One of the underappreciated advantages of working for yourself is access to some of the most generous retirement savings options in the tax code. Self-employed workers can contribute far more per year than most employees — in some cases well over $60,000 — and deduct every dollar from their taxable income. The trade-off is that there’s no employer handling the paperwork. You have to set it up and fund it yourself.
Quick answer: your three main options
- SEP-IRA: simplest to set up, high contribution ceiling, employer-only contributions
- Solo 401(k): highest contribution potential overall, Roth option available, more complex
- SIMPLE IRA: designed for businesses with employees; lower limits, mandatory employer contribution
SEP-IRA (Simplified Employee Pension)
The SEP-IRA is the most popular choice for self-employed individuals because setup is simple — most brokerage firms can open one in an afternoon, often with no fees.
How much you can contribute
Up to 25% of your net self-employment income (technically: net earnings after deducting half of self-employment tax), subject to an IRS dollar cap ($72,000 in 2026, indexed annually). Because of the math involved, the effective ceiling works out to roughly 20% of net Schedule C income — not 25% of gross. A tax professional or IRS worksheet can give you the exact number.
Deadlines
You can open a SEP-IRA and fund it for the prior tax year all the way until your tax filing deadline, including extensions — that’s potentially October 15. This is a significant advantage over the solo 401(k), which must be established by December 31 of the contribution year.
What to watch out for
If you ever hire employees, SEP-IRA rules require you to make the same percentage contribution for each eligible employee as you make for yourself. This can make the SEP-IRA expensive for businesses that grow.
Solo 401(k) (also called Individual 401(k) or Self-Employed 401(k))
The solo 401(k) is designed for self-employed individuals with no employees other than a spouse. It allows contributions from two buckets:
- Employee elective deferrals: up to $24,500 in 2026, plus an $8,000 catch-up if you’re 50 or older — same limit as any 401(k)
- Employer profit-sharing: up to 25% of compensation (the same formula as the SEP-IRA)
Combined limit: the total of both buckets can’t exceed $72,000 in 2026 ($80,000 with the age-50 catch-up). At higher income levels, the dual-bucket structure lets you save more than a SEP-IRA alone would allow.
Roth option
Many solo 401(k) providers offer a Roth election for the employee deferral portion — contributions made after-tax, with tax-free growth and withdrawal. SEP-IRAs don’t have a Roth option.
Loans
Solo 401(k)s allow participant loans — up to 50% of the account balance or $50,000, whichever is less. IRAs do not allow loans.
The establishment deadline
Unlike the SEP-IRA, you must establish (open) a solo 401(k) by December 31 of the tax year to make contributions for that year. Funding can come after year-end, but the account must exist by year-end. This catches people off guard: if you decide in February that you want a solo 401(k) for the prior year, it’s too late.
Administrative note
Once the plan balance exceeds $250,000, you must file Form 5500-EZ annually with the IRS. It’s straightforward but easy to forget.
SIMPLE IRA
The SIMPLE IRA is better suited for small businesses with employees, but sole proprietors can use it too. Contribution limits are lower — $17,000 in 2026, plus a $4,000 catch-up for those 50 and older. Employers are required to contribute either a 2% non-elective contribution for all eligible employees or a dollar-for-dollar match of up to 3% of compensation.
The mandatory employer contribution makes this less attractive for sole proprietors who just want to save for themselves. Where it makes more sense: small businesses with a handful of employees where a simple plan and modest match are a useful benefit.
SEP-IRA vs. solo 401(k): how to choose
For most self-employed workers at moderate income levels, the two plans allow similar contribution amounts. The decision usually comes down to:
- SEP-IRA wins when: you want simplicity, you may hire employees soon, or you need to open the account close to the tax filing deadline.
- Solo 401(k) wins when: you want a Roth option, you earn enough that the dual-contribution structure lets you contribute more than the SEP formula allows, or you want the loan option.
At net self-employment income below roughly $100,000, the two plans allow similar maximum contributions. As income rises above that level, the solo 401(k)’s employee deferral creates a meaningful advantage over the SEP-IRA formula alone.
Quarterly estimated taxes: handle this first
Before maximizing retirement contributions, make sure your quarterly estimated tax payments are on track. Self-employed workers owe both income tax and self-employment tax (15.3% on net earnings up to the Social Security wage base). Missing estimated payments triggers an underpayment penalty even if you pay the full balance at filing time.
Retirement contributions reduce your net income for income tax purposes — but not for self-employment tax. The two are calculated on related but distinct bases, which is why working through the numbers carefully (or with a CPA) is worth the effort.
The tax benefit in practice
At a 22% marginal tax rate, every $10,000 contributed to a self-employed retirement account saves $2,200 in income tax. At 32%, that’s $3,200. For a self-employed person contributing $30,000 per year, the annual tax savings alone can exceed $6,000–$10,000. This is one of the most powerful tax levers available to self-employed workers.
Common mistakes
- Not setting up any account at all. The most common mistake, and the most costly in the long run.
- Opening a solo 401(k) after December 31. It must be established by year-end to count.
- Using gross revenue instead of net income when calculating the SEP-IRA contribution — overstating the allowed amount.
- Missing quarterly tax payments while maximizing retirement contributions.
- Using a SEP-IRA and then hiring employees without understanding the matching obligation that follows.
What to do next
If you don’t have a self-employed retirement account, start with a SEP-IRA. Open one at a major brokerage (Fidelity, Vanguard, and Schwab all offer no-fee SEP-IRAs), and if you’re still within the tax filing window, you may be able to contribute for last year. If you want a Roth option or expect your income to grow past the point where the solo 401(k) produces meaningfully higher contributions, establish a solo 401(k) before December 31 of this tax year.
Further Reading
- Catch-Up Contributions at 50+
- Roth IRA vs. Traditional IRA
- Tax-Efficient Withdrawal Order in Retirement
- How Much Do You Need to Retire?
- How Retirement Income Is Taxed
This article is for general educational purposes only and does not constitute financial, tax, or investment advice. Individual circumstances vary — consider working with a qualified financial advisor or tax professional before making retirement account decisions.
