Retirement Plans for the Self-Employed: SEP-IRA, SIMPLE IRA and Solo 401(k)

If you work for yourself, nobody sets up a retirement plan for you, but the plans you can set up yourself allow some of the largest tax-deferred contributions in the system. This chapter compares the three main choices, the SEP-IRA, the SIMPLE IRA and the solo 401(k), explains how contributions are worked out from self-employment income, and covers the interactions people miss: a day job's 401(k), a spouse in the business, and the backdoor Roth.

Your "pay" when you are self-employed

An employee's plan contributions are based on salary. A self-employed person (sole proprietor, single-member LLC taxed as one, or partner) has no salary, so the plans use net earnings from self-employment: net profit from the business, minus the deductible half of self-employment tax.

Self-employment tax is the Social Security and Medicare tax an employer and employee would normally split. It is 15.3% (12.4% for Social Security and 2.9% for Medicare) on 92.35% of net profit, and the Social Security part stops at the 2026 taxable maximum of $184,500, which is shared with any wages from a job. Half of the tax is deductible, and that is the half that comes off before plan contributions are worked out.

Owners of an S corporation are different: they are employees of their own company, and plan contributions are based on the W-2 salary the company pays them, not on the company's profit.

The SEP-IRA: simplest, employer money only

A Simplified Employee Pension is an IRA that only the employer contributes to. For a self-employed person, you are the employer.

• How much. Up to 25% of compensation, with pay counted up to $360,000 and the total never more than $72,000 for 2026. For a self-employed person the 25% is applied to earnings that are already reduced by the contribution itself, which works out to 20% of net earnings after the self-employment tax deduction. (25% divided by 1.25 is 20%; IRS Publication 560 has the worksheet.)
• Flexibility. You can contribute any amount up to the limit, or nothing, each year. You can open and fund a SEP for a year up to your tax filing deadline, including extensions.
• Employees. If you have eligible employees, you must contribute the same percentage of pay for them as for yourself. This is the main reason SEPs suit people without staff.
• Roth. The law has allowed Roth SEP contributions since 2023, but few providers offer them yet.
• The catch for a backdoor Roth. A SEP-IRA is an IRA, so its balance counts in the pro-rata pool described in the previous chapter. A large SEP balance makes a backdoor Roth mostly taxable.

The SIMPLE IRA: for a small business with staff

The SIMPLE IRA is built for businesses with up to 100 employees that want something cheaper to run than a 401(k).

• Employee deferrals like a 401(k), but with a lower annual limit; the 2026 SIMPLE limits, including the catch-up amounts, are in IRS Notice 2025-67.
• A required employer contribution every year: either a dollar-for-dollar match on the first 3% of pay an employee defers (which can be lowered to as little as 1% in two years out of five), or 2% of pay for every eligible employee whether they defer or not.
• Restrictions. An employer with a SIMPLE IRA generally cannot run another retirement plan for the same year. Withdrawals within the first two years of joining can carry a 25% additional tax instead of the usual 10%. A new SIMPLE generally has to be set up by October 1 to cover that year.
• It is also an IRA, so it counts in the pro-rata pool for a backdoor Roth.

For a one-person business, the SIMPLE IRA is rarely the largest option; it exists mainly for owners who want to offer a modest benefit to a few employees.

The solo 401(k): two contributions from one person

A solo (one-participant) 401(k) is a normal 401(k) for a business with no employees other than the owner and the owner's spouse. You contribute in two roles.

• As the employee, you can defer up to $24,500 in 2026, plus a catch-up of $8,000 from age 50 or $11,250 at ages 60 to 63. The deferral can be up to 100% of your net earnings, and it can be pre-tax or Roth.
• As the employer, you add the same amount a SEP would allow: 20% of net earnings after the self-employment tax deduction for a sole proprietor, or 25% of W-2 pay for an S corporation owner.
• The total of both, not counting catch-up, is capped at $72,000 for 2026.

Because the employee part can equal your earnings, a solo 401(k) usually allows more than a SEP at low and middle incomes. To reach the overall cap with a SEP alone, net earnings would need to be five times the cap (the 20% rate). A solo 401(k) can get there with far less, because the employee deferral fills much of it.

Other features that differ from a SEP: Roth contributions, possibly loans if the plan document includes them, and money that sits outside the IRA pro-rata pool, which keeps a backdoor Roth clean. Some solo plans also accept after-tax contributions with in-plan conversion, the mega backdoor described in the previous chapter, but only if the document allows it.

The costs are more paperwork and a few deadlines. Once plan assets pass the threshold in the Form 5500-EZ instructions, you file that form each year. Under rules in effect since 2023, a sole proprietor can open a new solo 401(k) after the year ends, up to the tax filing deadline, and still make employee deferrals for that first year; in later years the deferral election is generally made by December 31, while the employer contribution can wait until the filing deadline. If you hire an eligible employee, the plan has to cover them, and it stops being a solo plan.

The solo 401(k) contribution calculator runs the IRS worksheet for both roles and shows the federal tax saved.

Choosing, and the traps when you also have a job

The right plan depends on a few questions:

• Do you have employees, or plan to? With none, the choice is usually between a SEP and a solo 401(k). With staff, a SEP means contributing the same percentage for them; a SIMPLE or a full 401(k) may fit better.
• How much do you want to put away, at your income? At modest earnings the solo 401(k) usually allows more. At high earnings both can reach the cap, and the SEP's simplicity may win.
• Do you want Roth contributions or a backdoor Roth? Both point toward a solo 401(k).

If you also have a job with a 401(k), one rule matters more than the rest: the employee deferral limit is per person, across every plan. Deferrals at your day job and in your solo 401(k) share the same $24,500. The employer side of the solo 401(k) is separate, because the overall cap applies to each unrelated employer on its own. A side business can therefore still add a meaningful employer contribution even when the deferral room is used up at work.

A spouse who genuinely works in the business and is paid reasonable wages can join a solo 401(k) with their own deferral and employer contribution. The wages must be real pay for real work, with payroll taxes.