If you have self-employment income, three tax-advantaged retirement plans are built for you: the SEP-IRA (simple, employer-only contributions), the Solo 401(k) (higher potential contributions, with a Roth option and loan feature, but only if you have no employees besides a spouse), and the SIMPLE IRA (a middle-ground plan often used once you have a small team). All three let you set aside part of your business income before it's taxed, or in some cases after-tax with tax-free growth, which is one of the few ways a self-employed person can meaningfully lower taxable income while building savings.
The specific dollar amounts you can contribute change every year because the IRS indexes them for inflation. This guide will not print this year's numbers - they'd likely be wrong by the time you read them. Always confirm the current-year limits at irs.gov (see Publication 560, Retirement Plans for Small Business, and the "Retirement Topics - Contribution Limits" pages) before you decide how much to put in.
SEP-IRA: the simplest option
A Simplified Employee Pension (SEP) IRA is built for solo operators and small businesses that want an easy, low-paperwork plan. Key features:
Employer contributions only. Employees (including you, in your capacity as the "employee" of your own SEP) cannot make salary-deferral contributions to a SEP. You contribute as the business, based on a percentage of compensation - the IRS sets a maximum percentage of compensation and a maximum dollar cap each year, and the lower of the two controls. Check the current figures at irs.gov before contributing.
Contributions are immediately 100% vested - the money belongs to the employee (or you) right away.
No Roth option and no loans. A SEP-IRA is a traditional pre-tax account only.
Low administrative burden. You generally do not have to file an annual report for the plan itself, which is part of why solo business owners like it.
A SEP-IRA can be opened and funded quite late: under IRS rules, you can set up a SEP for a given tax year as late as the due date of your business tax return for that year, including extensions. That flexibility makes a SEP a common choice for someone who didn't plan ahead but wants to lower last year's tax bill before filing.
Solo 401(k): the highest potential contributions
A Solo 401(k) - also called a one-participant 401(k) - is a regular 401(k) plan scaled down for a business owner with no employees other than a spouse. It generally allows for two contribution sources, which is why it can allow more total savings than a SEP-IRA at the same income level:
An "employee" elective deferral you make as the worker, up to the annual IRS deferral limit (indexed each year - confirm at irs.gov).
An "employer" contribution you make as the business, calculated as a percentage of compensation, similar in concept to a SEP contribution.
A Roth option in many Solo 401(k) plans, letting you contribute after-tax dollars for tax-free qualified withdrawals later - a SEP-IRA cannot do this.
A loan feature some Solo 401(k) plans permit, letting you borrow from your own account under IRS rules - again, something a SEP-IRA does not offer.
Catch-up contributions for participants who reach certain older ages, at IRS-set amounts that change periodically - confirm at irs.gov.
Deadlines are stricter than a SEP's. Under changes made by the SECURE 2.0 Act, a self-employed person with no employees can now adopt a new Solo 401(k) plan for a tax year after that year ends, but the plan must be adopted by the business's tax filing deadline not counting extensions. For a new plan's first year, an owner's elective deferrals generally must also be elected and deposited by that same filing deadline without extensions (the later "employer" contribution can often still go in by the extended deadline). This is a meaningfully earlier cutoff than a SEP-IRA's extended deadline, so if you're deciding late in the year (or after year-end) which plan to use, the calendar itself may steer the decision - confirm the exact rule and your filing deadline with the IRS or your tax preparer before you assume you still have time.
SIMPLE IRA: built for when you have a small team
A Savings Incentive Match Plan for Employees (SIMPLE) IRA is generally available to an employer - including a self-employed person - with no more than 100 employees who earned a minimum amount of compensation (set by the IRS and adjusted periodically) in the prior year. If you already have a SIMPLE IRA plan and later grow past that employee count, a grace period generally lets you keep it running for a couple of years before you have to switch plans - the exact rule is on irs.gov.
Under a SIMPLE IRA, employees make their own salary-deferral contributions, and the employer must generally choose one of two contribution methods each year:
A matching contribution, generally up to 3% of the employee's compensation, tied to what the employee defers, or
A flat nonelective contribution, generally 2% of each eligible employee's compensation, given to every eligible employee whether or not they contribute themselves.
Some SIMPLE IRA plans permit a somewhat higher employee deferral limit and correspondingly higher employer contribution for smaller employers, under provisions added by SECURE 2.0 - the specifics and current-year dollar figures are on irs.gov. Because the employer contribution is generally mandatory once you adopt the plan, a SIMPLE IRA is a real ongoing payroll commitment, not just a personal savings vehicle - budget for it.
