Individuals who are self-employed or freelancers face a different set of challenges when it comes to retirement planning. Without access to traditional employer-sponsored plans, choosing the right self-directed retirement plan becomes crucial. Two of the most popular plan options are the Solo 401(k) and the SEP IRA. While both options offer significant tax advantages and ample contribution limits, they differ in terms of structure, flexibility, and who they are best suited for. Being able to understand the differences between these two plans can help you decide which is the best plan for you and your needs.

What is a Solo 401(k)?

A Solo 401(k), sometimes referred to as an individual 401(k), is designed specifically for self-employed individuals with no full-time employees other than a spouse. This makes it ideal for solo freelancers or business owners who work alone. One of its biggest advantages is the ability to contribute in two ways. First as an employee, and then again as the employer. For 2025, this means you can contribute up to $23,000 as an employee (or $30,500 if you’re 50 or older), plus up to 25% of your net self-employment income as the employer. The total contribution limit contributed by the owner reaches $70,000, or $77,500 with catch-up contributions.

What is a SEP IRA?

By contrast, a SEP IRA (Simplified Employee Pension Individual Retirement Arrangement) allows only employer contributions up to 25% of your net self-employment income, with a limit of $69,000 in 2025. However, SEP IRAs do not offer catch-up contributions for those over 50, nor do they allow employee deferrals. With contributions being made only by the employer, SEP IRAs are simpler to manage and easier to set up in general. Most financial institutions can establish one with minimal paperwork and no ongoing IRS filing requirements.

What’s Right for You?

Ultimately, choosing the best retirement plan as a self-employed individual depends on your long-term business and personal goals. If you’re a solo freelancer seeking maximum contribution potential and plan flexibility, a Solo 401(k) is likely your best bet. The SEP IRA plan could be considered the more practical choice if you are looking for a simple, easily maintained plan. Either way, both options offer valuable ways to save for retirement while lowering your tax burden today.

Differences in Support of Loans or Roth Contributions

When it comes to flexibility and features, Solo 401(k)s tend to be more robust. Many Solo 401(k) plans do allow Roth contributions, allowing you to pay taxes on the money now and enjoy tax-free withdrawals in retirement. They also permit loans, which can be useful if the time comes and someone is in financial need. In contrast, SEP IRAs only allow for pre-tax contributions and do not support loans or Roth options.

Looking to the Future

The presence of employees is another major factor in deciding between a Solo 401(k) vs SEP IRA. A solo 401(k) will not allow you to hire full-time employees (aside from your spouse) and maintain the plan. The SEP IRA, however, can be used by businesses with employees, but there’s a catch. If you contribute for yourself, you must contribute the same percentage of compensation for every eligible employee. This can become costly if your business grows.

From a tax perspective, both plans offer tax-deferred growth and reduce your taxable income in the year contributions are made. Solo 401(k)s offer an added advantage if you want Roth options or are looking to maximize contributions on a modest income. Because you can make employee deferrals before employer contributions, it’s often possible to contribute more to a Solo 401(k) than to a SEP IRA, particularly when your income is under $100,000.

Contact Us Today

Written by: Roisin McGuirk