Self-Employed Retirement Calculator — SEP-IRA vs Solo 401(k)

Understanding Self-Employment Retirement Options

If you're self-employed — whether as a freelancer, consultant, sole proprietor, or single-member LLC — you don't have an employer setting up a 401(k) for you. But the tax code gives self-employed workers powerful retirement savings tools that can actually shelter MORE money than traditional employee plans. The two most popular options are the SEP-IRA (Simplified Employee Pension) and the Solo 401(k) (also called Individual 401(k) or One-Participant 401(k)).

Both plans let you contribute as both the"employer" and the"employee" of your own business. The key difference is in how much you can contribute on the employee side, which creates a significant gap in total contribution limits for most self-employed workers.

SEP-IRA: Simplicity and Flexibility

A SEP-IRA is the simplest retirement plan for self-employed workers. You can set one up at any brokerage (Vanguard, Fidelity, Schwab) in about 15 minutes with IRS Form 5305-SEP. No annual filings are required until plan assets exceed $250,000.

Contribution formula: Up to 25% of your net adjusted self-employment income, with a maximum of $69,000 for 2024.

The calculation for"net adjusted SE income" trips up many self-employed workers. Here's how it actually works:

1. Start with net self-employment income (Schedule C profit)
2. Subtract half of your self-employment tax (the"employer equivalent" portion)
3. Multiply by 25%

In practice, this means the effective contribution rate is about 20% of your Schedule C net profit, not 25%. The difference comes from the self-employment tax deduction reducing your base.

Example at $100,000 net SE income:

• Self-employment tax: $100,000 × 92.35% × 15.3% = $14,130
• Half of SE tax: $7,065
• Net adjusted SE income: $100,000 - $7,065 = $92,935
• SEP-IRA max contribution: $92,935 × 25% = $23,234

At $100,000 net SE income, you can shelter $23,234 in a SEP-IRA. This is an effective rate of about 23.2% of your net income. Many online calculators incorrectly show 25% of gross — always use the adjusted calculation.

SEP-IRA advantages:

• Simplest setup — one form, no annual reporting below $250k in assets
• Flexible contributions — contribute any amount up to the max each year (or nothing)
• Can be set up and funded as late as your tax filing deadline (including extensions)
• No custodian fees at most major brokerages
• Good for variable income — contribute more in good years, less in lean years

SEP-IRA limitations:

• No Roth option — all contributions are pre-tax only
• No employee deferral — only the"employer" 25% contribution
• If you have W-2 employees, you may want to contribute the same percentage for them
• No catch-up contributions for those 50+
• No loan provisions

Solo 401(k): Maximum Tax Shelter for the Self-Employed

The Solo 401(k) is more complex to set up but allows significantly higher contributions. It has two components: an employee deferral (just like a regular 401(k)) and an employer contribution (like the SEP-IRA).

Contribution components for 2024:

• Employee deferral: Up to $23,000 (or $30,500 if age 50+, thanks to $7,500 catch-up contribution)
• Employer contribution: Up to 25% of net adjusted SE income (same formula as SEP-IRA)
• Total maximum: $69,000 ($76,500 if 50+ with catch-up)

Example at $100,000 net SE income, age 45:

• Employee deferral: $23,000
• Net adjusted SE income: $92,935 (same calculation as SEP-IRA)
• Employer contribution (25%): $23,234
• Total Solo 401(k) contribution: $46,234

Compare this to the SEP-IRA maximum of $23,234 at the same income. The Solo 401(k) allows $22,999 more in tax-sheltered savings. That's nearly double.

At age 55 with the same income:

• Employee deferral: $23,000 + $7,500 catch-up = $30,500
• Employer contribution: $23,234
• Total: $53,734

The catch-up contribution adds another $7,500 in tax-sheltered savings for those 50 and older. This is exclusively available in the Solo 401(k) — SEP-IRAs don't offer catch-up contributions.

