Solo 401(k) vs SEP-IRA: which shelters more

Self-employment takes the employer match away and hands back something better: contribution ceilings an employee can only dream about. The two standard vehicles are the SEP-IRA and the solo 401(k). They sound interchangeable. Below roughly six figures of profit, they are not even close.

The same base, two formulas

Both plans start from your net self-employment earnings: profit minus half your SE tax. Call it the base.

SEP-IRA: contribute up to 20% of the base, capped at $70,000 (2025). One lever, employer-side only. Setup is famously instant at any broker.

Solo 401(k): two levers. As the employee, defer up to $23,500 (2025), plus catch-ups ($7,500 at 50+, and $11,250 at ages 60 to 63 under SECURE 2.0). As the employer, the same 20% of base. Combined cap: $70,000 plus catch-up.

That employee deferral is the whole story. It exists on top of the 20%, and at modest profits it dwarfs the 20%.

Where the gap bites

At $60,000 profit, the base is about $55,760. SEP ceiling: roughly $11,150. Solo 401(k) ceiling: the same $11,150 employer share PLUS $23,500 of deferral, about $34,650. Three times the shelter, same income, same person.

The gap narrows as profit grows and closes around $300k+ where both hit the overall cap. Run your own numbers in the solo 401(k) vs SEP-IRA calculator.

Three fine-print items worth knowing

1. The December 31 deadline. The solo 401(k) must EXIST by year end to accept that year’s employee deferral. The SEP can be opened and funded up to your filing deadline. Every December, freelancers discover this in the wrong order.
2. Contributions cut income tax, not SE tax. SE tax is computed on profit before retirement contributions. Budget with the quarterly calculator accordingly.
3. Employees change everything. Hire staff and SEP rules force proportional contributions for them. That decision deserves an accountant, not a blog post.

Our take

The SEP’s only remaining advantage is thirty minutes of setup convenience, and modern brokers have mostly erased even that. For a solo freelancer without employees, the solo 401(k) is the default answer, opened before December, funded to whatever your cash flow honestly allows.