The Self-Employed Retirement Account That
Sheltered $69,000 in One Year

The Situation

Lauren is a freelance brand designer in the Inland Empire. After years of contract work through agencies, she went fully independent in 2022 and has been earning between $110,000 and $140,000 in net profit annually since. She had a SEP-IRA she'd opened on a financial advisor's recommendation — contributing around $23,000 per year — and assumed she was doing everything she could.

When we reviewed her situation, we found she was leaving over $46,000 in additional tax-sheltered capacity on the table every year. Not because she lacked the income to use it — because no one had told her the SEP-IRA wasn't her best option.

The Strategy: Solo 401(k) vs. SEP-IRA

Both accounts let self-employed people save for retirement tax-advantaged. The key difference is in the contribution structure:

• SEP-IRA: Contributions are limited to 25% of net self-employment income (after the SE tax deduction). For Lauren at $130,000 net profit, that works out to approximately $23,000 — which is exactly what she was contributing.
• Solo 401(k) — Employee Contribution: As the "employee," Lauren can contribute up to $23,000 in 2024 (or $30,500 if age 50+). This is the same as the standard W-2 401(k) employee limit — dollar for dollar, not percentage-based.
• Solo 401(k) — Employer Contribution: As the "employer," the business can make an additional profit-sharing contribution of up to 25% of net self-employment income — approximately $24,300 for Lauren at her income level.
• Combined limit: The total Solo 401(k) contribution (employee + employer) is capped at $69,000 in 2024. Lauren could contribute $23,000 + $24,300 = $47,300 — more than double the SEP-IRA's $23,000 limit, with room to grow as her income increases.

The practical change required: open a Solo 401(k) account (most major brokerages offer them at no cost), close or leave the SEP-IRA in place as a rollover account, and begin directing contributions to the Solo 401(k) each quarter. The account requires a plan document but no ongoing government filings until plan assets exceed $250,000.

Lauren also had the option to designate a portion of her employee contributions as Roth — putting after-tax dollars into a tax-free growth environment, which made sense given her expectation that her income (and tax rate) would be higher in the future.

The Numbers: SEP-IRA vs. Solo 401(k)

Here's how the two accounts compare for Lauren at $130,000 in net self-employment income for 2024:

That's $8,092 in additional tax savings per year — without earning more, spending differently, or taking on any risk. Over 20 years, with the extra contributions compounding inside the account at a modest 7% return, the combined impact of higher contributions plus tax savings adds over $350,000 to Lauren's retirement wealth.

Key Takeaways

• The Solo 401(k) is available to any self-employed person with no full-time employees (a spouse can participate). It is not limited by industry, entity type, or income level.
• The SEP-IRA's 25%-of-income rule makes it less competitive than the Solo 401(k) at almost every self-employment income level. The Solo 401(k) wins because it adds a flat employee contribution on top of the same employer percentage.
• The Solo 401(k) must be established by December 31st of the year you want to use it. You can fund the employee contribution up to the tax filing deadline (including extensions), but the plan must exist before year-end.
• If you're age 50 or older, the employee contribution limit increases to $30,500 in 2024, making the Solo 401(k) even more powerful as a late-career catch-up vehicle.
• A Solo 401(k) also allows participant loans (up to $50,000 or 50% of the vested balance) — a feature SEP-IRAs and most IRAs don't offer, which adds financial flexibility.