SEP-IRAs and Solo 401(k)s are the two main retirement accounts for 1099 workers, and they differ in contribution limits, setup complexity, and loan rules

If you file taxes as self-employed on a 1099, you have two primary retirement account types to choose from: a SEP-IRA (Simplified Employee Pension) and a Solo 401(k) (also called a individual 401(k)). Both let you save pre-tax money and defer taxes until withdrawal. The choice between them depends on how much you want to contribute each year, whether you might need to borrow from your account, and how much paperwork you're willing to handle.

A SEP-IRA is simpler to open and maintain. A Solo 401(k) has higher contribution limits and lets you borrow against your balance, but requires annual tax forms and more administrative work. Neither account is better in absolute terms — they fit different situations.

Key Takeaways

  • SEP-IRAs let you contribute up to 25% of your net self-employment income (after the self-employment tax deduction), with a maximum that changes yearly based on IRS limits.
  • Solo 401(k)s allow you to contribute as both employer and employee, potentially reaching higher total amounts, and you can borrow up to $50,000 or half your balance from the account.
  • SEP-IRAs take minutes to open through most brokers and require no annual paperwork beyond your tax return.
  • Solo 401(k)s require you to file Form 5500-N (a short form for small plans) each year if your balance exceeds a certain threshold, and some providers charge annual maintenance fees.
  • Both accounts are tax-deferred, meaning contributions reduce your taxable income in the year you make them, and you pay taxes when you withdraw in retirement.

Contribution limits: how much you can set aside each year

The amount you can contribute to either account depends on your net self-employment income — the profit from your business after expenses. The IRS adjusts the maximum contribution limits each year, so the exact ceiling changes annually.

With a SEP-IRA, you contribute as the employer. You can put in up to 25% of your net self-employment income (calculated after you subtract half your self-employment tax). There is an annual maximum limit set by the IRS that applies to all SEP-IRAs; this limit increases most years. For example, if you earn $60,000 in net self-employment income, you could contribute roughly $15,000 to a SEP-IRA, though the exact amount depends on your self-employment tax calculation.

A Solo 401(k) works differently because you make two types of contributions: employee deferrals and employer contributions. As the employee, you can defer a portion of your income (up to an annual limit set by the IRS). As the employer, you can contribute up to 25% of your net self-employment income, just like a SEP-IRA. Combined, these can total significantly more than a SEP-IRA, but the overall contribution is still capped by an annual IRS maximum. The Solo 401(k) maximum is higher than the SEP-IRA maximum, which is why high-earning self-employed people often choose this route.

If your income is modest — under $50,000 in net self-employment income — the difference between the two may not matter much. If you earn substantially more, a Solo 401(k) typically allows you to set aside more money each year.

Tax treatment: when you pay taxes on the money

Both accounts are tax-deferred, meaning your contributions reduce your taxable income in the year you make them. You do not pay federal income tax on the money you contribute or on the investment growth inside the account. You pay taxes only when you withdraw the money in retirement.

This is different from a taxable brokerage account, where you owe taxes on investment gains each year, even if you do not withdraw anything. With a SEP-IRA or Solo 401(k), you defer all those taxes until you take the money out.

Both accounts also have the same withdrawal rules: you can withdraw money penalty-free starting at age 59½. If you withdraw before that age, you typically owe a 10% early withdrawal penalty plus income tax on the amount withdrawn. There are narrow exceptions — for example, if you become disabled — but early withdrawal is generally costly.

Required Minimum Distributions (RMDs) explore to both accounts. Starting at age 73 (as of 2023, though this age may change), you must withdraw a calculated minimum amount each year and pay taxes on it. The amount depends on your age and account balance.

Loans: whether you can borrow from your account

One significant difference between the two accounts is the loan feature. A Solo 401(k) allows you to borrow against your balance. You can borrow up to $50,000 or half your account balance, whichever is less. You repay the loan to yourself with interest, and the interest goes back into your account. If you leave self-employment or change jobs, you typically have to repay the loan within a set timeframe or face taxes and penalties on the unpaid balance.

A SEP-IRA does not allow loans. You cannot borrow from a SEP-IRA under any circumstances. If you need access to the money before retirement, you must withdraw it, which triggers taxes and potentially the 10% early withdrawal penalty.

The loan feature makes a Solo 401(k) more flexible if you anticipate needing short-term access to your retirement savings. However, borrowing from retirement reduces the money available to grow, so it should be a last resort, not a regular practice.

Setup and ongoing administration

A SEP-IRA is the simpler account to open. Most brokers and banks offer SEP-IRAs, and you can open one in minutes online. You sign a straightforward agreement, and the account is active. There is no annual paperwork beyond what you already file on your tax return. You do not file any separate forms with the IRS for the account itself.

A Solo 401(k) requires more setup. You must complete a plan document (some providers offer templates or handle this for you), and you may need to file Form 5500-N with the IRS each year if your account balance exceeds a threshold (currently $16,000, though this may change). Some Solo 401(k) providers charge annual maintenance or administrative fees, typically $100 to $300 per year, to handle the paperwork and filing. A SEP-IRA has no such fees.

If you value simplicity and do not need to borrow from your account, a SEP-IRA is the lower-friction choice. If you want to maximize contributions and may need a loan option, the extra paperwork of a Solo 401(k) may be worth it.

Who can open each account type

Both accounts are available only to self-employed people or business owners with no employees (except a spouse, in some cases). If you have employees, you cannot open a Solo 401(k), and a SEP-IRA becomes more complicated because you must contribute the same percentage for each employee as you do for yourself.

For a 1099 contractor with no employees, both accounts are open to you. The choice comes down to your income level, whether you need to borrow, and how much administrative burden you want to take on.

Frequently Asked Questions

Can I have both a SEP-IRA and a Solo 401(k) at the same time?

No. If you open a Solo 401(k), you cannot also contribute to a SEP-IRA for the same tax year. You must choose one. However, you can switch from one to the other in different years if your situation changes — for example, moving from a SEP-IRA to a Solo 401(k) when your income rises significantly.

What happens to my SEP-IRA or Solo 401(k) if I get a W-2 job?

Your account stays open and the money remains invested. You can no longer contribute to it based on self-employment income, but you can keep it and let it grow. If your new employer offers a 401(k), you can contribute to that separately. You may also be able to roll your SEP-IRA or Solo 401(k) into your employer's plan, depending on the plan's rules.

Can I withdraw money from a SEP-IRA or Solo 401(k) before age 59½?

You can withdraw, but you will owe income tax on the amount plus a 10% early withdrawal penalty in most cases. Some exceptions exist — for disability or certain hardships — but early withdrawal is generally expensive. A Solo 401(k) loan is one way to access money without triggering the penalty, though you must repay it.

Which account should I choose if I earn $80,000 in self-employment income?

At that income level, a Solo 401(k) typically allows you to contribute more per year than a SEP-IRA. If you do not need to borrow and want to keep things straightforward, a SEP-IRA still works. If you want to maximize retirement savings, the Solo 401(k)'s higher limit and loan option usually make it the better fit, despite the extra paperwork.

Do I have to file taxes differently if I have a SEP-IRA or Solo 401(k)?

You report your contribution on your tax return either way — it reduces your self-employment income. A Solo 401(k) requires Form 5500-N filing in some years, but a SEP-IRA does not. Both are reported on Schedule C or Schedule F depending on your business type.