Your accountant said the words "you're leaving money on the table" back in July, and you've been meaning to look into it ever since — probably right around the same week you wired the September 15 estimated tax payment and felt that particular sting. Two acronyms keep surfacing every time you search for an answer: SEP IRA and Solo 401(k). Every comparison chart online makes them look nearly identical, both letting a self-employed person shelter a chunk of income from tax, both funded entirely by you. They are not identical. For a freelancer or consultant clearing six figures, the gap between them can run to tens of thousands of dollars a year, and the account you pick locks in how much room you have to save until you close it and open the other one — which is its own paperwork headache.
The Two Numbers That Actually Decide This
Strip away the marketing copy from every brokerage's landing page and each account comes down to one formula. A SEP IRA lets your business contribute up to 25% of your compensation, capped at $72,000 for 2026 — full stop, nothing else. A Solo 401(k) lets you wear two hats: as the "employee," you can defer up to $24,500 of your own income in 2026, and as the "employer," your business can kick in up to 25% more, with the combined total also capped at $72,000. Do that math on a modest income and the two accounts land close together. Do it on a strong year, and the Solo 401(k) pulls dramatically ahead, because that $24,500 employee slice doesn't depend on how profitable the business was — it depends only on how much of your paycheck you're willing to defer.
SEP IRA, in One Paragraph
The whole contribution comes from the "employer" side — your business — calculated as a percentage of what you earned. There's no separate employee deferral, no catch-up contribution for anyone over 50, and no annual filing requirement no matter how large the account grows. You can open one and fund an entire year's contribution as late as your extended tax filing deadline, October 15, which makes it the account of choice for anyone who does their taxes in a hurry.
Solo 401(k), in One Paragraph
You get two separate buckets that stack. The employee deferral — $24,500 in 2026 — comes off your income the same way a W-2 employee's 401(k) contribution would, and it's available even in a thin income year because it isn't tied to profit the way the employer side is. On top of that, your business can still add its 25% employer contribution. Once your account balance crosses $250,000, the IRS wants a short annual filing (Form 5500-EZ), and if you decide to open the plan after your tax year has already ended, you're working against your unextended filing deadline — April 15 for most sole proprietors — not the extended one.
The Math on $120,000 in Net Self-Employment Income
Numbers make this concrete faster than any explanation does. Take a freelance consultant with $120,000 in net Schedule C profit for the year, under 50, no employees.
- Self-employment tax on that profit runs roughly $16,955, and half of it is deductible before you calculate retirement contributions.
- That brings "net earnings from self-employment" for retirement-plan purposes down to about $111,522.
- The 20% effective employer contribution rate that applies to sole proprietors (the self-employed equivalent of the 25% corporate figure) caps the employer-side contribution at roughly $22,304 — and this is the number both a SEP IRA and a Solo 401(k)'s employer bucket are limited to.
A SEP IRA stops there: $22,304, no matter what else you do. A Solo 401(k) adds the $24,500 employee deferral on top, for a total of roughly $46,804 sheltered from tax in a single year — more than double the SEP's ceiling, on identical income. Push the same freelancer into her early 60s, where the SECURE 2.0 catch-up bumps the employee deferral to $35,750, and the Solo 401(k) total climbs to around $58,054 while the SEP IRA is still sitting at $22,304. That gap is the entire argument.
Where the Solo 401(k) Pulls Ahead
Catch-up contributions are the headline reason, but they're not the only one. A Solo 401(k) typically allows you to borrow against your own balance — up to $50,000 or half the account, whichever is smaller — which a SEP IRA cannot do under any circumstance. And if you're already contributing to a traditional IRA and want to do backdoor Roth conversions down the line, a SEP IRA balance sits in the same bucket the IRS uses for the pro-rata rule on Form 8606, which can turn a clean backdoor Roth into a partially taxable mess. A 401(k) balance, solo or otherwise, doesn't count toward that calculation at all. If you're a solo operator with no employees and you're serious about maximizing what you can shelter, open the Solo 401(k) — the SEP's simplicity isn't worth the tens of thousands of dollars in lost contribution room once your income clears roughly $60,000 to $70,000 a year.
Where the SEP IRA Still Wins
None of that makes the SEP obsolete. If your income swings hard year to year — a launch year at $180,000 followed by a rebuilding year at $40,000 — the SEP's total flexibility to contribute nothing, or contribute the maximum, without ever filing paperwork to establish that flexibility in advance, is genuinely useful. It's also the better choice if you're the kind of person who doesn't finalize numbers until an accountant is staring at you in October: because it can be opened and funded any time up to your extended filing deadline, a late-in-the-year decision to save aggressively is still possible. Try that with a Solo 401(k) established after year-end and you'll find the window already closed months earlier.
The Employee Problem Nobody Mentions
So what happens the moment you hire your first part-time contractor and put them on payroll instead of 1099?
Everything changes. A SEP IRA that covers you must generally cover any employee who is at least 21, has worked for you in three of the last five years, and earned more than a few hundred dollars — and you have to contribute the same percentage of their pay that you contribute for yourself. A Solo 401(k), by design, only works when you and a spouse are the sole participants; add one non-spouse employee working over 1,000 hours a year and the plan has to convert into a standard 401(k) with the testing and administrative costs that come with it. Neither account is built for a growing team. Both are built for exactly one person, or two people married to each other, running the show.
So Which One Do You Actually Open
If you're a solo freelancer or consultant with no employees, clearing more than roughly $60,000 in net profit, and you plan to keep working solo for years — open the Solo 401(k) and stop leaving the employee-deferral half of your contribution room unused. If your income is unpredictable, you're not sure you'll keep freelancing past this year, or you simply want one account you can fund in a single transfer next April without touching it again, the SEP IRA still does its job well. One freelancer we'd describe to a friend: earning $120,000, comfortable, disciplined about saving — she's not the SEP IRA client anymore. She outgrew it the moment her income cleared six figures, and the paperwork to switch takes an afternoon, not a year.