The main retirement accounts available to self-employed people

If you work for yourself, you have more retirement account options than an employee does, but you have to set them up yourself. The three most common are the Solo 401(k), the SEP IRA, and the Solo Roth 401(k). Each lets you save more than a regular IRA, but they work differently depending on how much you earn and how much you want to contribute each year.

The choice comes down to three things: how much you can afford to put away, whether you want to reduce your taxes this year or in retirement, and how much paperwork you are willing to handle. A Solo 401(k) requires annual filing but lets you borrow against your balance. A SEP IRA is simpler to set up and maintain but has lower contribution limits if your income is modest. A Solo Roth 401(k) lets you pay taxes now and withdraw tax-free later, which matters if you expect to be in a higher tax bracket in retirement.

Key Takeaways

  • A Solo 401(k) lets you contribute as both employee and employer, with a 2024 limit of up to $69,000 per year if your income supports it, and requires annual Form 5500 filing once the balance exceeds $5,000.
  • A SEP IRA has a simpler setup and no annual filing requirement, but your contribution limit is 25% of your net self-employment income, capped at $69,000 in 2024, making it better for lower-income self-employed people.
  • A Solo Roth 401(k) works like a Solo 401(k) but contributions go in after-tax, so withdrawals in retirement are tax-free, and you can withdraw contributions (not earnings) anytime without penalty.
  • You must open and fund your account by December 31 of the tax year you want to claim the deduction, though you can make contributions until your tax filing important date the following April.
  • If you have employees, a Solo 401(k) or SEP IRA may disqualify you; a Solo Roth 401(k) has stricter rules — consult a tax professional before opening any account.

Solo 401(k): highest contribution limit, more paperwork

A Solo 401(k) is designed for self-employed people with no employees (except a spouse). You contribute as both the employee and the employer. In 2024, you can contribute up to $23,500 as an employee, plus up to 25% of your net self-employment income as the employer contribution, for a combined limit of $69,000. That is the highest limit of any retirement account for self-employed people.

The trade-off is paperwork. Once your account balance hits $5,000, you must file Form 5500-SF with the IRS each year. This is not difficult, but it is required. You also have the option to borrow against your balance — up to 50% of your vested balance or $50,000, whichever is less — which can be useful if you need cash and want to avoid early withdrawal penalties.

You must open the account by December 31 of the year you want to claim the deduction, but you can make contributions until your tax return important date (usually April 15 of the following year). Many providers, including Fidelity, Vanguard, and Charles Schwab, offer Solo 401(k)s with no setup fee.

SEP IRA: simplest to maintain, lower limits

A SEP IRA (Simplified Employee Pension) is the easiest retirement account to set up and maintain. There is no annual filing requirement, no loan option, and minimal paperwork. You open it at any brokerage — Fidelity, Vanguard, Schwab, or your bank — in minutes.

Your contribution limit is 25% of your net self-employment income, up to $69,000 in 2024. If you earn $100,000 in net self-employment income, you can contribute $25,000. If you earn $50,000, you can contribute $12,500. This makes the SEP IRA better suited to people with lower or variable income, because you decide how much to contribute each year based on what you earned.

Like a traditional IRA, contributions reduce your taxable income this year, and you pay taxes on withdrawals in retirement. You can open a SEP IRA and make contributions until your tax filing important date (usually April 15), so you have flexibility if your income is uncertain.

Solo Roth 401(k): tax-free withdrawals in retirement

A Solo Roth 401(k) works like a Solo 401(k) in terms of contribution limits and paperwork — you contribute as both employee and employer, you must file Form 5500-SF once the balance exceeds $5,000, and the 2024 limit is $69,000. The difference is that contributions go in after-tax, meaning you pay income tax on the money you contribute now, but withdrawals in retirement are completely tax-free.

This matters most if you expect to be in a higher tax bracket in retirement, or if you think tax rates will rise. You can also withdraw your contributions (not the earnings) anytime without penalty, which gives you some flexibility if you need the money. However, you cannot take a loan against a Roth 401(k) the way you can with a traditional Solo 401(k).

