Solo 401(k) vs SEP IRA: Which Is Better for Self-Employed?

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If you are self-employed with no full-time employees, the IRS lets you save up to $70,000 a year for retirement through your own business. Two main accounts compete for that contribution: the Solo 401(k) and the SEP IRA. They share the same headline cap and the same tax-deferred growth, but they behave very differently at low and middle income levels, and only one of them offers a Roth option. For most freelancers, the Solo 401(k) is the better answer. Here is the comparison with concrete numbers at three income levels.

Key takeaways

• 2025 limits: both accounts cap at $70,000 in total contributions ($77,500 if you are 50+).
• Solo 401(k) lets you contribute more at low and middle incomes thanks to the $23,500 employee deferral.
• Solo 401(k) offers a Roth side; SEP IRA generally does not (limited Roth SEP added by SECURE 2.0 but most custodians still do not support it).
• SEP IRA is simpler — no Form 5500-EZ, no plan adoption agreement.
• Solo 401(k) allows participant loans and pro-rata-safe Backdoor Roth; SEP IRA destroys Backdoor Roth via pro-rata.

The mechanics: how each one calculates contributions

Solo 401(k)

You wear two hats: employee and employer. You get to contribute as both.

• Employee deferral: up to $23,500 in 2025, regardless of business income (as long as net self-employment income is at least $23,500).
• Employer profit-sharing: up to 25% of net self-employment compensation. For sole proprietors and single-member LLCs, the effective rate is about 20% of net SE earnings because of the SE tax deduction.
• Combined cap: $70,000 ($77,500 with $7,500 catch-up if 50+).

SEP IRA

You contribute only as the employer.

• Employer contribution: up to 25% of net self-employment compensation (effective 20% for sole proprietors).
• Combined cap: $70,000.
• No employee deferral, no catch-up, no Roth (for practical purposes).

Side-by-side at three income levels

Assume sole proprietor or single-member LLC, net self-employment income before retirement contributions. The 20% effective employer contribution rate is used (the math accounts for the SE tax deduction).

The Solo 401(k) always beats or ties the SEP IRA on raw contribution capacity. The gap is largest at low and middle incomes, exactly where freelancers actually live. At $50,000 of net SE income, the Solo 401(k) lets you save 3x more.

The Roth question

The Solo 401(k) lets you designate the $23,500 employee deferral (and post-SECURE 2.0, employer contributions in some plans) as Roth. The SEP IRA, despite a SECURE 2.0 provision technically allowing Roth SEPs, has very limited custodian support in 2025. Fidelity, Schwab, and Vanguard do not offer Roth SEP IRAs as of writing.

If you want any Roth space from your self-employment income, you almost certainly need a Solo 401(k).

For a freelancer in the 24% bracket, getting $23,500 a year into Roth is worth roughly $5,640 of current tax cost — money you happily pay now to skip the tax forever on the eventual growth.

The Backdoor Roth interaction

A SEP IRA destroys your ability to do a clean Backdoor Roth. Recall the pro-rata rule: all Traditional, SEP, and SIMPLE IRA balances count as one pool. A $200,000 SEP IRA balance turns every Backdoor Roth attempt into a mostly-taxable conversion.

A Solo 401(k) is a 401(k), not an IRA. It is invisible to the pro-rata rule. You can have $500,000 in a Solo 401(k) and still do a clean $7,000 Backdoor Roth every year.

For any self-employed person with income high enough to need the Backdoor Roth (about $165k single / $246k MFJ), the Solo 401(k) is effectively mandatory.

Which broker

Fidelity Solo 401(k)

Fidelity offers a free Solo 401(k) with no setup fee, no annual fee, and full access to mutual funds and ETFs. As of recent updates, Fidelity supports both Traditional and Roth contributions in the Solo 401(k). No loan provision, but most freelancers do not use 401(k) loans anyway.

Schwab Solo 401(k)

Schwab's Solo 401(k) is also free but historically did not support Roth contributions. Check the current plan document carefully; Schwab may have added Roth support since SECURE 2.0. If Roth is not available, switch to Fidelity.

Vanguard Solo 401(k)

Vanguard Solo 401(k) supports Roth and has a $20 per fund annual fee unless you have $50,000+ in Vanguard. Functional but more expensive.

Third-party custom plans (mySolo401k, Solo401k.com)

Custom plans cost $500-$1,000 setup plus $100-$300 per year. They unlock features the brokerage plans skip: participant loans, voluntary after-tax contributions for Mega Backdoor Roth, broader investment choices including real estate and private placements. Worth it for high earners maxing the plan or for anyone wanting Mega Backdoor on top.

Deadlines and paperwork

Solo 401(k)

• Plan adoption deadline: the plan itself must be established by December 31 of the contribution year. SECURE Act extended the deadline for employer contributions to the tax filing deadline (including extensions), but the plan must exist by Dec 31.
• Employee deferral election: must be made by December 31.
• Contribution funding deadline: tax filing deadline including extensions (October 15 of the following year).
• Form 5500-EZ: required annually once the plan exceeds $250,000 in assets. Simple form, takes 30 minutes.

