When you work for yourself, no employer hands you a 401(k) with a match — but you have retirement options that are often more generous than what employees get. The catch is that you have to set them up yourself. The two most common choices for the self-employed are the SEP-IRA and the Solo 401(k). Both let you save far more than a regular IRA and cut your tax bill in the process.
Why It Matters for the Self-Employed
Without an employer plan, it’s easy to put retirement off entirely — and the self-employed are the people most at risk of reaching retirement age with little saved. The flip side: contributions to these accounts are generally tax-deductible, so you lower your taxable income now while building your nest egg. For a profitable solo business, opening one of these accounts is often the single biggest tax move available.
SEP-IRA: Simple and Flexible
A Simplified Employee Pension (SEP) IRA is the easiest high-limit plan to open — most brokerages set one up in minutes with no annual paperwork. You contribute a percentage of your net self-employment income (up to an IRS limit that’s far higher than a regular IRA’s), and contributions are flexible: in a great year you can put in a lot, in a lean year nothing at all.
- Pros — very easy to open, no annual filing, flexible contributions, high limit
- Cons — if you have employees, you generally must contribute the same percentage for them as for yourself; no catch-up contributions; no Roth option
- Best for — one-person businesses that want simplicity and high limits
Solo 401(k): Bigger Limits for One-Person Businesses
A Solo 401(k) (also called an individual or one-participant 401(k)) is for a business with no employees other than you and a spouse. It lets you contribute as both the “employee” (a salary-deferral amount) and the “employer” (a profit-sharing percentage), which often allows a larger total contribution than a SEP at the same income level — especially at moderate incomes. Many Solo 401(k)s also offer a Roth option and the ability to make catch-up contributions if you’re 50 or older.
- Pros — potentially higher contributions than a SEP at the same income, Roth option available, catch-up contributions for those 50+
- Cons — more setup, and once the balance is large enough an annual IRS form (5500-EZ) is required; not available if you have non-spouse employees
- Best for — solo owners who want to maximize contributions or want a Roth option
How to Choose
- Want the simplest setup? A SEP-IRA opens in minutes with no ongoing paperwork
- Want to save the most or want a Roth? A Solo 401(k) usually allows more and offers Roth
- Have employees? A SEP requires equal contributions for them; a Solo 401(k) isn’t allowed — look at a SIMPLE IRA or a regular small-business 401(k) instead
The Bottom Line
The self-employed have powerful, tax-advantaged retirement options — you just have to open them. A SEP-IRA wins on simplicity and flexibility; a Solo 401(k) usually allows larger contributions and offers a Roth choice for a one-person business. Contribution limits and deadlines change yearly, so check the current IRS figures and consider a quick conversation with a financial professional before you open one.
Further Reading
This article is educational only and is not legal, tax, or financial advice. Business, tax, and retirement rules vary by situation and change over time. Consult a qualified attorney, CPA, or financial professional before making decisions about your specific business.