Solo 401(k) advantages:

• Highest possible contribution limits for most self-employed workers
• Roth option available — make after-tax contributions that grow tax-free
• Catch-up contributions for those 50+
• Loan provisions (borrow up to $50,000 or 50% of balance)
• Both employee deferrals AND employer contributions

Solo 401(k) limitations:

• More complex setup — requires plan documents (though many brokerages provide these free)
• Annual IRS Form 5500-EZ filing required when assets exceed $250,000
• Must be established by December 31 (not your tax filing deadline like SEP-IRA)
• Cannot cover any non-spouse employees (hence"solo")
• Some brokerages don't offer Solo 401(k) plans or charge fees

The Crossover Point: When SEP-IRA Catches Up

The Solo 401(k) advantage shrinks as income rises. That's because the employee deferral ($23,000) is a fixed amount, while the employer contribution (25%) scales with income. At very high incomes, both plans max out at $69,000.

The crossover point where both plans allow the same maximum contribution is approximately $280,000 in net SE income. Above that level, both plans hit the $69,000 ceiling and the Solo 401(k) offers no contribution advantage.

However, the Solo 401(k) still offers the Roth option and catch-up contributions even at high incomes, so it retains advantages beyond just contribution limits.

Income-based comparison (age under 50):

• $50,000 net SE: SEP max ~$11,617 vs Solo 401(k) max ~$34,617. Solo wins by $23,000.
• $100,000 net SE: SEP max ~$23,234 vs Solo 401(k) max ~$46,234. Solo wins by $23,000.
• $150,000 net SE: SEP max ~$34,174 vs Solo 401(k) max ~$57,174. Solo wins by $23,000.
• $200,000 net SE: SEP max ~$44,457 vs Solo 401(k) max ~$67,457. Solo wins by $23,000.
• $280,000+ net SE: Both max at $69,000. Tie on contributions.

Notice the pattern: the Solo 401(k) advantage is exactly $23,000 (the employee deferral limit) at every income level below the crossover. This makes the decision straightforward for most self-employed workers earning under $280,000: the Solo 401(k) shelters more money.

Tax Savings: How Much Are You Actually Saving?

Retirement contributions reduce your taxable income dollar-for-dollar (for pre-tax contributions). The tax savings depend on your marginal tax bracket.

At $100,000 net SE income, single filer:

• Marginal tax rate: 24% (federal)
• SEP-IRA contribution ($23,234) saves: ~$5,576 in federal taxes
• Solo 401(k) contribution ($46,234) saves: ~$10,187 in federal taxes
• Solo 401(k) saves $4,611 more in taxes

Add state income taxes (typically 3-10%) and the difference grows further. In California (9.3% state rate at this income), the Solo 401(k) saves an additional $2,139 in state taxes vs the SEP-IRA.

Over 20 years, if you consistently contribute the maximum to a Solo 401(k) vs SEP-IRA, the additional tax-deferred growth could amount to hundreds of thousands of dollars. Use our calculator above to see the exact difference for your income and filing status.

Roth vs Traditional: The Solo 401(k) Advantage

One of the Solo 401(k)'s unique advantages is the Roth option. You can designate some or all of your employee deferral ($23,000) as Roth contributions — after-tax money that grows and is withdrawn tax-free in retirement.

This is particularly valuable if you expect to be in a higher tax bracket in retirement, if you want tax diversification (some pre-tax, some Roth), or if you're currently in a lower tax bracket and want to pay taxes now at the lower rate.

SEP-IRAs offer no Roth option. All SEP contributions are pre-tax. If you want Roth savings as a self-employed worker, the Solo 401(k) is your primary vehicle (besides a backdoor Roth IRA, which has a much lower $7,000 limit).

Strategy: Many self-employed workers split their Solo 401(k) contributions — making the employee deferral as Roth (pay taxes now at a known rate) and the employer contribution as traditional pre-tax (reduce current taxes). This creates tax diversification for retirement.

