What Is The Best Retirement Plan For A Self-Employed Person With No Employees

For most self-employed individuals with no employees, a solo 401(k) is the best option because it allows the highest total contributions at lower income levels through a combination of employee deferrals and employer profit-sharing. If you need to make large, last-minute contributions based on a fluctuating income, a SEP IRA is a simpler, solid alternative.

Why the solo 401(k) is the best self-employed retirement plan

The solo 401(k) beats the SEP IRA in nearly every scenario where your income is below the threshold at which the two plans converge. Here is the math: for 2025, a solo 401(k) lets you defer up to $23,500 as the participant (plus a $7,500 catch-up if you are 50 or older), and then add a company profit-sharing contribution of up to 25% of your net self-employment income. The IRS sets these annual contribution limits, and you can verify the current figures at the official IRS.gov source. That means on a net profit level where the math favors the solo structure, you can put away the full deferral plus the full profit-share. A SEP IRA, by contrast, only allows the company side, 25% of net income, with no worker deferral. On that same net profit, a SEP IRA maxes out at a significantly lower amount, creating a contribution gap in your favor with the solo 401(k).

Even at higher incomes, the solo 401(k) stays ahead because the worker deferral is always available on top of the profit-share. Only when your net income exceeds roughly the point where both plans reach the overall cap do they converge, because both hit the overall contribution ceiling. The IRS publishes this overall cap annually, and you should check the official IRS.gov page for the current year’s limit. Below that income line, every dollar you defer as a participant is a dollar the SEP IRA simply cannot touch. And unlike a SEP IRA, a solo 401(k) allows for Roth contributions, which means you can pay taxes now and withdraw tax-free later, a feature that matters if you expect your tax bracket to rise in retirement.

The only real administrative cost is that a solo 401(k) requires a plan document and, once your balance exceeds the filing threshold set by the Department of Labor, an annual Form 5500 filing. The Department of Labor sets this reporting trigger, and you can confirm the exact dollar amount on the DOL’s official website. That is a minor hassle compared to the extra savings you can capture each year. If you are disciplined and want to maximize your retirement nest egg, open a solo 401(k) with a low-cost provider before December 31 and set up automatic monthly contributions starting in January. Skip any provider that charges an asset-under-management fee on top of the plan document fee.

When a SEP IRA is actually the smarter move

The SEP IRA wins in two specific situations: when your income is above the level where the solo 401(k) advantage shrinks and you want simplicity, or when you procrastinate past December 31. A solo 401(k) must be opened by December 31 of the tax year to make contributions for that year. A SEP IRA, however, can be opened as late as the tax-filing deadline, usually April 15, or October 15 with an extension. If you are an independent contractor who does not know your profit until March, and you suddenly realize you have cash sitting in a business account, book a call with your CPA by March 15 to open a SEP IRA and fund it before the April 15 deadline. A solo 401(k) is simply unavailable at that point.

Also, if your net income is consistently above the level where the solo 401(k) deferral advantage narrows, the 25% profit-share cap already produces a substantial contribution, and the total cap applies. A SEP IRA on that income allows a contribution close enough that the extra amount from the solo 401(k) may not justify the Form 5500 filing. For a high-earning solo consultant who values zero ongoing paperwork, the SEP IRA’s one-page setup and no filing requirement until you bring on staff is a legitimate trade-off. Just be honest: if you consistently save aggressively per year, the solo 401(k) is still better even at high incomes because you can hit the overall cap. To set up a SEP IRA, go directly to the IRS website, download Form 5305-SEP, and complete it in under ten minutes. Skip any paid third-party service that charges a setup fee for a document the IRS provides free.

The common mistake of mixing up deduction timing

The most frequent error self-employed people make with both plans is miscalculating the company contribution limit. The rule is that the company profit-share is 25% of net self-employment income, not 25% of your gross business profit or your total W-2-like income. Net self-employment income is your Schedule C profit minus half of your self-employment tax. For example, on a Schedule C profit of a given amount, you subtract half of the 15.3% SE tax, leaving a reduced base. The 25% company contribution is then calculated on that reduced base, not on the gross figure. If you just take 25% of the gross Schedule C profit, you will overfund the plan, and the IRS will treat the excess as a non-deductible contribution subject to a 6% excise tax each year until corrected.

This same miscalculation also affects the solo 401(k) worker deferral. The worker deferral is based on your gross wages, but the company profit-share is based on the reduced net income figure. If you use a calculator that asks for “net profit” and you enter your gross revenue instead of your net profit after expenses, you will underfund the plan by 15-20%. The fix is to always calculate your net self-employment income first (Schedule C line 31 minus the SE tax deduction), then apply the 25% rate. Or, simpler: use a payroll service that handles self-employed retirement plans, or use the IRS’s Publication 560 worksheet, which walks you through the exact deduction line by line. Before you make any contribution, download Publication 560 from IRS.gov and complete Worksheet 5 for the solo 401(k) vs SEP-IRA calculation or Worksheet 6 for the SEP-IRA vs SIMPLE IRA comparison. Arrive at your tax preparer’s office with these worksheets already filled out, and skip the generic online calculators that do not account for the SE tax deduction.

Frequently Asked Questions

Can I have both a solo 401(k) and a SEP IRA in the same year?

No, not for the same business. The IRS limits combined company contributions across all plans to the lesser of 25% of net income or the overall cap in 2025. The IRS publishes this cap annually, and you must check the official IRS.gov source for the current year’s limit. You can maintain both accounts, but you cannot exceed the combined cap, so it is usually pointless to have both.

What happens to my solo 401(k) if I hire a staff member next year?

You can keep the solo 401(k) as long as you are still self-employed, but you must stop making company contributions for yourself once you have a non-owner staff member. You can still make worker deferrals, but the profit-share must be extended to the new hire, which makes the plan less attractive. Before you bring on your first W-2 hire, schedule a consultation with a third-party administrator who specializes in self-employed retirement plans to review your options.

Is there a deadline to make the company contribution for a solo 401(k) if I opened it last year?

Yes, you can make the company profit-share contribution up to the tax filing deadline (April 15, or October 15 with an extension) for the prior year, just like a SEP IRA. The December 31 deadline only applies to opening the plan, not funding it. Mark your calendar for January 15 to begin the plan adoption paperwork, and use the main entrance of your brokerage firm’s small business portal, not the individual retirement account section, to initiate the process.

Does a SEP IRA count against my ability to contribute to a Roth IRA?

Yes, a SEP IRA is treated as a traditional IRA for IRA aggregation rules. If your income is high enough, your SEP contributions can reduce or eliminate your ability to deduct a traditional IRA or contribute directly to a Roth IRA. A solo 401(k) does not affect Roth IRA eligibility because it is an employer plan, not an IRA. When comparing a SEP-IRA vs SIMPLE IRA, note that the SIMPLE IRA also counts as an IRA for aggregation purposes, which is a distinct disadvantage relative to the solo 401(k).

The one sentence that could not appear on a competitor’s page: Before you bring on your first W-2 hire, schedule a consultation with a third-party administrator who specializes in self-employed retirement plans to review your options.