Hiring employees changes the rules
All three plans are shaped around whether you have employees:
SEP-IRA: if you hire, you generally must make the same percentage-of-compensation contribution for every eligible employee that you make for yourself - you cannot contribute a large percentage to your own account and skip your staff. Eligibility rules (age, years of service, minimum compensation) are set by the IRS; read them before assuming an employee is excluded.
Solo 401(k): the "solo" structure depends on having no employees other than a spouse. Hire even one other eligible employee and the plan generally converts into a standard 401(k) plan, with the fuller set of nondiscrimination testing, reporting, and coverage rules that come with it.
SIMPLE IRA: once you have more than 100 employees earning above the compensation floor, you generally lose eligibility to keep using a SIMPLE IRA (subject to the grace-period rule above), and you generally cannot maintain a SIMPLE IRA in the same year you maintain another retirement plan for the same employees.
If you're a sole proprietor today but expect to hire soon, think about which plan you'll need in a year or two, not just this year - switching plans mid-stream has its own rules and timing traps.
What to do
Estimate your net self-employment income for the year before deciding how much you can contribute - your available contribution room is tied to that number, not your gross revenue.
Pick the plan that matches your situation: no employees and want simplicity → SEP-IRA; no employees and want to maximize contributions or want a Roth/loan option → Solo 401(k); you have (or will soon have) a small staff → SIMPLE IRA.
Confirm this year's contribution limits and deadlines at irs.gov - specifically Publication 560 and the "Retirement Topics - Contribution Limits" pages - before you contribute a specific number.
Open the account with enough lead time. A SEP-IRA can generally be opened as late as your extended filing deadline; a Solo 401(k) generally has to be adopted by your filing deadline without extensions. Don't assume you have until October if you're setting up a Solo 401(k).
If you have or plan to hire employees, get the eligibility and required-contribution rules in writing from the IRS guidance or your CPA before you exclude anyone - getting this wrong can require corrective contributions later.
Talk to a CPA or qualified financial/tax advisor before choosing a plan or setting a contribution amount. The right plan depends on your income, whether you have or plan to hire staff, your cash flow, and your broader retirement and tax picture - a professional can run the actual numbers for your situation, which this general overview cannot do.
One more thing worth knowing: retirement accounts often receive some level of protection from business creditors and in bankruptcy, though the details depend on account type and legal limits - if you're worried about business debt reaching your personal assets, that's a conversation for a bankruptcy attorney, not something to assume based on this article.
For free, official guidance beyond what's here, the IRS's "Retirement Plans for Self-Employed People" page and Publication 560 are good starting points, along with the SBA and your local Small Business Development Center for general small-business financial planning help.
This is general business and tax information, not legal, tax, or financial advice, and it does not create an accountant-client or attorney-client relationship.
Frequently asked questions
Can I have a SEP-IRA and a Solo 401(k) at the same time?
In some cases you can maintain both, but combined contribution limits and coordination rules apply, and the details are technical. This is exactly the kind of question to bring to a CPA rather than decide on your own - the IRS rules on combined limits are on irs.gov, but applying them correctly to your income takes individualized calculation.
What if I have a day job with a 401(k) and also freelance on the side?
You can generally still open a SEP-IRA or Solo 401(k) for your self-employment income, but contribution limits that apply per person (like elective deferral limits) may need to be coordinated across both your employer's plan and your own. Confirm the coordination rules at irs.gov and talk to a tax professional - this is a common source of accidental over-contribution.
Do I have to contribute every year to a SEP-IRA?
Generally, no - a SEP-IRA typically lets you decide each year whether to contribute and how much, up to the applicable limits, which gives sole owners flexibility in leaner years. A SIMPLE IRA is different: once adopted, the employer contribution is generally required each year the plan is in effect.
Is a Solo 401(k) worth the extra complexity over a SEP-IRA?
It depends on your income, whether you want a Roth option or the ability to borrow from the account, and how much you want to contribute. A Solo 401(k) can allow higher total contributions than a SEP-IRA at some income levels because of its dual employee-plus-employer contribution structure, but it also has an earlier funding deadline and more moving parts. A CPA can model both options against your actual numbers.
What happens to my SEP-IRA or Solo 401(k) money if my business fails?
Retirement accounts often carry some protection from business creditors and in bankruptcy, though the scope of that protection depends on the account type and applicable legal limits, and it is not automatic or unlimited. If your business is carrying debt you're worried about, talk to a bankruptcy attorney about how your specific accounts would be treated rather than assuming they're fully shielded.
This article is general legal information, not legal advice, and may not reflect the most current law or the law in your jurisdiction. Laws vary by state and change over time. For advice about your specific situation, consult a licensed attorney.
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