Setting Up Your Self-Employed Retirement Plan

SEP-IRA Setup Steps

1. Choose a brokerage (Vanguard, Fidelity, Schwab — all free)
2. Complete IRS Form 5305-SEP or the brokerage's equivalent
3. Open the SEP-IRA account online
4. Fund the account (can contribute up to tax filing deadline + extensions)
5. Invest contributions in index funds or target-date funds

Total time: 30-60 minutes. Cost: $0 at major brokerages.

Solo 401(k) Setup Steps

1. Choose a brokerage that offers Solo 401(k) plans (Fidelity, Schwab, Vanguard, or specialists like Rocket Dollar for alternative investments)
2. Obtain an EIN (Employer Identification Number) if you don't have one
3. Complete the plan adoption agreement (brokerage provides this)
4. Open the Solo 401(k) account — must be done by December 31 of the tax year
5. Employee deferrals must be made by December 31; employer contributions can be made until tax filing deadline
6. Invest contributions

Total time: 1-2 hours. Cost: $0-$20/year at most brokerages.

Common Mistakes Self-Employed Workers Make

Mistake 1: Using 25% of gross income for SEP-IRA calculations. The correct base is net adjusted SE income (after deducting half of SE tax). This means the effective rate is closer to 20% of gross, not 25%.

Mistake 2: Missing the December 31 deadline for Solo 401(k) setup. Unlike SEP-IRAs (which can be set up until your tax filing deadline), Solo 401(k) plans must be established by December 31 of the year you want to contribute for. Don't procrastinate.

Mistake 3: Not contributing because income varies. Both plans allow flexible contributions. In a lean year, contribute $5,000. In a great year, contribute $50,000. There's no minimum annual contribution requirement for either plan.

Mistake 4: Forgetting about state tax savings. Federal tax savings get the attention, but state income tax deductions from retirement contributions add 3-13% more savings depending on your state. Factor this in when comparing contribution levels.

Mistake 5: Contributing to a SEP-IRA when a Solo 401(k) would shelter more. If you earn under $280,000 in net SE income and can afford to contribute more than 25% of your adjusted income, the Solo 401(k) is almost always superior. Run the numbers with our calculator before choosing.

Choosing the Right Provider for Your Plan

Where you open your self-employed retirement account matters more than most people realize. The wrong provider can mean higher fees, limited investment options, or missing features that cost you thousands over time.

For SEP-IRAs: Fidelity, Schwab, and Vanguard all offer SEP-IRAs with no account fees and access to low-cost index funds. Setup takes about 15 minutes online. The main differentiator is investment selection — Vanguard excels at index funds, Fidelity offers zero-expense-ratio funds, and Schwab has the broadest range of commission-free ETFs. Any of these three is a solid choice.

For Solo 401(k): Fidelity and Schwab offer free Solo 401(k) plans with Roth options. Vanguard's Solo 401(k) doesn't currently support Roth contributions, which eliminates one of the plan's key advantages. If you want Roth contributions (and most self-employed workers should at least consider them), choose Fidelity or Schwab. For higher contribution limits or more exotic investments (real estate, crypto), providers like Rocket Dollar or Alto offer self-directed Solo 401(k) plans — but expect $15-30/month in fees.

The Roth vs. Traditional Decision: Solo 401(k) plans uniquely allow you to split contributions between pre-tax (traditional) and after-tax (Roth). The employee deferral portion ($23,000/$30,500) can go either way; the employer portion is always pre-tax. If you expect your income to be higher in retirement or if tax rates rise, Roth contributions make sense — you pay tax now at a known rate rather than gambling on future rates. A common strategy is to make employee deferrals as Roth and employer contributions as traditional, hedging your tax exposure both ways.

Year-End vs. Ongoing Contributions: While you can make a lump-sum contribution before your tax filing deadline, contributing monthly or quarterly has advantages. Dollar-cost averaging smooths out market timing risk, and regular contributions prevent the scramble of finding $40,000+ in December. Set up automatic transfers from your business checking account to your retirement account — treat it like a payroll deduction, even though you're the employer and the employee.