Self-employed people can put away far more for retirement than the $7,500 IRA limit. The two main options are the SEP-IRA and the Solo 401(k). Both reduce your income tax; the right one depends mostly on how much you want to save and how much paperwork you’ll accept.
The 2026 limits
| SEP-IRA | Solo 401(k) | |
|---|---|---|
| Employee contribution | None | Up to $24,500 (plus $8,000 catch-up at 50+, or $11,250 at ages 60–63) |
| Employer contribution | About 20% of net self-employment earnings | About 20% of net self-employment earnings |
| Total cap | $72,000 | $72,000 (plus any catch-up) |
| Roth option | Allowed under recent law, if the provider offers it | Roth employee deferrals widely available |
| Paperwork | Minimal | More; Form 5500-EZ once assets exceed $250,000 |
| Employees allowed | Must include eligible employees | Only you (and your spouse) |
“Net self-employment earnings” here means your profit minus half of your self-employment tax. For a sole proprietor the employer contribution works out to 20% of that figure, not the 25% often quoted for employees.
Same income, different limits
Half of self-employment tax is $6,005, so net earnings are $78,995.
SEP-IRA: 20% × $78,995 ≈ $15,799.
Solo 401(k): $24,500 employee deferral + $15,799 employer contribution ≈ $40,299.
The Solo 401(k) lets you save much more at modest income levels because of the employee deferral. At high incomes, where 20% of earnings already approaches the cap, the gap narrows.
When a SEP-IRA is enough
- You want something simple to open and run.
- You plan to save less than about 20% of your net earnings anyway.
- You want to open and fund it after the year ends — a SEP can be set up and funded up to your tax filing deadline, including extensions.
When a Solo 401(k) wins
- You want to save as much as possible on a moderate income.
- You want Roth contributions alongside pre-tax ones.
- You have no employees other than a spouse.
Plan setup and contribution deadlines for a Solo 401(k) are stricter than a SEP’s, especially for employee deferrals; check with the provider before year-end.
What contributions save
Pre-tax contributions are deducted on Form 1040 and reduce income tax, not self-employment tax. Saving $15,000 in the 22% bracket cuts federal income tax by about $3,300. Remember to include planned contributions as an expense when you set your freelance hourly rate.