Employees get 401k matching. Self-employed people get the SEP-IRA, which, when used fully, allows contributions three times the standard 401k employee limit.
A SEP-IRA is simple to open, has minimal administration, and generates the largest pre-tax retirement contribution available to sole proprietors and freelancers with high income.
The 2026 SEP-IRA Limits
Maximum SEP-IRA contribution = 25% of net self-employment income, up to $70,000.
Net self-employment income for this calculation = net profit from Schedule C minus the deductible portion of self-employment tax.
The formula:
- Net profit from Schedule C
- Subtract deductible SE tax (half of SE tax)
- Multiply by 20% (which is equivalent to 25% of the adjusted net)
Why 20% and not 25%? The math creates a circular calculation because the SEP contribution itself reduces the base. The simplified calculation: multiply net Schedule C profit by 20%.
| Net Schedule C Profit | Max SEP-IRA Contribution |
|---|---|
| $50,000 | $10,000 |
| $80,000 | $16,000 |
| $100,000 | $20,000 |
| $140,000 | $28,000 |
| $200,000 | $40,000 |
| $280,000+ | $70,000 (maximum) |
Tax Savings from Maximum Contribution
At $140,000 net self-employment income, contributing $28,000 to a SEP-IRA:
| Tax Component | Without SEP | With $28,000 SEP |
|---|---|---|
| Net SE income | $140,000 | $140,000 |
| SE tax deduction | -$9,886 | -$9,886 |
| SEP contribution deduction | $0 | -$28,000 |
| Standard deduction | -$15,000 | -$15,000 |
| Taxable income | $115,114 | $87,114 |
| Federal income tax | $19,400 | $13,700 |
| Tax savings | — | $5,700 |
Plus state income tax savings (at 5%): $1,400.
Total immediate tax savings: $7,100 on a $28,000 contribution.
Effective cost of the $28,000 contribution: $28,000 - $7,100 = $20,900. You contributed $28,000 to retirement and it only cost $20,900 in reduced take-home.
SEP-IRA vs. Solo 401k
For self-employed people, the SEP-IRA and Solo 401k are the two primary options. They differ significantly:
| Feature | SEP-IRA | Solo 401k |
|---|---|---|
| 2026 max (high income) | $70,000 | $70,000 (combined) |
| Employee contribution allowed | No | Yes ($23,500) |
| Max at lower income | Lower (25% formula) | Higher (employee + employer) |
| Roth option | No (but backdoor Roth possible) | Yes (Roth 401k elections) |
| Loan provision | No | Yes (up to $50,000) |
| Administration complexity | Very simple | More paperwork, must file Form 5500 above $250k |
| Catch-up contributions | No | Yes ($7,500 age 50+) |
| Other employees | Must cover eligible employees | Only for owner(s), no employees |
Key insight: Solo 401k is better at lower income levels. With a Solo 401k at $60,000 net income:
- Employee contribution: $23,500
- Employer contribution: 25% of $60,000 × 0.9235 = $13,853
- Total Solo 401k: $37,353
vs. SEP-IRA at $60,000:
- Maximum: 20% × $60,000 = $12,000
The Solo 401k allows $25,000 more in contributions at $60,000 income.
At higher incomes ($140,000+), the gap narrows because the employer contribution hits the cap. At $280,000+ income, both cap at $70,000.
Who Should Use SEP-IRA Over Solo 401k
Simplicity preference: SEP-IRA has almost no administration. Open the account, contribute. No forms, no annual filings until the balance exceeds $250,000 (at which point Form 5500-EZ is required).
Existing employees: Solo 401k is only for businesses with no employees other than the owner and spouse. If you have even one part-time employee, you cannot use a Solo 401k. SEP-IRA requires covering eligible employees (can be expensive).
High income with maximum contributions: At $140,000+ income, both can get near or at the $70,000 limit. SEP-IRA's simplicity advantage is pure upside.
Where to Open a SEP-IRA
Any major brokerage accepts SEP-IRA accounts:
- Fidelity: no minimums, excellent fund selection
- Vanguard: investor-friendly, low-cost funds
- Schwab: no minimums, good platform
- TD Ameritrade (now merged with Schwab)
Opening takes 10-15 minutes online. You contribute by the tax filing deadline (April 15, or October 15 with extension). The contribution deadline flexibility allows you to calculate your exact profit before committing to a contribution amount.
The Contribution Timing Strategy
Unlike a 401k where contributions must be made during the calendar year, SEP-IRA contributions can be made up to the tax filing deadline including extensions.
This flexibility allows:
- File 2025 taxes in April 2026
- Calculate exact profit
- Make 2025 SEP-IRA contribution any time up to April 15, 2026 (or October 15 with extension)
- The contribution reduces 2025 taxable income
This is particularly valuable for businesses with variable income. You know the exact profit before deciding the contribution amount.
Frequently Asked Questions
Can I have both a SEP-IRA and a traditional IRA?
Yes. They are separate accounts with separate contribution limits. However, SEP-IRA contributions count as an employer plan for IRA deductibility purposes. At moderate income levels, the traditional IRA deduction may be limited. You can still contribute to a non-deductible IRA and execute the backdoor Roth.
What if I have employees. Can I use a SEP-IRA?
Yes, but you must cover eligible employees at the same percentage as you contribute for yourself. If you contribute 15% of your income to your SEP, you must also contribute 15% of each eligible employee's compensation. This makes SEP-IRAs expensive for businesses with employees. A SIMPLE IRA or 401k may be more appropriate with employees.
Can I contribute to a SEP-IRA and a Solo 401k in the same year?
Only one employer can sponsor retirement contributions for the same business. You cannot have both a SEP-IRA and a Solo 401k for the same sole proprietorship. However, if you have a day job with a 401k (through an employer) AND self-employment income, you can have both a 401k through your employer and a SEP-IRA for your self-employment income, each with separate limits.
You Might Also Like
Put These Numbers to Work
Open a Fidelity brokerage account. $0 commissions, no account minimums, fractional shares available.
Run the Numbers →Related Guides
Free Tools
Run the actual numbers
Stop estimating. Plug in your numbers and get a precise answer in seconds. Free, no signup required.
Open Free Calculators