Sizing up your options for saving while self-employed

Sizing up your options for saving while self-employed Mar 10, 2025 9:50:21 AM Both solo 401(k)s and SEP IRAs offer high contribution limits, but which one is right for you? Self-employed workers wear many hats. Accounting, admin, you name it. And that doesn't even include saving for retirement. Depending on your income, you may still have access to the tax benefits of an IRA, but some folks quickly run up against its $7,000 contribution limit. They may want (or need) to save more. So what's a gig worker, small-business owner, or solo practitioner to do? Luckily, two accounts offer up to 10x the capacity for tax-advantaged investing: the solo 401(k), and the SEP IRA. In general, SEPs tend to be better for business owners planning to hire employees in the future. Solos, meanwhile, often make sense for self-employed individuals without employees other than a spouse. But the best fit for you will depend on your business model, income level, and financial goals. So to help you make a pick, let’s compare these accounts across three categories: High contribution limits Easy admin Flexibility (Roth access and small-business growth) High contribution limits You can contribute roughly the same (upwards of $70,000) to each account type annually, but solos have a slight edge in two cases: Case #1: You're over the age of 50 and playing catch-up. In this case, a solo 401(k) offers additional catch-up contributions of $7,500 each year, or $11,250 for those between the ages of 60 and 63. Case #2: Say you're a super saver, someone whose saving rate is well above the standard advice of 10-15%, but you earn less than $280,000. You'll be able to save more in a solo in this scenario, because not only can you contribute up to 25% of your income as an employer (the same as a SEP), solo 401(k)s allow you to contribute up to $23,500 as an employee as well. Advantage: solo 401(k) Easy admin Simply put, a solo 401(k) takes more work to set up, and unlike a SEP IRA, it requires annual reporting once its balance exceeds $250,000. But there's a big caveat here. If you have a trusted advisor—and a truly modern solo 401(k) offering like our own—they can handle the heavy lifting of setting one up and keeping it compliant year-in and year-out. That's in large part why we offer solo 401(k)s as an exclusive Betterment Premium offering. Premium puts a team of advisors in your corner, experts who can not only assist with all things solos, but help you make the decision of whether to open one in the first place. If you decide a Betterment solo 401(k) is right for you, a paperless and pleasant experience awaits. Advantage: Tie Put a team of advisors in your corner with Premium. Flexibility Both SEPs and solos offer flexibility, but in different ways. A solo 401(k), for example, allows for Roth (aka after-tax) and/or traditional contributions. But depending on your business goals, the ability to scale your business and keep saving may be the most important type of flexibility for you. In general, SEPs allow you to quickly shift from a solo practitioner to an employer who contributes to employees’ SEP IRAs on their behalf. The only catch is you must contribute the same amount to their SEPs as you do yours. With Betterment’s solo 401(k), however, our advisors can transition the plan to a group 401(k) should you hire employees beyond your spouse. A group 401(k) requires more work to administer, but offers more flexibility than a SEP in how you structure contributions for you and your employees. Advantage: Tie So which account is right for you? The good news is both SEP IRAs and solo 401(k)s offer excellent tax advantages that can help you reach retirement quicker. We offer both at Betterment, and make it easy to open either one. Because when you’re self-employed, you’re busy running your business. Optimizing your retirement savings? Consider that one less hat for your wardrobe.