Retirement Plans for 1099 Employees: Solo 401(k), SEP, and IRA Options

If you earn 1099 income, you have four retirement plans to choose from: a Solo 401(k), a SEP IRA, a traditional or Roth IRA, and, for very high earners, a defined benefit plan. Retirement plans for 1099 employees let a self-employed person shelter up to $72,000 in 2026 through a Solo 401(k) or SEP IRA, with another $8,000 in catch-up contributions available at age 50 and more at ages 60 through 63.¹ Nobody sets these up for you, and the plan you pick, along with how you calculate your contribution, determines whether you capture those savings or leave them on the table.

How Your Income Sets the Ceiling

Every contribution limit flows from one number: your net earnings from self-employment, also called plan compensation. That is not your gross revenue. You start with total business income, subtract ordinary business expenses, and then subtract the deductible half of your self-employment tax.² That last subtraction mirrors what W-2 workers get implicitly when their employer pays half of their payroll taxes.

One wrinkle trips people up. When you calculate the “employer” portion of your contribution, the contribution itself reduces the income base it’s calculated on. This circular math is why a “25% of compensation” rate works out to roughly 20% of your net self-employment earnings.³ IRS Publication 560 has rate tables and worksheets for this, and tax software handles it automatically.

You will also choose a tax treatment. Pre-tax (traditional) contributions reduce your taxable income this year and are taxed when you withdraw. Roth contributions use after-tax dollars with no deduction now, but qualified retirement withdrawals, including all the growth, are tax-free.

The Solo 401(k): Highest Limits for Most Contractors

For most independent contractors with no full-time employees other than a spouse, the Solo 401(k) is the right choice. Its power comes from a dual structure: you contribute as both the employee and the employer of your own business, which lets you shelter far more than a plan with only one contribution type allows.⁴

2026 Contribution Limits

The employee side is your elective deferral, capped at $24,500 for 2026.⁵ You can direct it to a traditional account, a Roth account, or split it. The employer side is a profit-sharing contribution capped at 25% of compensation, which works out to about 20% of your net self-employment earnings after the circular calculation.

The combined total of both pieces cannot exceed $72,000 for 2026, before catch-ups.⁶ Hitting that ceiling takes roughly $237,500 in net self-employment earnings. Below that income level, the Solo 401(k) still beats a SEP IRA because the $24,500 employee deferral isn’t available in a SEP.

Catch-Up Contributions at 50 and Up

At 50 or older, you can add $8,000 in catch-up contributions on top of the $72,000 limit, pushing the maximum to $80,000 for 2026.⁵ Under the SECURE 2.0 Act, workers who turn 60, 61, 62, or 63 during the tax year get a higher “super catch-up” of $11,250, bringing the potential total to $83,250 for 2026. The year you turn 64, the catch-up drops back to $8,000.⁶

Roth and Loan Features

Your employee deferral can go to a Roth account if your plan document allows it. Recent legislation also lets the employer profit-sharing contribution be designated as Roth, provided the plan document specifically authorizes it. A Solo 401(k) can also allow participant loans up to the lesser of $50,000 or 50% of your vested balance, a feature no IRA-based plan offers.⁷

Paperwork You Should Expect

A Solo 401(k) carries more administration than a SEP. You need a formal plan document (most major brokerages provide a free prototype), and once total assets across all your one-participant plans exceed $250,000, you must file IRS Form 5500-EZ every year the balance stays above that threshold.⁸ That is the price of the highest contribution limits available to a self-employed person.

The SEP IRA: Simpler, Lower Ceiling

The SEP IRA is the easier alternative. There are no plan documents to draft, no annual IRS filings, and you can set it up and fund it on the same day. The trade-off is a lower ceiling for anyone earning under roughly $360,000 in net self-employment income.

A SEP accepts only employer contributions. There is no employee deferral. The maximum for 2026 is the lesser of 25% of compensation or $72,000, which again translates to about 20% of net self-employment earnings after the required adjustment.⁹ No catch-up contributions are available at any age.

The math matters. A sole proprietor with $100,000 in net self-employment earnings can put roughly $20,000 into a SEP IRA. The same person could put about $44,500 into a Solo 401(k) by combining the $24,500 employee deferral with roughly $20,000 of profit-sharing. The SEP only catches up when net earnings get high enough that 20% alone approaches the $72,000 cap.

When a SEP Is Still the Right Call

The SEP’s advantages are flexibility and simplicity. Contributions are fully discretionary, so a lean year can be a zero-contribution year with no consequences. You can establish a SEP as late as your tax filing deadline, including extensions, for the prior year.¹⁰ You could file for an extension in April, calculate final profit in September, and open and fund the SEP by October 15 for the prior tax year. No other retirement plan offers that kind of retroactive window.

Under the SECURE 2.0 Act, SEP plans can also allow employer contributions to go into a Roth account rather than a traditional pre-tax IRA.³ Not every custodian supports this yet, so check before assuming it’s an option.

Traditional and Roth IRAs on Top

Even after maxing out a Solo 401(k) or SEP IRA, you can usually contribute to a traditional or Roth IRA as well. The 2026 IRA limit is $7,500, with an additional $1,100 catch-up at 50 and older, for a total of $8,600.¹ Modest next to the plans above, but it compounds.

Traditional IRA Deduction Phase-Outs

You can always contribute to a traditional IRA, but the deduction may be limited if you’re also covered by a self-employed plan like a Solo 401(k) or SEP IRA. For 2026, the deduction phases out for single filers with modified adjusted gross income between $81,000 and $91,000, and for married couples filing jointly between $129,000 and $149,000.⁶ Above those ranges, contributions are allowed but non-deductible.

