Table of Contents
Without an employer plan, self-employed retirement saving means choosing between a small number of account types built specifically for this situation. The two most common are the SEP IRA and the Solo 401(k), and the right one depends more on your situation than on which is generically "better."
SEP IRA: Simpler to Set Up and Maintain
A SEP IRA is straightforward to open and has minimal ongoing paperwork, contributions are based on a percentage of net self-employment income. It's a strong fit if you want a retirement account with the least administrative overhead, especially in the first few years of a business when time is the scarcer resource.
Solo 401(k): More Flexibility, More Paperwork
A Solo 401(k) allows contributions in two forms, as the "employee" and as the "employer," which can allow higher total contributions in some situations compared to a SEP IRA at the same income level. It also supports a Roth option in many cases, something a SEP IRA typically doesn't. The tradeoff is more setup and, once the account grows past a certain size, an annual filing requirement a SEP IRA doesn't have.
What Actually Decides It
- If you want the simplest possible setup, a SEP IRA is usually the easier starting point
- If you want a Roth option or the potential for higher contributions at your income level, a Solo 401(k) is worth the extra paperwork
- If you have employees other than a spouse, a SEP IRA typically requires contributing for eligible employees too, which changes the math significantly, a Solo 401(k) generally requires no full-time employees besides an owner and spouse
Contribution Limits Change Every Year
Both account types have contribution limits set by the IRS that adjust annually. Rather than repeat a specific dollar figure here that may already be outdated by the time you're reading this, check irs.gov directly for the current year's limits before deciding how much to contribute.
This Only Works Once Owner Pay Is Consistent
Both accounts assume you have a knowable amount of income to contribute from. See how to pay yourself consistently first, retirement planning is much harder to stick to when your own pay swings with the business's revenue every month.
Frequently Asked Questions
Can I have both a SEP IRA and a Solo 401(k)?
Generally you'd choose one primary vehicle rather than fund both simultaneously for the same self-employment income, since they serve the same core purpose. A tax professional can confirm specifics for your exact situation.
What if my income is too irregular to commit to a fixed contribution?
Both account types generally allow variable annual contributions rather than requiring a fixed schedule, which fits irregular self-employment income better than a traditional employer 401(k) would.
Do I need an accountant to set one of these up?
A SEP IRA can often be opened directly through a brokerage with minimal help. A Solo 401(k), especially once it grows large enough to require annual filing, is worth involving a tax professional for.