SEP-IRA and Solo 401(k) for Self-Employed FIRE Savers

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.

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.

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

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.