A Solo Roth 401(k) is less common than a Solo 401(k) or SEP IRA, so fewer providers offer it. Fidelity and E*TRADE both do. You must open the account by December 31, and you can contribute until your tax filing important date.

How much you can actually contribute: the math

Your contribution limit depends on your net self-employment income, which is your business profit minus half of your self-employment tax. This is not the same as your gross revenue or your W-2 income if you have a day job.

For a Solo 401(k), the employee deferral (the part you contribute as an employee) is capped at $23,500 in 2024. The employer contribution is up to 25% of your net self-employment income. If you earn $100,000 in net self-employment income, your employer contribution is roughly $25,000, for a total of about $48,500. If you earn $200,000, your total contribution is about $69,000 (the annual cap).

For a SEP IRA, you can contribute 25% of your net self-employment income, up to $69,000. If you earn $100,000, you contribute $25,000. If you earn $50,000, you contribute $12,500. The percentage is fixed; the dollar amount scales with your income.

For a Solo Roth 401(k), the limits are the same as a traditional Solo 401(k), but contributions are after-tax. This means if you contribute $48,500, you pay income tax on that $48,500 in the year you contribute it.

If you have employees: your options narrow

If you have employees (other than a spouse), a Solo 401(k) and SEP IRA have strict rules. With a Solo 401(k), you must offer the same plan to all employees and match their contributions at the same rate you match your own. With a SEP IRA, you must contribute the same percentage of compensation for every employee as you do for yourself. Both become expensive and complex quickly.

A Solo Roth 401(k) has even stricter rules and is rarely practical with employees. If you have employees, talk to a tax professional or payroll provider before opening any account. You may need a different plan, such as a straightforward IRA or a standard 401(k) with a payroll processor.

How to choose: a straightforward decision tree

Start with your net self-employment income. If you earn less than $50,000 per year and want the simplest option, a SEP IRA is usually the right choice. You open it in minutes, there is no annual filing, and your contribution limit scales with your income.

If you earn more than $100,000 and want to save the maximum amount, a Solo 401(k) or Solo Roth 401(k) lets you contribute up to $69,000 per year. Choose the traditional Solo 401(k) if you want to reduce your taxes this year. Choose the Solo Roth 401(k) if you expect higher taxes in retirement or want tax-free withdrawals.

If your income varies year to year, a SEP IRA or traditional Solo 401(k) both let you decide how much to contribute based on what you actually earned. A Solo 401(k) also lets you borrow against your balance if you need cash.

If you have employees, consult a tax professional before opening any account. The rules change, and the wrong choice can be expensive.

Frequently Asked Questions

Can I have both a Solo 401(k) and a SEP IRA?

No. You can only have one type of employer-sponsored retirement plan per business. If you open a Solo 401(k), you cannot also open a SEP IRA for the same business. You can have a traditional or Roth IRA in addition to either one, but the combined contribution limits explore.

What happens if I miss the December 31 important date to open the account?

You cannot claim a deduction for that tax year. However, you can still open the account and make contributions until your tax filing important date (usually April 15 of the following year) if you file an extension. Talk to a tax professional about whether an extension makes sense for your situation.

Do I have to contribute the maximum amount every year?

No. For a SEP IRA or Solo 401(k), you decide how much to contribute each year based on your income and cash flow. In a year when business is slow, you can contribute less or nothing. In a good year, you can contribute more. The only requirement is that you do not exceed the annual limit.

Can I withdraw money from my account before retirement?

Yes, but there are penalties. Withdrawals before age 59½ are subject to a 10% early withdrawal penalty plus income tax, with some exceptions (hardship, disability, first-time home purchase for Roth accounts). A Solo 401(k) lets you borrow against your balance instead, which avoids the penalty. A Solo Roth 401(k) lets you withdraw contributions (not earnings) anytime without penalty.

What if my business income drops to zero?

You can keep the account open and make no contributions that year. There are no minimum contribution requirements. However, if you have a Solo 401(k) with a balance over $5,000, you still must file Form 5500-SF each year, even if you contribute nothing.