Freelancers have no employer match and no automatic enrollment, so retirement saving is entirely a decision rather than a default. The tax advantages, though, are larger than anything available to an employee.
The two real options
SEP IRA
Simplicity. Open one at any major brokerage in about fifteen minutes.
Contributions: up to 25% of net self-employment income, capped at the annual IRS limit ($70,000 for 2025; the 2026 figure adjusts for inflation — check the current number).
The catch: because of how net self-employment income is computed, the effective rate for a sole proprietor is closer to 20% of net profit than 25%.
Deadline: you can open and fund a SEP for a tax year up to your filing deadline, including extensions. That flexibility is its real advantage — you can decide in September after seeing the year.
Solo 401(k)
Two capacities. You contribute as the employee and as the employer.
- Employee: up to the annual elective deferral limit ($23,500 for 2025, plus catch-up if 50 or over)
- Employer: up to 25% of compensation
- Combined capped at the same overall limit as the SEP
Why it wins at moderate income: the employee portion does not depend on profit percentage. At $60,000 of net profit, a SEP allows roughly $12,000. A Solo 401(k) allows the $23,500 deferral plus the employer portion — roughly double.
The catch: more paperwork, and once assets exceed $250,000 you file Form 5500-EZ annually.
Deadline: the plan generally must be established by December 31 of the tax year. Contributions can follow later, but the plan has to exist. Miss it and the SEP is your only option for that year.
A rough comparison
| Net profit | SEP IRA (approx) | Solo 401(k) (approx) |
|---|---|---|
| $40,000 | ~$8,000 | ~$31,500 |
| $80,000 | ~$16,000 | ~$39,500 |
| $150,000 | ~$30,000 | ~$53,500 |
| $300,000 | capped | capped |
Indicative only — the exact figures depend on the year’s limits and on the self-employment tax deduction. The pattern is what matters: the gap is widest at lower and middle incomes, which is the opposite of what most people assume.
Roth
Solo 401(k) plans commonly offer a Roth option for the employee portion: no deduction now, tax-free qualified withdrawals later.
SEP IRAs are traditional by default; some providers now offer Roth SEP options following recent legislation, but availability varies.
Roth generally favours people who expect higher tax rates later — which includes a lot of freelancers early in a career that is going to grow.
What contributions do and do not do
They reduce income tax. A $20,000 deductible contribution at a 24% marginal rate saves roughly $4,800.
They do not reduce self-employment tax. The 15.3% is computed before these deductions. This is the most common misunderstanding.
Practical sequence
- If you are unsure and it is December: open a Solo 401(k) now, even with a small contribution. It preserves the option. A SEP can still be opened later; a Solo 401(k) cannot.
- If profit is under about $150,000: the Solo 401(k) almost certainly lets you save more.
- If you want zero admin and flexibility to decide late: SEP.
- If you may hire employees: a SEP requires you to contribute the same percentage for eligible employees. Factor that in early.
Fidelity, Schwab and Vanguard all offer both with no account fee. The provider matters far less than starting.
This is general information, not investment or tax advice. Contribution limits change annually — confirm current figures with the IRS or a qualified professional.