You left the W-2 world for 1099 income, or started a side business that's generating real money. Your old 401(k) stopped accepting contributions the day you left, and your new reality is that nobody is offering to match anything. The question becomes: how do you save for retirement as a self-employed earner?
The two main options — Solo 401(k) and SEP-IRA — both let you contribute significantly more than an IRA allows. Both are standard products at Fidelity, Vanguard, and Schwab. They solve similar problems differently, and the right choice depends on specifics most articles get wrong.
The Contribution Limits
Both accounts allow much higher contributions than a Traditional or Roth IRA's $7,000 limit.
SEP-IRA 2026 limit: 25% of "net self-employment income" (or 20% of Schedule C income after deducting half of self-employment tax), capped at $70,000.
Solo 401(k) 2026 limit: same employer-side 25%/20% calculation (capped at same $70,000 total), PLUS a separate employee-side elective deferral of up to $23,500 ($31,000 if 50+).
The Solo 401(k) total ceiling: $70,000 employer side + $23,500 employee side = up to $93,500 for someone under 50 (or $101,000 at 50+). The SEP-IRA ceiling: $70,000.
The Self-Employment Income Math
Both use the same percentage calculation, but the math gets tricky. Starting with Schedule C net income:
- Calculate self-employment tax (15.3% of 92.35% of Schedule C income, up to Social Security wage base)
- Deduct half of SE tax from Schedule C income to get "net earnings from self-employment"
- Multiply by 20% (because the 25% rate applies to "compensation" net of the contribution, which requires algebra to solve)
For someone with $150,000 Schedule C income:
- SE tax: about $20,700
- Half SE tax: $10,350
- Net earnings: $139,650
- Max employer-side contribution (SEP-IRA or Solo 401(k)): roughly $27,900 (20% of $139,650)
For Solo 401(k), add $23,500 elective deferral to reach $51,400 total. For SEP-IRA, $27,900 is the total.
When Solo 401(k) Wins
For incomes up to about $230,000 Schedule C, the Solo 401(k) allows more contributions than a SEP-IRA. The difference is the employee-side $23,500 elective deferral, which SEP-IRA doesn't have.
Example: Schedule C income $100,000. SEP-IRA allows roughly $19,000. Solo 401(k) allows $19,000 + $23,500 = $42,500. That's $23,500 more tax-deferred savings per year in the Solo 401(k).
For most self-employed earners making $75K-$200K Schedule C, Solo 401(k) is clearly better for total contribution capacity.
When SEP-IRA Wins
Two specific situations favor SEP-IRA:
- Very high Schedule C income where both options hit the $70,000 employer-side cap, making the extra $23,500 elective deferral (which also hits a cap combined with employer-side) less advantageous
- Part-time self-employment alongside a W-2 job where the W-2 401(k) already uses your $23,500 elective deferral
The second scenario is where most "SEP-IRA is better" arguments actually apply. If you work a W-2 job and max out that 401(k) with $23,500, you can't contribute another $23,500 to a Solo 401(k) for side business income — the $23,500 is per person, not per employer.
In that case, both accounts are limited to employer-side contributions only. SEP-IRA is slightly simpler to set up and administer.
The Administrative Differences
SEP-IRA:
- 5-minute setup at Fidelity, Vanguard, or Schwab
- No annual tax filing required
- No Form 5500 filing ever
- Minimal ongoing paperwork
Solo 401(k):
- Similar 5-minute setup online
- Must file Form 5500-EZ annually if plan assets exceed $250,000
- Needs to adopt a formal plan document (providers supply this)
- Slightly more paperwork
The Form 5500-EZ is a one-page form that takes 10 minutes annually. It's not a real administrative burden, but it's a thing you have to remember.
The Backdoor Roth Interaction
SEP-IRA assets count toward the pro-rata rule for backdoor Roth calculations. Solo 401(k) assets don't.
If you plan to do backdoor Roth IRA contributions, a SEP-IRA creates problems. Every backdoor Roth conversion becomes partially taxable because your SEP balance is pre-tax.
For high earners doing backdoor Roth annually, the Solo 401(k) is strictly better. This alone is usually enough to pick Solo over SEP.
The Roth Option
Solo 401(k) offers both Roth and Traditional elective deferrals. SEP-IRA is traditional-only (no Roth SEP).
If you want Roth tax treatment for your self-employed savings, Solo 401(k) is the only option. The Roth Solo 401(k) contribution is $23,500 in 2026 — substantial tax-free space.
The Loan Feature
Solo 401(k) allows loans (up to 50% of vested balance, max $50,000). SEP-IRA doesn't.
For self-employed people, access to loans against retirement assets can be valuable during business cash flow crunches. You're borrowing from yourself at a market interest rate that you pay back to yourself.
The Roth Conversion Angle
Both accounts allow Roth conversion of pre-tax balances. But:
- Solo 401(k) typically allows in-plan Roth conversions without needing to roll out
- SEP-IRA requires rolling over to a Roth IRA (separate account)
Minor difference, but Solo 401(k) is slightly more flexible for Roth conversion strategies.
The Spouse Consideration
Solo 401(k) specifically allows a working spouse to also contribute. If your spouse is on payroll from your business (even for a few hours per week), they can make elective deferrals up to $23,500 plus employer contributions. This effectively doubles household retirement savings capacity from the business.
SEP-IRA requires contributions be made to all employees (except those meeting certain exclusion criteria). If you have a spouse on payroll, you must contribute for them too — but it's proportional, so this isn't automatically better or worse.
The Multi-Employee Question
Solo 401(k) requires zero employees (other than owner and spouse). If you hire your first real employee, you must either convert to a regular 401(k) (expensive to administer) or switch to a SEP-IRA.
SEP-IRA works with employees but requires equal percentage contributions across all employees. Once you hire, the math of SEP-IRA contributions gets expensive — you're contributing for everyone, not just yourself.
For most single-owner small businesses with plans to stay small, Solo 401(k) is clearly better.
The Real Answer
For 90% of self-employed earners with no employees, Solo 401(k) is the correct answer. Higher contribution limits, Roth option, loan availability, no pro-rata rule interaction, spouse contribution capability.
SEP-IRA is the right answer in two cases:
- You max out a separate W-2 401(k) and just need employer-side capacity for self-employment income
- Administrative simplicity is worth the modest contribution tradeoff
Open the Solo 401(k) at Fidelity, Schwab, or E*Trade (not Vanguard — Vanguard's Solo 401(k) has traditionally been weaker). Most providers have zero account fees. Set up takes 15 minutes. Fund it by December 31 of the tax year. Welcome to self-employed retirement saving, where the contribution limits are the highest they'll ever be in your financial life.