# How to save for retirement when you're self-employed

> Start with an IRA, then add a SEP IRA or solo 401(k). The solo 401(k) usually allows the most at moderate incomes.

Source: https://www.walletprep.com/learn/retirement-for-self-employed/ · Updated 2026-10-04 · Work and income

When you work for yourself, you can open your own retirement plan: a regular IRA, a SEP IRA or a solo 401(k). A solo 401(k) usually lets you save the most at low and middle incomes, because you put money in both as the employee and as the employer.

## Key facts
- **Three main options.** A traditional or Roth IRA allows $7,500 a year. A SEP IRA lets the business put in up to 25% of compensation, capped at $72,000. A solo 401(k) adds an employee deferral of up to $24,500 on top of that employer share.
- **Self-employed math is different.** For a sole proprietor, compensation means net profit minus the deductible half of self-employment tax, minus the contribution itself. In practice the 25% employer rate works out to 20% of net profit after the self-employment tax deduction.
- **The overall cap.** Employee and employer contributions to one person's defined contribution plans can't top $72,000 for 2026, or 100% of compensation if that is less. Catch-up contributions for age 50 and over, $8,000 in a 401(k), go on top.
- **The tax break.** Traditional (pre-tax) contributions for yourself are deducted on Schedule 1 of Form 1040. They lower income tax, but not self-employment tax, which is figured on your net profit before the contribution.

## How a SEP IRA works
A SEP IRA is an IRA that your business funds. You open it at a brokerage or bank with a short IRS form or a ready-made plan document, and you decide each year how much to put in, from nothing up to the limit. Light years are fine, since there is no required contribution.
The catch comes if you hire. A SEP must give every eligible employee the same percentage of pay you give yourself. That can get expensive, so many business owners with staff use a different plan, such as a SIMPLE IRA or a 401(k) for the whole team.

## How a solo 401(k) works
A solo 401(k), also called a one-participant 401(k), is a regular 401(k) for a business with no employees other than the owner and a spouse. You wear two hats. As the employee you can defer up to 100% of compensation, up to $24,500. As the employer you can add up to 25% of compensation, which is about 20% of net profit for a sole proprietor.
That double role is why a solo 401(k) usually beats a SEP at moderate incomes. At $50,000 of profit, the SEP employer share is under $10,000, but the employee deferral can add up to $24,500 more. Many providers also let you make the employee part as Roth, so you pay tax now and withdraw tax-free in retirement.
There is a little more paperwork. Once the plan holds $250,000 or more at year end, you generally file Form 5500-EZ each year.

## How to figure your number
Start with your net profit from Schedule C. Subtract half of your self-employment tax (the self-employment tax calculator shows it). Multiply what's left by 20% to get the most you can put in as the employer, in a SEP or a solo 401(k).
For a solo 401(k), add your employee deferral, up to $24,500 or your remaining compensation, whichever is less. Check the total against the $72,000 cap. The worksheets in IRS Publication 560 walk through the exact steps if you want to confirm your figure.

## Which one to choose
Choose an IRA alone if you are just starting out and want the simplest account. Choose a SEP IRA if you want very little paperwork, your profit is high enough that 20% of it gets close to the cap, or you are late and need a plan you can open after the year ends.
Choose a solo 401(k) if you work alone and want to save as much as you can at a normal freelance income, or you want a Roth option. You can also hold an IRA alongside either plan, although a traditional IRA deduction may be limited once you are covered by a workplace plan.

## Fitting it into an uneven income
You don't have to contribute on a schedule. Many self-employed people send a fixed percentage of each client payment to retirement, then top up after the year ends, once profit is clear. SEP contributions and the employer part of a solo 401(k) can be made up to your tax filing deadline, including extensions.
Build an emergency fund first. Self-employed income swings, and pulling money from a retirement account before age 59½ usually costs income tax plus a 10% penalty.

## A worked example: SEP IRA vs solo 401(k)
Sam is a freelance developer under 50 with no employees and no other job. His Schedule C net profit is $80,000. His self-employment tax is $11,304, so half is $5,652.

- Net profit: $80,000
- Half of SE tax: −$5,652
- Earnings for the plan: = $74,348
- Employer rate: 20%
- SEP or employer share: $14,870
- Employee deferral: $24,500
- Solo 401(k) total: = $39,370

1. Sam subtracts half his self-employment tax from his profit: $80,000 − $5,652 = $74,348.
2. The employer share is 20% of that: $74,348 × 20% = $14,870. That is the most he can put in a SEP IRA.
3. In a solo 401(k) he can add the 2026 employee deferral of $24,500: $14,870 + $24,500 = $39,370, well under the $72,000 cap.

## Common mistakes
- **Using 25% of profit.** The 25% rate applies to compensation, which for a sole proprietor is figured after the self-employment tax deduction and the contribution itself. Use about 20% of net profit after half of self-employment tax, or you will put in too much.
- **Opening a SEP after hiring.** A SEP has to cover eligible employees at the same percentage you give yourself. Check the plan rules before you hire, or the plan can cost far more than you planned.
- **Doubling up the deferral.** If you defer $24,500 at a day job, you have no employee deferral room left in a solo 401(k). You can still make the employer contribution from your self-employment income.

## Questions people ask
### Can I have a SEP IRA and a Roth IRA at the same time?
Yes. A SEP IRA is funded by your business and a Roth IRA by you, so you can use both in the same year, as long as your income is under the Roth IRA limits.

### Can I open a solo 401(k) if I also have a 401(k) at work?
Yes, if you have self-employment income. Your employee deferrals across both plans share one $24,500 limit, but the employer share in the solo 401(k) is separate and is based on your self-employment earnings.

### What is the deadline to contribute to a SEP IRA?
You can open and fund a SEP IRA for a tax year up to the due date of that year's tax return, including extensions. That makes it a useful plan if you are late in the year or after it ends.

### Do I need a business entity to open one of these plans?
No. A sole proprietor filing Schedule C can open a SEP IRA or a solo 401(k). Providers usually ask for an employer identification number (EIN), which you can get free from the IRS.

## Do this today
Take last year's Schedule C net profit, subtract half of your self-employment tax and multiply by 20%. That is your SEP figure. Add the employee deferral to see your solo 401(k) room, then pick a plan.

## Sources
- [IRS: SEP contribution limits](https://www.irs.gov/retirement-plans/plan-participant-employee/sep-contribution-limits-including-grandfathered-sarseps)
- [IRS: One-participant 401(k) plans](https://www.irs.gov/retirement-plans/one-participant-401k-plans)
- [IRS: 401(k) and profit-sharing plan contribution limits](https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits)
- [IRS Publication 560: Retirement plans for small business](https://www.irs.gov/publications/p560)
- [IRS Notice 2025-67: 2026 retirement plan limits](https://www.irs.gov/pub/irs-drop/n-25-67.pdf)

_General education, not personalized financial, tax or legal advice. Figures are examples. Check current rates and limits before you act._