Retirement accounts are the most powerful legal tax reduction tool available to freelancers — and most freelancers dramatically underuse them. A $20,000 SEP-IRA contribution can cut your tax bill by $7,000-8,000+. Here's how to choose the right account and use it aggressively.
Freelancers have access to retirement accounts with dramatically higher contribution limits than traditional employee 401(k)s. While employees are limited to $23,000 per year in a 401(k) (2024), a freelancer with a SEP-IRA can contribute up to $66,000/year — or 25% of net SE income, whichever is less. A Solo 401(k) offers similar contribution room with even more flexibility for higher-income earners.
Every dollar you contribute to a SEP-IRA, Solo 401(k), or SIMPLE IRA reduces your taxable income dollar-for-dollar. More importantly for freelancers, retirement contributions also reduce your net SE income, which means they reduce both your income tax AND your SE tax. A $20,000 SEP-IRA contribution at the 22% bracket saves you $4,400 in income tax plus approximately $3,060 in SE tax — a combined $7,460 in tax savings.
The choice between account types depends primarily on your income level and how much you want to contribute. Under $50K net income, a SEP-IRA is usually the right choice: dead simple to open, no annual filings required, and contribution limits are adequate. Over $100K net, a Solo 401(k) often allows much larger contributions due to the "employee + employer" contribution structure. Under $50K annual income or with one or two employees, a SIMPLE IRA is worth considering.
The tax-deferred compounding benefit is enormous over time. A freelancer contributing $20,000/year from age 30-60 at a 7% average return accumulates approximately $1.9 million — almost all from investment growth. The current-year tax savings are the bonus that essentially makes the government subsidize your retirement savings. No other legal tax strategy for freelancers comes close.
Under $50K net: SEP-IRA is simplest and contribution limits are adequate. Over $100K net: Solo 401(k) allows more total contributions because of the employee contribution portion. Have employees: SIMPLE IRA. Want Roth option: Solo 401(k) (many custodians offer Roth Solo 401(k)).
Fidelity, Vanguard, Charles Schwab, and TD Ameritrade all offer free SEP-IRA and Solo 401(k) accounts with no annual fees. Fidelity and Schwab have the most flexible options and best customer service for self-employed individuals. Avoid high-fee insurance or bank products for this.
SEP-IRA: net SE income × 92.35% × 20% (approximately 25% of net SE income after adjustments). Use IRS Publication 560 Table and Worksheets for the exact calculation. Solo 401(k): employee portion up to $23,000 + employer portion up to 25% of W-2 compensation (more complex; custodian or CPA can calculate).
Contribute as much as you can afford while maintaining adequate operating cash flow and emergency reserves. Even contributing the maximum allowable amount is almost always the right financial decision — the tax savings are immediate, guaranteed returns that exceed most investment alternatives.
You can open a SEP-IRA and make contributions for the prior tax year any time before your tax filing deadline — including extensions. This means in April, you can open a SEP-IRA and reduce last year's taxes. This flexibility makes the SEP-IRA uniquely powerful for retroactive tax planning.
The Solo 401(k) must be established by December 31 of the year for which you want to make contributions. Employee contributions (up to $23,000) must be made by December 31. Employer contributions can be made up to the tax filing deadline, including extensions.
Vanguard Target Date funds, Fidelity ZERO index funds, or simple three-fund portfolios (US stocks, international stocks, bonds) are ideal for most freelancers. Keep investment fees under 0.20% annually — high fees compound against you as powerfully as low fees compound for you.
Even $5,000/year in a SEP-IRA saves a 22%-bracket freelancer $765 in income tax + $765 in SE tax = $1,530 in immediate tax savings. The government is essentially handing you $1,530 to save for retirement. Start with any amount you can afford — you can always contribute more in high-income years.
The best time to open a retirement account is now. The compounding benefit of starting earlier vastly outweighs any concern about contribution size. A SEP-IRA can be opened with a $500 contribution. Open the account, establish the habit, and scale up contributions as income grows.
At $100K+ net income, the Solo 401(k) often allows significantly more total contributions than a SEP-IRA. This is because the Solo 401(k) employee contribution ($23,000) is added on top of the employer contribution, while the SEP-IRA is employer-contribution only. At $100K net income, a Solo 401(k) might allow $40,000+ in total contributions vs. $18,587 with a SEP-IRA.
You can only contribute to a SEP-IRA or Solo 401(k) if you have net SE income. In a loss year, no contribution is possible. However, you can still maintain the account and let existing contributions compound. A Roth IRA ($7,000/year if income is under certain thresholds) remains an option even in lower-income years.
High-income freelancers who earn above the Roth IRA income limits ($161K single, $240K MFJ in 2024) can use the "backdoor Roth" strategy: make a non-deductible traditional IRA contribution then convert it to a Roth. This adds another $7,000/year in tax-advantaged savings on top of your SEP-IRA or Solo 401(k).
Open a SEP-IRA at Fidelity this week — it takes 10 minutes online and is completely free. You can contribute $0 this year and still have the account ready for when you need it.
The Solo 401(k)'s employee contribution ($23,000) is particularly powerful if your net income is under $100K because it allows higher contributions than a SEP-IRA at lower income levels.
Consider a Roth Solo 401(k) for the employee contribution portion — you pay taxes now on that $23,000 but all future growth is tax-free. Given current tax rates and likely future increases, Roth conversions often make sense for younger freelancers.
Your CPA can calculate the exact maximum contribution for your specific income situation. The self-employed retirement contribution worksheets in IRS Publication 560 are clear but require careful reading. A $300 CPA consultation to optimize this can save you $5,000-10,000 in taxes.
SEP-IRA contributions can be made for the prior year up until you file your return (including extensions). In a pinch, filing for a tax extension to October 15 gives you extra months to accumulate the cash for a large contribution.
Generally, no — you can't contribute to both a SEP-IRA and a Solo 401(k) for the same self-employment income in the same year. (There are some exceptions for employees with a day job who also freelance.) Choose one. For most freelancers over $80K net income, the Solo 401(k) allows higher total contributions; under $80K, the SEP-IRA is usually simpler with comparable or better limits.
This is the big SEP-IRA gotcha: if you hire eligible employees, you must make the same percentage contribution to their SEP-IRAs as you make to your own. A 20% contribution for yourself means 20% for every eligible employee too — which can become very expensive. Solo 401(k) plans don't allow employees (other than a spouse), so they're truly designed for solo freelancers.
As of 2023, SECURE Act 2.0 allowed employers (including self-employed) to designate SEP-IRA contributions as Roth. However, most major custodians have been slow to implement Roth SEP-IRAs. Fidelity began offering them in 2024. If you want Roth treatment with high contribution limits, the Solo 401(k) Roth option is currently more widely available.
No — both SEP-IRA and Solo 401(k) contributions require net SE income. If your freelance business had a net loss, you cannot make SE retirement contributions for that year. However, you may be able to contribute to a traditional or Roth IRA if you have other earned income (from a part-time job, for example). The regular Roth/traditional IRA limits are $7,000/year (2024) and require any earned income.
Understanding your tax burden is step one. Step two is setting your freelance rates high enough to actually keep what you earn. Our $27 guide gives you exact rate benchmarks for 40+ niches — so you can price with full knowledge of what the IRS will take.
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