The decision most solo business owners keep pushing to "next quarter"
Every August, the same pattern shows up in accounting inboxes: a service-based business owner emails asking about retirement accounts, gets a two-paragraph explanation of SEP IRAs and Solo 401(k)s, says "I'll set this up before year-end," and then doesn't. Six months of billable client work later, December 31st passes, and one of the two options quietly closes for the year. The frustrating part is that the decision itself takes maybe twenty minutes once you actually sit down with the numbers — it's the procrastination, not the complexity, that costs women-owned service businesses real money.
Both accounts let a self-employed woman shelter income from taxes while building retirement savings, and both are available to anyone running a business with no full-time employees other than a spouse. Where they differ is in how much you can contribute at a given income level, when you're allowed to open the account, and how much paperwork you're signing up for. Get the choice wrong for your specific income pattern and you either leave contribution room on the table or take on more administrative overhead than your business actually needs.
SEP IRA: the one you can still open in March
A SEP IRA — Simplified Employee Pension — is entirely employer-funded, meaning the contribution comes from the business, not from a paycheck deduction. The maximum contribution sits at roughly 25% of net self-employment income, capped at a combined limit around $70,000 (the IRS adjusts this figure most years, so confirm the current number with your accountant before filing). The real advantage isn't the ceiling — it's the deadline. You can open a SEP IRA and fund it for the previous tax year right up until your filing deadline, including extensions, which for a business filing as a sole proprietor typically stretches to October 15th.
That flexibility makes the SEP IRA the forgiving option for anyone who didn't plan ahead. If a client pays a large invoice in November and your accountant tells you in March that you owe more than expected, you can still open a SEP IRA, fund it, and reduce that tax bill retroactively for the year that already ended. Setup is minimal — most brokerages, including Fidelity, Schwab, and Vanguard, let you open one online with no account fees, and there's no annual filing requirement with the IRS as long as your balance stays under $250,000.
Where SEP IRA falls short
The catch shows up at modest income levels. Because the entire contribution is calculated as a percentage of net self-employment income, a business owner earning $50,000 in profit can only shelter around $9,300 — 25% of net earnings after adjusting for self-employment tax, which works out closer to 18.6% of the raw profit figure once the IRS math is applied. For a business in growth mode, still reinvesting in contractors and software rather than pulling large profit, that's a modest contribution ceiling compared to what a Solo 401(k) allows at the same income.
Solo 401(k): more paperwork, more room at lower income
A Solo 401(k) — also called an individual 401(k) or one-participant 401(k) — lets you contribute in two capacities at once: as the "employee," deferring up to the standard annual elective deferral limit (around $23,500, plus a $7,500 catch-up if you're 50 or older, or an enhanced catch-up for those 60 to 63 under the SECURE 2.0 rules), and separately as the "employer," contributing up to 25% of net self-employment income on top of that. Combined, the two paths hit the same roughly $70,000 ceiling as a SEP IRA — but you get there with far less income.
Take that same $50,000-profit business owner from the SEP IRA example. Under a Solo 401(k), she can defer close to the full employee limit as a direct contribution, plus a smaller employer contribution on top, sheltering roughly double what the SEP IRA allowed at identical income. This is the single biggest reason Solo 401(k)s have become the default recommendation for women running consulting, coaching, design, and other service businesses where profit margins are healthy but total revenue is still climbing toward six figures.
The deadline that trips people up
Here's the part that makes procrastination expensive with this account specifically: a Solo 401(k) must be legally established — meaning opened, with the plan documents signed — by December 31st of the tax year you want it to apply to. You can still make certain contributions after that date, sometimes up to the filing deadline, but the account itself has to exist before the calendar year ends. Miss that window and you're locked out of a Solo 401(k) for that tax year entirely, with the SEP IRA becoming your only remaining option even though it would have sheltered less of your income.
Solo 401(k)s also come with more moving parts. Most brokerages still offer them fee-free, but once your account balance crosses $250,000, you're required to file IRS Form 5500-EZ annually — a short form, but one more compliance date to track. Some business owners find that tradeoff completely worth it for the higher contribution room; others, particularly those who already outsource bookkeeping and don't want another form on the calendar, decide the SEP IRA's simplicity is worth the lower ceiling.
What if you hire someone next year?
Both accounts assume you're currently a business of one, but the rules diverge sharply the moment you add staff. A SEP IRA requires you to contribute the same percentage of compensation for any eligible employee that you contribute for yourself — hire a part-time assistant at $30,000 and decide to max out your own SEP at 25%, and you're now on the hook for 25% of that assistant's salary too, roughly $7,500 you may not have budgeted for. A Solo 401(k), by contrast, is legally required to close entirely once you have a non-spouse employee working more than 1,000 hours a year; at that point you'd need to convert to a standard 401(k) plan with its own testing and compliance requirements, which typically means bringing in a third-party administrator.
This matters more than it sounds like it should for a decision framed around "just you." Plenty of women running service businesses hire their first contractor or part-time employee within two or three years of opening a retirement account, and switching account types mid-stream isn't difficult, but it does mean paperwork and, in the Solo 401(k) case, potentially rolling funds into a new plan structure. If hiring is realistically on your three-year roadmap, that's worth factoring into which account you open first rather than treating the decision as permanent.
Which one actually fits your business
If your net self-employment income is under roughly $100,000 and you want to shelter as much of it as possible, open a Solo 401(k) before December 31st — the contribution room advantage at that income level is too large to leave on the table for the sake of avoiding one extra tax form. If you're past that income threshold, where the employer contribution alone gets you close to the combined cap either way, or if you already know you tend to make retirement decisions in March rather than December, the SEP IRA's late-filing flexibility is the better trade.
- Solo 401(k) providers worth comparing: Fidelity (no account fees, strong fund selection), Charles Schwab (no fees, slightly more manual paperwork for loans), and E*TRADE (allows Roth Solo 401(k) contributions, which Fidelity's version doesn't support directly)
- SEP IRA works well if your income is unpredictable month to month — freelance writers and consultants with lumpy client payments often prefer knowing they can decide the contribution amount after seeing the full year's numbers
- Neither account requires you to contribute the maximum every year; both let you adjust contributions based on how the business actually performed, which matters more than most first-time business owners expect
Whatever you choose, the actual task is small — an online application, a beneficiary designation, and a transfer once the account exists. The expensive mistake isn't picking the "wrong" account between these two reasonable options. It's letting December 31st pass again with neither one open, and paying full tax on income that could have quietly become retirement savings instead.