New on FinoLib · Volume V: Personal Finance
I have added a new article to FinoLib, my finance education website: Solo 401(k) vs SEP-IRA: Self-Employed Retirement Accounts, part of Volume V: Personal Finance. It is part 1 of a 2-part guide. This page gives you the core of the topic in expert but plain language; the full article goes much deeper.
The idea in plain words
When you work for yourself, nobody sets up a retirement plan for you, so you build your own. Two accounts do the job. A Solo 401(k) lets you save as both the employee and the employer, so it usually shelters the most money. A SEP-IRA lets you save only as the employer, but it is simpler and can be opened as late as the extended tax-filing deadline. Many freelancers on moderate incomes do better putting their own share in as Roth, because a pre-tax contribution saves less tax than the bracket suggests.
Key points
■At $90,000 of net profit, the Solo 401(k) allows $41,228.34 against the SEP-IRA’s $16,728.34; the two converge only near $376,000 of profit.
■Contributions cut income tax but never self-employment tax, and each pre-tax dollar also shrinks the 20% qualified business income deduction, so it saves about 80% of your bracket rate.
■The $24,500 deferral limit is shared with any 401(k) at a day job; the employer contribution is not.
■A SEP-IRA allows no catch-up contributions; a Solo 401(k) adds $8,000 at 50 and $11,250 at 60 to 63.
A closer look
Everything in 6.2–6.7 assumes an employer. Freelancers, consultants and owners of one-person businesses have no payroll department and no match — but they are both the employee and the employer, and can contribute in both roles. The two main vehicles are the Solo 401(k) (formally a one-participant 401(k)) and the SEP-IRA (Simplified Employee Pension).
In a Solo 401(k) you contribute twice. As the employee you can defer up to $24,500 of earnings in 2026 (plus the $8,000 catch-up at 50 or older, or $11,250 at ages 60–63), pre-tax or Roth. As the employer you can add a profit-sharing contribution of up to 25% of compensation — which, for a sole proprietor or single-member LLC, works out to 20% of net self-employment earnings after subtracting half of the self-employment tax. The reason for 20% rather than 25%: a self-employed person’s “compensation” is defined as net earnings after the contribution itself is deducted, so 25% of what remains equals 20% of the starting figure (0.25 ÷ 1.25 = 0.20).
A worked example
Worked Example — Compare the Scenarios: SEP-IRA, Pre-Tax Solo 401(k) or Roth Solo 401(k)
Return to the single freelancer with $90,000 of 2026 net profit, no other income, the $16,100 standard deduction and no state income tax. Her self-employment tax is $12,716.60 in every scenario, and her deductible half is $6,358.30. She takes the QBI deduction: 20% of QBI, limited to 20% of taxable income before the deduction. A, SEP-IRA only: AGI = $90,000 − $6,358.30 − $16,728.34 = $66,913.36; before QBI, $66,913.36 − $16,100 = $50,813.36; QBI deduction = the lesser of 20% × $66,913.36 = $13,382.67 and 20% × $50,813.36 = $10,162.67; taxable income $40,650.69; tax = $1,240 + 12% × ($40,650.69 − $12,400) = $4,630.08.
Under the hood
Under the Hood: Why a Pre-Tax Contribution Saves Less Than Your Bracket
Two features of the self-employed tax return shrink the saving. First, self-employment tax is figured on Schedule SE from net profit before any retirement deduction; the contribution is deducted later, on Schedule 1 (line 16, “Self-employed SEP, SIMPLE, and qualified plans”), where it lowers income tax only. The freelancer above owes the full $12,716.60 of self-employment tax whatever she contributes. Second, most sole proprietors also take the qualified business income (QBI) deduction of Section 199A: 20% of business income, limited to 20% of taxable income before the deduction, and made permanent by the One Big Beautiful Bill Act.
Edge Cases: When the Standard Answer Changes
The $90,000 example assumes one sole proprietor, under 50, with no other job and no prior plan. Each of these facts moves the answer. Situation What changes Why Number or rule A day job with its own 401(k) Deferral room in the Solo 401(k) shrinks; employer room does not Elective-deferral limits are per person, not per plan; the annual-additions limit counts only plans your business maintains Deferring $10,000 at work leaves $24,500 − $10,000 = $14,500 of Solo deferrals, plus…
What the full article covers
The full article includes worked examples, a look under the hood at the mechanics, a recap, a reveal-on-click quiz and the official sources behind every figure.
Volume V: Personal Finance
Read the full article on FinoLib
The complete article, Solo 401(k) vs SEP-IRA: Self-Employed Retirement Accounts, with every worked example, diagram, quiz and source, is free to read in Volume V, Personal Finance on finolib.com.
Explore the Finance Education Series: Vol. II — Capital Markets · Vol. I — Global Economy · Vol. III — Finance Encyclopedia · Vol. IV — Finance Careers · Vol. V — Personal Finance