SEP-IRA vs. Solo 401(k): The Retirement Math Most Freelancers Get Dead Wrong

Here's the thing: it's March 3rd. You've got 43 days until the April 15 tax deadline. And if you haven't made a retirement contribution for 2025 yet, you're still in the game — but only if you understand the rules.

The average solo operator I talk to has one of two problems. Either they haven't opened a retirement account at all (leaving thousands in tax deductions on the table), or they opened a SEP-IRA years ago because it was "easy" and never ran the math on whether a Solo 401(k) would've been the better call. Both situations cost money. Let me break this down so you stop bleeding.

Why Retirement Accounts Are Actually a Tax Strategy, Not a Savings Plan

I need to reframe this first, because "saving for retirement" sounds like something you do when you have extra money. You don't have extra money. You're a freelancer.

Here's how this actually works: every dollar you contribute to a SEP-IRA or Solo 401(k) as a self-employed person comes off your net income before federal income tax is calculated. If you're in the 22% bracket and you contribute $20,000 to a retirement account, you just avoided $4,400 in federal taxes. That's not theoretical — that's $4,400 that stays in your pocket instead of going to the IRS.

This is different from a W-2 employee's 401(k). They save on income tax. You also save on your self-employment tax deduction math. The mechanics are slightly more complicated, but the punchline is the same: a retirement contribution is one of the few legal ways to meaningfully lower your tax bill as a freelancer.

So when I say the retirement account math matters, I mean it in the most concrete way possible: this is a question of how much money ends up in your pocket versus how much you send to the government. Now let's look at the two main options.

The SEP-IRA: Dead Simple, But the Math Has a Ceiling

The SEP-IRA (Simplified Employee Pension) is the account everyone opens because it's the easiest. And "easy" isn't nothing — anything that gets a freelancer to actually save is better than paralysis. But let's talk about what it actually does.

How much can you contribute? Up to 25% of your "net self-employment compensation" — but that number isn't your gross income. After the self-employment tax deduction, the real ceiling works out to roughly 18.59% of your gross net business income. The hard maximum is $69,000 for the 2025 tax year.

When can you open and fund it? This is the SEP-IRA's big advantage: you can open a new SEP-IRA AND fund it for 2025 up to your tax filing deadline — April 15, 2026, or October 15 if you file an extension. If you've never opened one and you're panicking right now, take a breath. You have 43 days.

What's the catch? The contribution limit is tied entirely to your income percentage. There's no flat "employee contribution" component. This matters a lot at lower income levels, and I'll show you the math in a minute.

Other stuff to know: No Roth option. No loan option. Minimal paperwork. Vanguard, Fidelity, Schwab — you can open one online in under 30 minutes.

The Solo 401(k): More Power, More Complexity, One Critical Deadline You Probably Missed

The Solo 401(k) — also called an Individual 401(k) or i401(k) — is the account you want if you're serious about maximizing retirement savings. Here's why.

The Solo 401(k) has two contribution buckets:

Employee contribution: Up to $23,000 for 2025 (or $30,500 if you're 50 or older). This is a flat dollar amount, not tied to a percentage of income.
Employer contribution: The same ~18.59% of gross net income as the SEP-IRA formula.

Combined, the total limit is $69,000 ($76,500 if 50+). But the math at lower incomes is where the Solo 401(k) destroys the SEP-IRA.

The deadline problem: To make 2025 contributions to a Solo 401(k), the plan must have been established by December 31, 2025. (Some providers — notably Schwab via their prototype plan — had hard cutoffs even earlier.) If you didn't open one last year, you cannot open one now and fund it for 2025. That window is closed.

What you can do is open one before December 31, 2026 and make 2026 contributions. I'll get to that.

Other features: Roth option (contribute after-tax, withdraw tax-free in retirement). Loan option (borrow up to 50% of your balance or $50,000, whichever is less — useful in a cash crunch, but I'll have opinions about that). When your balance exceeds $250,000, you're required to file Form 5500-EZ annually. Minor paperwork, but worth knowing.

The Math at Three Different Income Levels

This is where it gets real. Let's look at what each account actually lets you contribute at three income scenarios for the 2025 tax year. All numbers are approximate after SE tax deduction math.

