Maria went freelance three years ago, shooting weddings and portraits around Denver. When she set up her first retirement account, her accountant at the time recommended a SEP IRA — simple to open, one form, done. She's contributed to it every year since. Nobody ever suggested she reconsider.
This year, her net self-employment income landed at $45,000. When she ran her numbers through a retirement calculator out of curiosity, she found out her SEP IRA has been quietly limiting her to about half of what she could actually be saving — and the fix is more straightforward than she expected.
What Maria's SEP IRA Actually Allows
A SEP IRA is an employer-only contribution — there's no separate "employee" bucket to defer income into, which is the piece most self-employed people don't realize when they set one up. The contribution formula for a sole proprietor comes out to roughly 20% of net self-employment income, after adjusting for self-employment tax.
At Maria's $45,000 in net income: $45,000 × 20% = $9,000 maximum SEP IRA contribution for the year.
What a Solo 401(k) Would Allow at the Same Income
A Solo 401(k) works differently because it lets Maria contribute in two separate roles — as the "employee" and as the "employer" — even though she's a one-person business.
- Employee deferral: Up to $24,500 for 2026, and this amount doesn't depend on her income level at all — it's a flat dollar limit available to anyone with enough net earnings to support it
- Employer contribution: The same ~20% formula as the SEP IRA, applied to her $45,000 income: another $9,000
Combined: $24,500 + $9,000 = $33,500 — nearly four times what the SEP IRA alone allows.
The Gap, In Real Numbers
| SEP IRA | Solo 401(k) | |
|---|---|---|
| Employee deferral | Not available | $24,500 |
| Employer contribution (~20%) | $9,000 | $9,000 |
| Total | $9,000 | $33,500 |
That's a $24,500 difference — money Maria could be setting aside for retirement every year at her current income level, simply by using a different type of account with the same underlying self-employment income.
Why This Gap Is Bigger for Lower Earners, Not Smaller
It might seem counterintuitive that someone earning $45,000 sees a bigger proportional gap than someone earning $150,000 — but the math works that way because the Solo 401(k)'s employee deferral is a flat $24,500 regardless of income, while the employer-side contribution scales with earnings either way. At lower income levels, that flat deferral amount represents a much larger share of what someone could otherwise save, which is exactly Maria's situation.
The Tax Impact, Not Just the Retirement Impact
Beyond the extra $24,500 in savings capacity, this also reduces Maria's current-year taxable income if she contributes on a traditional (pre-tax) basis — at her income level, this could mean a few thousand dollars less in federal income tax owed this year, on top of the long-term retirement benefit. The exact amount depends on her full tax picture, which is why running her specific numbers through a calculator matters more than a generic percentage.
What Maria Needs to Do Before December 31
The one detail that actually creates urgency: a Solo 401(k) has to be legally established by December 31 of the tax year, even though the money itself can be contributed later, up to the tax filing deadline. If Maria wants this switch to apply to this year's taxes rather than waiting until next year, she needs to open the account — not necessarily fund it yet — before the calendar turns over. A SEP IRA doesn't have this same year-end deadline, which is part of why it's the "easier" default that many freelancers never revisit.
See Your Own Numbers
Maria's situation — sole proprietor, moderate income, been using the "simple" retirement option without knowing there was a much larger one available — is common enough that it's worth checking your own numbers directly rather than assuming your SEP IRA is fine because it was fine when you set it up. Run your actual net income through our Solo 401(k) vs SEP IRA Calculator to see your specific gap.