Retirement accounts for self-employed people

One of the overlooked advantages of self-employment is access to retirement accounts with higher contribution limits than employer 401(k)s. Used correctly, they let you shelter a huge chunk of income from current taxes. There are three main options.

SEP IRA

Simplified Employee Pension IRA. Contribution limit: up to 25% of net self-employment earnings, capped at $70,000 in 2026. Easiest to set up — most brokerages offer one in under 10 minutes. Traditional (pre-tax) contributions only; no Roth option. Good if you have no employees and want zero administrative overhead.

Solo 401(k)

A 401(k) designed for self-employed individuals with no employees (or only a spouse). Contribution limit: up to $23,500 as 'employee' contributions plus up to 25% of earnings as 'employer' contributions, with a combined cap of $70,000. Can often contribute more than a SEP at the same income level because of the employee-plus-employer structure. Allows Roth contributions (in most plans). Allows loans in some plans. More paperwork than a SEP — a Form 5500 filing once assets exceed $250k.

SIMPLE IRA

Savings Incentive Match Plan for Employees. Contribution limit: $16,500 in 2026 plus employer match. Mainly useful for small businesses with employees where a 401(k) is too complex. For a solo operator, a SEP or Solo 401(k) is almost always better.

The advanced move

If you have both self-employment income AND W-2 income (full-time job with a 401(k) plus a side business), you can contribute to both a regular 401(k) from your employer AND a Solo 401(k) from your business — up to the combined limit. This is one of the most powerful strategies available to hybrid earners.

The three accounts side by side

The math at two income levels

The contribution formulas are where the Solo 401(k) earns its reputation. Take a freelancer with $80,000 of net self-employment profit. After the deduction for half of self-employment tax, the effective employer contribution base is about $74,300, and the 25%-of-net rule works out to roughly 20% of that — about $14,900. That is the SEP IRA ceiling. The Solo 401(k) owner gets the same $14,900 employer piece PLUS the $23,500 employee deferral, for a total around $38,400 — more than two and a half times the SEP at the same income.

At $300,000 of profit the gap closes: the 25% employer calculation alone reaches the $70,000 combined cap, so SEP and Solo 401(k) allow the same total. That is the practical rule: below roughly $250,000 of profit, the Solo 401(k) shelters dramatically more; above it, choose on features. And the features still favor the Solo 401(k) — Roth contributions, loan provisions in some plans, and crucially no interference with the backdoor Roth IRA, since the pro-rata rule counts SEP and SIMPLE balances but not 401(k) balances.

Opening a Solo 401(k), step by step

1. 1
   Get an EIN if you do not have one

   Free at IRS.gov in ten minutes. Brokerages require it for the plan paperwork even for sole proprietors.

2. 2
   Pick a provider

   Fidelity, Schwab, and E*TRADE offer free Solo 401(k)s with index funds. Check whether the plan allows Roth deferrals and incoming rollovers — Fidelity added Roth in 2023, but details differ.

3. 3
   Adopt the plan by December 31

   The plan must exist by year-end to accept employee deferrals for that year, though employer contributions can wait until your tax filing deadline including extensions.

4. 4
   Fund it in the right order

   Employee deferral first (biggest bang at moderate incomes), then employer profit-sharing after your accountant confirms the exact 20%-of-net figure.

5. 5
   Calendar the 5500-EZ threshold

   Once plan assets exceed $250,000 you must file a one-page Form 5500-EZ annually. The late-filing penalty is brutal — up to $250 per day — for a form that takes fifteen minutes.

Common mistakes

• Opening a SEP IRA while also doing backdoor Roth conversions. The SEP balance triggers the pro-rata rule and makes every conversion partially taxable — the single most common structural error high-earning freelancers make.
• Waiting until April to think about contributions. Employee deferrals to a Solo 401(k) require the plan to exist by December 31 of the tax year.
• Contributing the maximum in a good year and nothing for the next three. A steady $1,500 a month beats a sporadic $20,000 windfall for both compounding and discipline.
• Forgetting the Form 5500-EZ once the Solo 401(k) crosses $250,000 in assets. The penalty accrues daily and has ruined otherwise perfect plans.
• Assuming you earn too little for this to matter. Even at $30,000 of profit, a Roth Solo 401(k) shelters gains for decades, and low-income years are exactly when Roth contributions are cheapest.

The bottom line

For a solo operator with no employees, the default answer is a Solo 401(k) at a major brokerage: highest contribution capacity at normal incomes, Roth flexibility, and no interference with backdoor Roth strategies. The SEP IRA remains a fine choice for people who value ten-minute setup over everything else, and the SIMPLE IRA only enters the conversation once you have a team. Whichever you pick, the account is a container, not a strategy — fill it with low-cost index funds, automate the contribution monthly, and let the self-employment tax code do what it rarely does anywhere else: work in your favor.

Where does this sit in your overall priority order? For most self-employed people the sequence looks like: keep the tax account funded first, build a personal emergency fund of three to six months, capture any HSA eligibility, then push hard on the Solo 401(k) — Roth deferrals in lower-income years, pre-tax in higher ones. The flexibility cuts both ways: nobody withholds this money for you, so the contribution only happens if it is automated. Set a monthly transfer into the plan the same way you set the tax skim, and treat raises to it as the default use of every good quarter.