Solo 401(k) vs SEP IRA for Freelancers: Which Retirement Plan Lets You Save More in 2024?

As a freelancer, you're responsible for your own retirement—and choosing the right plan can mean tens of thousands more in tax-deferred savings. Both Solo 401(k)s and SEP IRAs allow self-employed workers to contribute far more than traditional IRAs, but they work very differently. This guide breaks down contribution limits, tax treatment, administrative burden, and real-world scenarios so you can pick the plan that fits your income and goals.

Key Takeaways

• Solo 401(k)s allow higher total contributions (up to $69,000 in 2024, or $76,500 if you're 50+) and include Roth options and loan provisions.
• SEP IRAs are simpler to set up and maintain, with no annual filing requirements, but contributions are limited to 20% of net self-employment income (up to $69,000).
• At lower income levels (under ~$150,000 net profit), both plans often hit similar contribution caps, but Solo 401(k)s give you more control.
• Solo 401(k)s require Form 5500-EZ once plan assets exceed $250,000, adding a minor administrative step.
• You can have either plan even if you have employees, as long as they are ineligible (typically part-time or contract workers who work fewer than 1,000 hours per year).

How Solo 401(k) Contributions Work

A Solo 401(k)—also called an Individual 401(k) or Self-Employed 401(k)—lets you contribute in two ways: as the employee and as the employer. For 2024, the IRS sets the employee elective deferral limit at $23,000 (or $30,500 if you're 50 or older). You can then add an employer profit-sharing contribution of up to 25% of your W-2 compensation (if you're incorporated) or 20% of your net self-employment income (if you're a sole proprietor or single-member LLC).

The combined employee + employer contribution cannot exceed $69,000 in 2024 (or $76,500 with the catch-up). According to the IRS, net self-employment income is your Schedule C profit minus one-half of your self-employment tax.

Example: You're a sole proprietor who earned $100,000 in net profit on Schedule C in 2024. After deducting half of your self-employment tax (~$7,065), your net self-employment income is approximately $92,935.

• Employee deferral: You can contribute up to $23,000.
• Employer contribution: 20% of $92,935 = $18,587.
• Total Solo 401(k) contribution: $23,000 + $18,587 = $41,587.

This nearly doubles what you'd be allowed in a SEP IRA at the same income level.

Roth Solo 401(k) Option

One of the biggest advantages of a Solo 401(k) is the ability to make Roth contributions on the employee-deferral side. You pay tax now on the $23,000 (or whatever portion you choose), but all future growth and withdrawals are tax-free. The employer profit-sharing contribution must still go in pre-tax. If you expect your tax rate to rise in retirement—or simply want tax diversification—this is a powerful feature SEP IRAs don't offer.

Loan Provisions

Solo 401(k) plans can include a loan feature, letting you borrow up to $50,000 or 50% of your account balance, whichever is less. You pay yourself back with interest. This can be a lifeline in an emergency, but it comes with strict repayment rules; default and the loan becomes a taxable distribution plus a 10% penalty if you're under 59½.

How SEP IRA Contributions Work

A SEP IRA (Simplified Employee Pension) is easier to set up and administer. You contribute purely as the employer—there is no employee deferral component. For 2024, the IRS allows you to contribute up to 25% of W-2 compensation (if you're incorporated) or 20% of net self-employment income (if you're a sole proprietor), with a maximum contribution of $69,000.

Using the same $100,000 net-profit example:

• Net self-employment income: ~$92,935.
• SEP IRA contribution: 20% of $92,935 = $18,587.

Notice that without the employee-deferral layer, your SEP IRA contribution stops at $18,587—far less than the $41,587 you could put into a Solo 401(k).

When Does a SEP IRA Catch Up?

At very high income levels, both plans converge at the $69,000 annual limit. If your net self-employment income is approximately $345,000 or more, you'll max out the $69,000 cap with a SEP IRA's 20% contribution, and the Solo 401(k) will also hit the same ceiling. At that point, the Solo 401(k)'s advantage lies in its Roth option, loans, and flexibility—not raw contribution dollars.

Side-by-Side Comparison: Solo 401(k) vs SEP IRA

Which Plan Is Right for You?