Roth IRA Income Limits

Roth IRA eligibility depends on modified adjusted gross income. For 2026, single filers can contribute fully below $153,000, with eligibility phasing out completely at $168,000. Married couples filing jointly can contribute fully below $242,000, with the phase-out ending at $252,000.⁶ Successful independent contractors often earn above these thresholds, which is where the backdoor Roth comes in.

The Backdoor Roth

If your income exceeds the Roth IRA limit, you can still get money into a Roth through a two-step process. Make a non-deductible contribution to a traditional IRA (no income limit applies to non-deductible contributions), then convert that balance to a Roth IRA. Report the non-deductible contribution on IRS Form 8606, which tracks your basis so the same money isn’t taxed twice.¹¹

One warning. If you hold any pre-tax money in traditional, SEP, or SIMPLE IRAs, the IRS applies a pro-rata rule to conversions. You can’t convert only the non-deductible portion. The conversion is taxed proportionally across all your traditional IRA balances. Rolling pre-tax IRA money into a Solo 401(k) first can clear the way.

Spousal IRA

If you’re married and your spouse doesn’t have earned income, you can fund a spousal IRA using your self-employment earnings. Each spouse keeps their own IRA, and the same limits apply: $7,500 for 2026, or $8,600 at 50 and older. Roth eligibility for a spousal IRA uses combined household income against the same $242,000 to $252,000 phase-out.⁶

Defined Benefit Plans for Very High Earners

If you consistently earn well above $300,000 and want to shelter more than the $72,000 defined contribution limit allows, a one-person defined benefit plan (sometimes called a cash balance plan) can let you contribute significantly more. The 2026 annual benefit limit for defined benefit plans is $290,000, and the contributions needed to fund that benefit are calculated by an actuary based on your age, expected investment returns, and target retirement date.¹² Older participants benefit especially, because fewer years to fund the promised benefit justify larger annual contributions.

These plans can be paired with a Solo 401(k), but the complexity and cost are real. You’ll need an actuary to design the plan and run calculations annually, and the commitment is less flexible than a SEP or Solo 401(k): skipping contributions in a low-income year can create compliance problems. This option fits contractors with stable, high income who want to catch up aggressively.

Setup and Funding Deadlines

Missing a deadline is one of the easiest ways to lose a year’s deductions, and the rules differ by plan.

Solo 401(k)

The plan must be formally adopted by December 31 of the tax year you want contributions for. That means signing the plan documents by then, and making a written election to defer part of your compensation by the same date.³ Actual funding of both the employee deferral and the employer profit-sharing contribution can happen later, up to your tax filing deadline including extensions. For most sole proprietors, that is October 15.

When you deposit, label the employee elective deferral and employer profit-sharing contribution clearly as separate contribution types. Mixing them up can create excess contribution problems.

SEP IRA

The SEP is the most forgiving. You can both establish and fund it as late as the due date of your business tax return, including extensions.¹³ With an extension, that’s October 15 to decide whether a SEP makes sense, calculate the contribution, and execute.

Traditional and Roth IRAs

Contributions for a given tax year must be made by April 15 of the following year. No extensions apply, even if you’ve extended your tax return.

Excess Contribution Penalties

Contribute more than the limit to an IRA and a 6% excise tax applies to the excess for every year it remains in the account. For a Solo 401(k), excess elective deferrals not corrected by April 15 of the following year can jeopardize the plan’s tax-exempt status. The stakes are high enough that careful calculations, with tax software or a CPA, pay for themselves.

Rolling Over an Old Employer Plan

If you left a W-2 job for 1099 work, you likely have a balance in an old 401(k) or 403(b). You can roll those funds directly into a Solo 401(k) if your plan document allows incoming rollovers, which most prototype plans do.¹⁴ A direct trustee-to-trustee transfer avoids tax withholding.

Consolidating also has a strategic benefit. Moving pre-tax IRA balances into the 401(k) clears the way for a clean backdoor Roth conversion, because the pro-rata rule only looks at IRA balances.

What Changes When You Hire Employees

A Solo 401(k) is available only to businesses with no full-time employees other than the owner and the owner’s spouse. If your contracting work grows and you bring on employees who meet the plan’s eligibility rules, you must include them, and the plan loses its one-participant status. Elective deferrals then become subject to nondiscrimination testing, which can limit how much you personally defer.⁴

Many owners convert at that point to a safe harbor 401(k), which passes testing automatically in exchange for mandatory employer matching. Others switch to a SEP IRA, which handles multiple employees easily but requires the employer to contribute the same percentage of compensation for every eligible employee. Planning the transition before you hire is far less painful than scrambling after.

1
Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500
2
Internal Revenue Service. Self-Employed Individuals – Calculating Your Own Retirement Plan Contribution and Deduction
3
Internal Revenue Service. Publication 560 – Retirement Plans for Small Business
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Internal Revenue Service. One-Participant 401(k) Plans
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Internal Revenue Service. Retirement Topics – 401(k) and Profit-Sharing Plan Contribution Limits
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Internal Revenue Service. 2026 Amounts Relating to Retirement Plans and IRAs
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Internal Revenue Service. Retirement Topics – Loans
8
Internal Revenue Service. One-Participant Plans More Than $250,000
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Internal Revenue Service. SEP Contribution Limits
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Internal Revenue Service. Retirement Plans FAQs Regarding SEPs
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Internal Revenue Service. Instructions for Form 8606
12
Internal Revenue Service. Retirement Plans for Self-Employed People
13
Internal Revenue Service. Simplified Employee Pension Plan (SEP)
14
Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions