SEP IRA vs Solo 401(k) for Side Income

Retirement Accounts for Your Side Income

When you earn self-employment income alongside a W2 job, you get access to additional retirement accounts that can shelter thousands from taxes. The two main options — SEP IRA and Solo 401(k) — have different strengths depending on your income level and tax situation.

SEP IRA Basics

A Simplified Employee Pension (SEP) IRA lets you contribute up to 25% of net self-employment earnings, with a maximum of $70,000 (2025). Setup is simple: open one at any brokerage (Fidelity, Vanguard, Schwab) in about 15 minutes.

The catch for side hustlers: at lower income levels, the 25% limit is restrictive. On $30K net side income, you can only contribute $7,500. On $50K, it's $12,500. You need $280K+ in net self-employment income to hit the $70K cap.

Net self-employment income = gross income minus business expenses minus half of self-employment tax. So $40K gross becomes roughly $36K-$37K net, allowing a ~$9,000-$9,250 SEP contribution.

Solo 401(k) Basics

A Solo 401(k) — also called an Individual 401(k) — allows two types of contributions: an employee deferral up to $23,500 (2025) plus an employer profit-sharing contribution of up to 25% of net earnings.

This dual structure makes it far more powerful at lower income levels. On $30K net side income: employee deferral of $23,500 + employer contribution of $7,500 = $31,000 total. Compare that to the SEP's $7,500 limit at the same income. The Solo 401(k) shelters 4x more.

Critical caveat: The $23,500 employee deferral limit is shared with your W2 employer's 401(k). If you already contribute $23,500 to your W2 401(k), the Solo 401(k) only allows the employer match portion (25% of net earnings). You don't get an extra $23,500.

Side-by-Side at Different Income Levels

$25K net side income: SEP IRA max: $6,250. Solo 401(k) max: $23,500 + $6,250 = $29,750 (or $6,250 if W2 401(k) is maxed). Winner: Solo 401(k) if you haven't maxed your W2 401(k).

$60K net side income: SEP IRA max: $15,000. Solo 401(k) max: $23,500 + $15,000 = $38,500 (or $15,000 if W2 maxed). Winner: Solo 401(k).

$150K net side income: SEP IRA max: $37,500. Solo 401(k) max: $23,500 + $37,500 = $61,000 (or $37,500 if W2 maxed). Winner: Solo 401(k), but the gap narrows.

$280K+ net side income: Both hit $70,000 max. It's a tie on contribution limits, and the SEP wins on simplicity.

Tax Impact: Real Savings

Every dollar contributed reduces your taxable income dollar-for-dollar. At a 24% federal bracket plus 5% state, a $20,000 contribution saves you $5,800 in taxes — this year. The money grows tax-deferred until retirement.

If you're in the 32% bracket with high side income, the savings are even larger: $20,000 x 37% (federal + state) = $7,400. For a deep dive on structuring side income to minimize taxes while building exit velocity, The W-2 Trap covers tax-optimized transition strategies.

Roth Option: Pay Taxes Now, Never Again

Solo 401(k) plans can include a Roth option. Employee deferrals go in after-tax, grow tax-free, and come out tax-free in retirement. SEP IRAs have no Roth option (though you can convert SEP funds to a Roth IRA, which triggers a taxable event).

The Roth Solo 401(k) is ideal if you expect your tax rate to be higher in retirement, you want tax-free income in retirement, or you're in a lower bracket now (early career, first year of self-employment).

Setup and Maintenance

SEP IRA: Open in 15 minutes. No annual filings. No compliance requirements beyond contribution limits. Dead simple.

Solo 401(k): Slightly more setup (plan adoption agreement, EIN). Once assets exceed $250K, you must file Form 5500-EZ annually. Some providers (Fidelity, Schwab) offer free Solo 401(k) accounts. Others charge $20-$50/year.

Which One Should You Choose?

Choose SEP IRA if: your net side income exceeds $200K, you want zero administrative hassle, or you already max your W2 401(k).

Choose Solo 401(k) if: your net side income is under $200K, you haven't maxed your W2 401(k) deferrals, you want a Roth option, or you want to maximize tax shelter on every dollar of side income.

The Bottom Line

For most W2 employees with side income under $200K, the Solo 401(k) shelters more money at every income level. The setup takes an extra hour, but the tax savings are worth thousands per year. Open one before December 31 to contribute for the current tax year, and start shrinking your tax bill immediately.