100,000 | $20,000 | $24,500 | $20,000 | $44,500 |
| $150,000 | $30,000 | $24,500 | $30,000 | $54,500 |
| $200,000+ | $40,000–$72,000 | $24,500 | $40,000–$47,500 | Up to $72,000 |
At income above ~$235,000, the Solo 401(k) and SEP IRA both hit the $72,000 ceiling and are equivalent on total contribution amount. At that point, the Solo 401(k)'s Roth option and loan feature become the deciding factors.
Which should you choose?
Choose SEP IRA if: You want maximum simplicity, you have employees you'd also need to cover, or you're fine without a Roth option.
Choose Solo 401(k) if: You're an owner-only business (no non-spouse employees), you want maximum contributions at any income level, you want a Roth option, or you want a loan feature.
Choose SIMPLE IRA if: You have employees who need retirement coverage and you want the easiest employer plan to administer.
If you hire a non-spouse full-time employee (1,000+ hours/year), your Solo 401(k) immediately becomes ineligible and must be converted to a regular 401(k), SEP IRA, or SIMPLE IRA. Plan for this transition before hiring — especially if you're early in the SIMPLE IRA's 2-year lockout period.
Frequently asked questions
Not for the same business. You can only have one employer plan per business entity. However, if you have income from multiple separate businesses (e.g., a W-2 job and a side business), you can have a Solo 401(k) for your side business and participate in your employer's 401(k) — but the combined employee deferral across all plans is capped at $24,500 (plus catch-up).
Yes. SEP IRA contributions don't affect your IRA contribution limits. You can max a SEP IRA at $72,000 and also contribute $7,500 to a Roth IRA in the same year (subject to Roth IRA income limits). In fact, for self-employed individuals under the Roth phase-out threshold, the combination of SEP IRA (pre-tax) + Roth IRA (tax-free) provides excellent tax diversification.
No — your spouse is not considered a disqualifying employee for Solo 401(k) purposes. If your spouse works in the business, they can participate in the Solo 401(k) as an employee, potentially doubling the household contributions. This makes the Solo 401(k) especially powerful for spouse-partnership businesses.
To make employee deferral contributions for 2026, you must establish the Solo 401(k) plan by December 31, 2026. The employer profit-sharing contribution can be made up to the tax return deadline (plus extensions). So if you want both portions, establish the plan by December 31 — but you don't have to fund it until you file your taxes.