SEP IRA

• Plan adoption deadline: tax filing deadline including extensions. You can open and fund a SEP IRA in October for the previous tax year.
• Form 5500: none. Zero ongoing paperwork.

The SEP IRA wins on simplicity and on "oh no it is April 14 and I forgot to set up retirement" recoverability. The Solo 401(k) wins on every other dimension.

Who should pick what

Pick the Solo 401(k) if any of these apply

• Your net SE income is under $200,000.
• You want any Roth contributions from your self-employment.
• You want to do a Backdoor Roth alongside.
• You earn over $200,000 of regular W-2 income and your business income is supplemental.
• You want to leave the door open to Mega Backdoor Roth with a custom plan.

Pick the SEP IRA if all of these apply

• You earn $400,000+ of net SE income (you hit the $70k cap either way).
• You do not want any Roth from your SE income.
• You have no other IRA balances (so Backdoor Roth is not on the table).
• You strongly value avoiding Form 5500-EZ and want zero paperwork.
• You are setting up a plan after December 31.

What about SIMPLE IRA or defined-benefit plans?

SIMPLE IRA caps contributions at about $16,500 in 2025 — strictly worse than both Solo 401(k) and SEP IRA for a one-person business. Used by small businesses with employees who want lower employer cost.

Defined-benefit (cash balance) plans let high earners over 50 contribute $200,000+ a year tax-deferred. Setup runs $2,000-$5,000 with $1,500-$3,000 annual administration. Worth it for a $500k+ earner with no employees and 5+ years until retirement.

What can go wrong

• Missing the Dec 31 plan adoption deadline for Solo 401(k). Fall back to SEP IRA for that tax year and adopt Solo 401(k) for next year.
• Hiring a full-time employee. Solo 401(k) requires no common-law employees other than you and your spouse. Once you hire, you need a different plan or to bring the employee into the existing plan with non-discrimination rules.
• Excess contribution. The 25% employer rate is calculated after the SE tax deduction. Many freelancers miscalculate and over-contribute. Either fix before the deadline or face a 6% excise tax.
• Forgetting Form 5500-EZ. Once Solo 401(k) assets cross $250,000, the form is mandatory. Penalty for non-filing is $250 per day. Tax software does not always remind you.
• Mixed S-corp wages. S-corp owners contribute based on W-2 wages, not pass-through profit. Set the W-2 right or the contribution math is wrong.

Related reading

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FAQ

What is the 2025 Solo 401(k) contribution limit?

$70,000 total ($77,500 with the age 50+ catch-up). Composed of up to $23,500 in employee deferral plus up to 25% of net SE compensation as employer profit sharing.

Can I have a Solo 401(k) and a regular 401(k) at my day job at the same time?

Yes. The $23,500 employee deferral is shared across all 401(k) plans you participate in (you cannot defer $23,500 in both). The $70,000 annual addition limit is per unrelated employer, so you can have $70,000 in each.

Does a Solo 401(k) allow Roth contributions?

Yes, at most major custodians. Fidelity, Vanguard, and most third-party plans support Roth. Schwab has historically been the exception; check current plan documents.

Can I roll an old 401(k) into a Solo 401(k)?

Yes. Most Solo 401(k) plans accept incoming rollovers from prior employer 401(k)s and Traditional IRAs. This is one way to clean out a pre-tax IRA balance before doing a Backdoor Roth.

Do I need an EIN for a Solo 401(k)?

Yes. The plan needs its own EIN, separate from your personal Social Security number and any business EIN. Free to obtain from irs.gov in 10 minutes.

What happens to my Solo 401(k) if I shut down the business?

You roll it to a Traditional IRA or to a new employer 401(k). You do not have to liquidate.

Can my spouse contribute to my Solo 401(k)?

Yes, if the spouse is a legitimate employee of the business and receives W-2 compensation. Each spouse gets their own $23,500 deferral and their own profit-sharing share.

Is the SEP IRA really worth nothing?

It is worth something for someone who earns enough to hit the cap regardless, has no other IRA balances, and values simplicity. For everyone else, the Solo 401(k) is better on contribution capacity, Roth access, and Backdoor Roth compatibility.

Bottom line

For a freelancer or single-member LLC with no employees, the Solo 401(k) at Fidelity is the default answer. You get more contribution room at low and middle incomes, the Roth side, and full compatibility with Backdoor Roth. The SEP IRA's only real advantage is simplicity and the late-adoption deadline. Open the Solo 401(k) before December 31, fund the employee deferral by year-end, fund the employer profit-share by your tax filing deadline, and file the Form 5500-EZ once the balance crosses $250,000. That is the whole playbook.