$50,000 net business income

Account	Employee Contribution	Employer Contribution	Total
SEP-IRA	—	~$9,295	$9,295
Solo 401(k)	$23,000	~$9,295	$32,295

The difference: $23,000. At a 22% federal tax rate, that's $5,060 in avoided federal taxes. Gone. Because you picked the wrong account type or never set one up.

$100,000 net business income

Account	Employee Contribution	Employer Contribution	Total
SEP-IRA	—	~$18,590	$18,590
Solo 401(k)	$23,000	~$18,590	$41,590

Still a $23,000 gap. At 24% bracket, that's $5,520 in federal taxes you didn't have to pay.

$175,000+ net business income

At this income level, the SEP-IRA employer contribution alone approaches the $69,000 cap (~$32,500), and adding the $23,000 employee contribution pushes the Solo 401(k) to its overall $69,000 ceiling faster. The gap narrows, but the Solo 401(k) still wins until both accounts hit the same ceiling at very high income levels (~$371,000+).

Bottom line: If your net income is under roughly $280,000, the Solo 401(k) will let you contribute more — often substantially more — than a SEP-IRA. The SEP-IRA only "wins" on simplicity and deadline flexibility.

What You Should Actually Do Right Now

Here's your decision tree. No fluff, just the map.

Situation A: You have no retirement account and haven't contributed for 2025

Open a SEP-IRA. Today. Not next week. Fidelity, Vanguard, and Schwab all have online applications. Calculate your contribution limit (roughly 18.59% of your net business income, up to $69,000), fund it before April 15, and deduct it on your 2025 return. If you need more time, file an extension — but fund the SEP-IRA by the extended deadline, October 15.

Then, before December 31, 2026, open a Solo 401(k) so you can use it for 2026 contributions and capture that employee contribution bucket going forward.

Situation B: You have a SEP-IRA and are wondering if you should switch

Run the math at your income level. If the difference in annual contributions is $5,000+, the answer is almost certainly yes — open a Solo 401(k) this year. You can keep the SEP-IRA open (balances can be rolled into the Solo 401(k) later) or just stop contributing to it going forward. Check with your accountant on the cleanest way to transition — there are no tax penalties for having both, but there's no reason to fund two accounts when one is clearly superior.

Situation C: You missed the Solo 401(k) establishment deadline for 2025

You're doing a SEP-IRA for 2025. That's not a disaster — it's still a deduction. But set a calendar reminder for Q4 2026: open the Solo 401(k) before December 31, 2026. Don't miss it twice.

Situation D: You're 50+ and haven't maximized catch-up contributions

The Solo 401(k) catch-up contribution for 2025 is $7,500, bringing your employee contribution ceiling to $30,500. If you're over 50 and only have a SEP-IRA, you're leaving that catch-up on the table entirely. This is the highest-priority case for switching to a Solo 401(k) before 2026 is over.

The Two Things I'll Die On

First: a Solo 401(k) with the Roth option is underrated for freelancers in their early years. If you're building the business and your income is still volatile — maybe $60k-$80k range — paying tax now on a Roth contribution while you're in a lower bracket, and having tax-free growth for 30+ years, can beat the traditional deduction in lifetime terms. Run the numbers with your accountant. It's not always right, but it's worth the conversation.

Second: the loan feature is a trap. Yes, you can borrow from a Solo 401(k). I know. I also know that in 2019 I had a cash-flow crisis and seriously considered it. I didn't do it, because the second you treat your retirement account like a savings account you can dip into, you've fundamentally misunderstood what it's for. It's a tax shelter with a 30-year lock. Leave it alone.

The Five-Minute Action List

Calculate your 2025 net SE income. Net business profit minus half your SE tax. If you don't know this number, look at your Schedule SE.
Multiply by 18.59%. That's your approximate SEP-IRA max contribution.
If you have no retirement account: Open a SEP-IRA at Fidelity or Schwab. Today.
If you already have a SEP-IRA: Compare the Solo 401(k) contribution limit at your income level. If the difference is $10,000+, open a Solo 401(k) before December 31, 2026.
Talk to your accountant. Not to validate your feelings — to confirm the actual deductible contribution amount for your specific situation before you fund anything.

The math here is not complicated. The problem is that nobody explains it in plain language, so freelancers either do nothing or do the "easy" thing and leave money on the table for years. You don't have to be one of them.

43 days. Go open the account.

—Marcus