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Two accounts built for self-employed workers — and which one gets you to FIRE faster
W-2 employees can put away $23,500/yr in a 401(k). Self-employed workers with the right account structure can put away $69,000 — nearly triple. The SEP-IRA and Solo 401(k) are the two primary tools for self-employed FIRE savers, and choosing between them can add hundreds of thousands to your retirement savings over a career.
Self-employed people pay both sides of FICA — employee plus employer — which comes to 15.3% on income up to the Social Security wage base. This is the most important number to understand before modeling your retirement contributions.
The SE tax deduction
The IRS allows self-employed workers to deduct half of their self-employment tax from gross income before calculating their adjusted gross income. This deduction affects retirement contribution calculations for both SEP-IRA and Solo 401(k) — specifically, the “employer” contribution side is based on net self-employment income after this deduction.
Contributions reduce ordinary income, not SE income
Both SEP-IRA and Solo 401(k) contributions lower your ordinary income tax bill. They do not reduce your self-employment tax liability (FICA). That said, the ordinary income tax savings are still extremely powerful — and at the contribution limits available to self-employed workers, the total tax reduction can dwarf what W-2 employees can achieve.
The Simplified Employee Pension IRA is the easiest self-employed retirement account to set up. You can open one the day before your tax filing deadline and fund it retroactively for the prior year — no December 31 deadline, no annual paperwork.
| Detail | SEP-IRA |
|---|---|
| Contribution type | Employer only (no salary deferral) |
| Contribution rate | Up to 25% of W-2 comp; ~20% of net SE income |
| 2025 limit | $69,000 |
| Roth option | No |
| Annual filing requirement | None (until assets > $250K, then Form 5500-EZ) |
| Setup deadline | Tax filing deadline incl. extensions (Oct 15) |
| Funding deadline | Tax filing deadline incl. extensions |
Pros
Cons
The Solo 401(k) — also called the individual 401(k) or self-employed 401(k) — mirrors the structure of an employer plan but you wear both hats. As the employee, you make an elective salary deferral. As the employer, you make an additional profit-sharing contribution. The combination lets you reach the annual limit at a much lower income level than the SEP-IRA.
| Detail | Solo 401(k) |
|---|---|
| Employee deferral (2025) | $23,500 ($31,000 if age 50+) |
| Employer contribution | ~20% of net SE income (25% of W-2 equivalent) |
| Combined 2025 limit | $69,000 ($76,500 with catch-up) |
| Roth option | Yes (at most custodians) |
| Annual filing | Form 5500-EZ when assets exceed $250K |
| Setup deadline | Must be ESTABLISHED by Dec 31 of the tax year (critical!) |
| Funding deadline | Tax filing deadline incl. extensions |
| Employees allowed | Owner only (spouse with SE income qualifies) |
Pros
Cons
The Dec 31 gotcha
Unlike a SEP-IRA, you cannot set up a Solo 401(k) retroactively. The plan must be established (paperwork signed, plan document in place) by December 31 of the tax year you want contributions for. You can fund it until the tax filing deadline, but if you miss the Dec 31 establishment deadline, you lose the ability to contribute for that year entirely. Set up the plan the moment you start self-employed work — even if you don't fund it yet.
At $100,000 net self-employment income, the Solo 401(k) total contribution is nearly double what a W-2-only worker can contribute in an employer 401(k). The employee deferral alone matches the W-2 worker; add the employer side and the total gap becomes substantial.
$100K net SE income · 2025 limits · illustrative
Illustrative. Solo 401(k) employer side is ~20% of net SE income after SE tax deduction. Actual amounts depend on net profit and deductions. Consult a tax professional for your specific situation.
There's no universal answer. The right choice depends on your income level, whether you want Roth access, and how much administrative simplicity matters to you.
Low income (<$50K SE net) → Solo 401(k) wins
At modest self-employment income, the SEP-IRA employer-only math severely limits contributions. A $40K net SE income yields only ~$8,000 in SEP contributions (20%). The Solo 401(k) lets you shelter $23,500 as an employee deferral regardless of income — far more efficient at lower income levels.
Higher income → either works, but Solo 401(k) still has advantages
Once SE income exceeds ~$175K, both accounts approach the same annual limit ($69,000). At that point, the Roth option in the Solo 401(k) becomes the deciding factor for most FIRE savers. Tax-free growth and tax-free withdrawals in early retirement are worth more than administrative simplicity.
Simplicity matters → SEP-IRA
If you find financial administration genuinely burdensome — or you're just starting and don't want to deal with plan documents — the SEP-IRA's simplicity has real value. It takes fifteen minutes to set up at Fidelity, Vanguard, or Schwab, and you never have to file anything with the IRS until assets exceed $250K.
You also have a W-2 job → important caveat
If you have self-employment income alongside a W-2 job with a 401(k), the IRS $23,500 employee deferral limit is shared across all employers. You cannot contribute $23,500 to a Solo 401(k) employee deferral if you've already maxed your W-2 employer 401(k). SEP-IRA contributions are entirely separate and are not affected by your W-2 contributions.
The FIRE bottom line
For most self-employed FIRE savers, the Solo 401(k) is the better tool — particularly for its Roth option and higher effective limit at moderate income levels. Open it as soon as you start any self-employment activity; the Dec 31 establishment deadline is an easy thing to miss and an expensive mistake to make.
SEP-IRA deadlines
Open and fund your SEP-IRA any time up to your tax filing deadline, including extensions — typically October 15 for most filers using an extension. This makes the SEP-IRA the only retirement account that can be set up retroactively after the calendar year ends. If you realized in March that you had a profitable SE year, you can still open a SEP-IRA and reduce your tax bill.
Solo 401(k) deadlines
The plan must be established — meaning paperwork signed and plan document executed — by December 31 of the tax year. You cannot set one up in January for the prior year. However, once the plan is established, you can fund both the employee deferral and employer contribution up to your tax filing deadline (including extensions).
Where to open
Fidelity
Fee-free Solo 401(k) with Roth option, excellent fund selection, no minimums.
Vanguard
Good for existing Vanguard investors; Roth option available. Setup slightly more involved.
Schwab
Fee-free, Roth option, straightforward online setup. Strong customer service.
Form 5500-EZ: the only ongoing requirement
Once your Solo 401(k) — or SEP-IRA — exceeds $250,000 in assets, you must file Form 5500-EZ annually with the IRS. It's a straightforward one-page informational return with no tax due, but failure to file carries steep penalties ($250/day, up to $150,000). Mark your calendar and consider a tax professional once you approach this threshold.
Account Types Compared
How 401(k), IRA, Roth, HSA, and taxable accounts fit together in a FIRE portfolio.
The Roth Conversion Ladder
Converting pre-tax funds to Roth tax-efficiently in early retirement — essential for self-employed FIRE savers.
Tax-Efficient Withdrawal
Which accounts to tap first in retirement — and how to minimize lifetime taxes across all account types.
Savings Rate
Why your savings rate matters more than your return rate — and how self-employed contribution limits amplify it.