Choose a Solo 401(k) if:

• Your net self-employment income is under ~$200,000 and you want to maximize contributions through the $23,000 employee deferral.
• You want Roth contribution flexibility or the option to borrow against your balance.
• You're comfortable with slightly more paperwork (plan adoption and eventual Form 5500-EZ filing).

Choose a SEP IRA if:

• You value simplicity and want to avoid any annual IRS filings.
• Your income is high enough that you'll hit the $69,000 limit anyway, so the Solo 401(k)'s extra features don't matter.
• You want the flexibility to establish the plan as late as your filing deadline (including extensions).

Real-world scenario: Jasmine is a freelance UX designer who netted $85,000 in 2024. With a Solo 401(k), she contributes the full $23,000 employee deferral plus ~$15,500 employer contribution—$38,500 total. A SEP IRA would cap her at ~$15,500. Over 20 years at 7% growth, that $23,000 annual difference compounds to roughly $940,000 more in retirement savings.

Common Mistakes to Avoid

1. Calculating the employer contribution incorrectly Many freelancers forget to subtract half of their self-employment tax before applying the 20% rate. Use IRS Publication 560 or a tax professional to get the math right—overfunding triggers penalties.

2. Missing the setup deadline for Solo 401(k)s You must establish a Solo 401(k) by December 31 of the tax year. SEP IRAs can be opened as late as your filing deadline (including extensions). If it's already January, you're limited to a SEP IRA for the prior year.

3. Thinking you can't have a plan if you have a side W-2 job You can maintain a Solo 401(k) or SEP IRA for self-employment income even if you also participate in an employer's 401(k). However, the $23,000 employee-deferral limit is combined across all 401(k) plans. The employer profit-sharing contribution is separate and can still reach the $69,000 overall cap.

4. Not considering future employees If you hire your first W-2 employee (other than your spouse), you'll need to include them in your SEP IRA after they meet eligibility rules (typically three years of service). Solo 401(k)s can also require coverage, though some plan designs exclude employees who work under 1,000 hours. Plan for growth.

5. Ignoring Roth conversion opportunities If you open a Solo 401(k), you can later convert pre-tax balances to Roth inside the plan (if your plan document allows in-plan Roth conversions). This strategy is especially powerful in low-income years. SEP IRAs require you to roll assets into a separate Roth IRA, triggering taxes on the entire amount.

6. Forgetting Form 5500-EZ Once your Solo 401(k) assets exceed $250,000, you must file Form 5500-EZ annually by July 31 (or the last day of the seventh month after your plan year ends). Miss it and you face penalties. SEP IRAs never require this filing.

How to Set Up Each Plan

Solo 401(k) Setup

1. Adopt a plan document by December 31 of the tax year. Many brokerages (Fidelity, Vanguard, Schwab, E*TRADE) offer free prototype plans.
2. Open a Solo 401(k) brokerage account and designate beneficiaries.
3. Make contributions by your tax-filing deadline (including extensions).
4. File Form 5500-EZ if plan assets exceed $250,000 at year-end.

SEP IRA Setup

1. Complete IRS Form 5305-SEP (or use your brokerage's version). You don't file this with the IRS; keep it for your records.
2. Open a SEP IRA account at any brokerage.
3. Make contributions by your tax-filing deadline (including extensions).
4. No annual filing required, ever.

Can You Have Both Plans at Once?

No. The IRS prohibits maintaining both a Solo 401(k) and a SEP IRA simultaneously for the same business. However, you can have a Solo 401(k) for one self-employment venture and participate in an employer's 401(k) at a W-2 job—just watch the combined employee-deferral limit of $23,000 across all plans.

If you have two separate self-employment businesses (for example, freelance writing and consulting under different entities), you typically combine the income and use one retirement plan. Consult a CPA if your structure is more complex.

Conclusion

For most freelancers earning under $150,000 in net self-employment income, a Solo 401(k) delivers significantly higher contribution limits and valuable Roth and loan features, making it the better choice if you can handle the modest extra paperwork. If you crave simplicity or earn enough to hit the $69,000 cap anyway, a SEP IRA is faster to set up and maintain. Run the numbers for your specific income, consider your administrative tolerance, and open your account before year-end if you're going the Solo 401(k) route.

Next step: Use the Solo 401(k) contribution calculator to model your 2024 savings, or read our guide on how to open a Solo 401(k) in 5 steps to get started today.

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