If you have a W2 job and do some contracting on the side, you have access to retirement savings options that most people don't even know exist. Your side income as a self-employed individual lets you open your own retirement plan - on top of whatever your employer offers. (If you need a refresher on the basics of 401k contribution types, start with the pre-tax vs Roth vs after-tax guide.)

The tricky part is understanding how these plans interact. Some limits are shared across employers, others aren't, and picking the wrong account type can actually mess up other strategies you're using (like the backdoor Roth). This guide breaks down your options, explains the gotchas, and helps you pick the right approach.

Your Options at a Glance

When you have self-employment income, four retirement account types come into play. Here's how they stack up:

If you're already doing a backdoor Roth or plan to, the “Blocks backdoor Roth?” row is the one to pay attention to. More on that below.

Solo 401(k) - The Best Option for Most People

A solo 401(k) (also called an individual 401(k) or one-participant 401(k)) is a full-blown 401(k) plan that you set up for yourself as a self-employed individual. It works the same way your employer's plan does, with both an employee and employer side, but you wear both hats.

How contributions work

You can contribute on two sides:

• Employee (elective deferral): Up to $24,500.00 in 2026 - but this limit is shared across all your 401(k) plans. If you already defer $24,500.00 at your W2 job, you get $0.00 in elective deferrals here. That's fine though, because the real power is on the employer side.
• Employer (profit-sharing): Up to 25% of your net self-employment earnings. Due to how the IRS math works out for sole proprietors (the contribution itself is deductible, creating a circular calculation), the effective rate is about 20% of your net Schedule C profit.
  Source: IRS - Calculating Your Own Retirement Plan Contribution, IRS Publication 560

The key insight: 415(c) is per employer

This is the part most people miss. The $72,000.00 total additions limit (Section 415(c)) applies per employer, not per person. Your W2 employer and your self-employment are separate employers (as long as they're not part of a controlled group), so each gets its own $72,000.00 bucket.

Meanwhile, the $24,500.00 elective deferral limit (Section 402(g)) is per person across all plans. You can't double-dip on elective deferrals.

Mega backdoor Roth through your solo 401(k)

If your solo 401(k) plan document allows after-tax contributions and in-plan Roth conversions, you can do a mega backdoor Roth with your side income too. The math works like this:

That's $50,000.00 you can contribute after-tax and convert to Roth - completely separate from whatever you're doing at your W2 employer's plan.

The catch: this is conditional, not standard. Your solo 401(k) plan document has to explicitly allow voluntary after-tax contributions and provide a path to Roth conversion or rollover. Many mainstream prototype solo 401(k) plans from major brokerages still don't support the full feature set cleanly. If you want this capability, you'll likely need a provider that offers custom plan documents (like MySolo401k.net or Nabers Group). The strategy is real, but expect some implementation friction.

The self-employment contribution formula

The employer contribution calculation for a sole proprietor is a bit circular, so here's the actual math:

1. Start with your net Schedule C profit
2. Subtract half of your self-employment tax (roughly 7.65% of net profit)
3. Multiply by 20% - that's your maximum employer contribution

For example, if your side income nets $60,000 after business expenses: after subtracting half of SE tax (~$4,590), your adjusted earnings are about $55,410. Your max employer contribution is ~$11,082 (20% of that).

The IRS has a detailed worksheet for this calculation in Publication 560.

SEP IRA - Simpler, but With a Major Catch

A SEP (Simplified Employee Pension) IRA is the easier alternative. There's no plan document to maintain, setup takes minutes at any brokerage, and the contribution limits are identical to the employer side of a solo 401(k): 25% of compensation, effective 20% for sole proprietors, up to $72,000.00.

So why not just use a SEP? One big reason:

There is a workaround: you can roll the SEP IRA balance into your W2 employer's 401(k) (if it accepts incoming rollovers) or into a solo 401(k) before December 31. That zeros out your IRA balance and makes the backdoor Roth clean again. But it's an extra step you have to remember every year.

When a SEP IRA makes sense

• You don't do (or plan to do) backdoor Roth conversions - maybe your income is below the Roth IRA limit, or you just don't want to deal with it
• You can roll the SEP balance into a 401(k) before year-end every year
• You want the simplest possible setup with no plan administration

When a SEP IRA is the wrong choice

• You're doing backdoor Roth and can't roll the balance into a 401(k)
• You want mega backdoor Roth (SEP doesn't support after-tax contributions)
• You want a Roth option for your contributions (SEP is pre-tax only)

Source: IRS - SEP Contribution Limits, Fidelity - SEP IRA Contribution Limits

SIMPLE IRA - Probably Not What You Want

SIMPLE IRAs are designed for small businesses with employees. If you're a solo contractor, there's almost no reason to pick a SIMPLE over a solo 401(k):

• Lower employee deferral limit ($17,000.00 vs $24,500.00)
• No after-tax contributions, so no mega backdoor Roth
• It's an IRA, so the same pro-rata problem applies
• The deferral limit is shared with your W2 401(k) contributions, so if you're already maxing out at work, you can't defer here either

Unless you have a specific reason (like an existing small business with employees), skip this one.

Source: IRS - SIMPLE IRA Contribution Limits

The Backdoor Roth - Don't Forget the Extra $7.5K

Separate from all of the above, if your income is too high for direct Roth IRA contributions (above $168,000 MAGI for single filers in 2026), you can still get $7,500.00 into a Roth IRA each year through the backdoor Roth:

1. Contribute $7,500.00 to a traditional IRA (non-deductible)
2. Convert the entire balance to Roth IRA
3. Report on Form 8606

The key requirement: you need $0 in traditional, SEP, and SIMPLE IRA balances on December 31 of the year you convert. Otherwise the pro-rata rule makes the conversion partially taxable.

This is a major reason the solo 401(k) is preferred over the SEP IRA for people who do this. A solo 401(k) is not an IRA, so it doesn't count toward the pro-rata calculation. You get your employer contributions sheltered and a clean backdoor Roth.

Source: IRS - IRA Contribution Limits, Schwab - Backdoor Roth: Is It Right for You?

Putting It Together - Which Strategy Fits You Best?

You want maximum Roth savings

Set up a solo 401(k) with a plan that supports after-tax contributions and in-plan Roth conversions. Here's what your year looks like:

1. Max W2 401(k) elective deferrals ($24,500.00)
2. Mega backdoor Roth at W2 employer (if their plan supports it)
3. Employer profit-sharing to solo 401(k) (20% of net SE income)
4. Fill remaining solo 401(k) 415(c) space with after-tax, convert to Roth
5. Backdoor Roth IRA ($7,500.00)

Total potential tax-advantaged space: up to $72,000.00 at your W2 employer + up to $72,000.00 at your solo 401(k) + $7,500.00 backdoor Roth IRA. Obviously limited by your actual compensation, but the ceiling is enormous.

You want simplicity and don't care about Roth conversions

A SEP IRA gets you the same employer contribution room with way less paperwork. Just know it blocks the backdoor Roth unless you roll it out before year-end.

Your side income is small ($5-15K)

The employer contribution space is modest (20% of $10K = $2,000), but a solo 401(k) is still worth it if you want to preserve backdoor Roth eligibility. The SEP IRA gives you the same contribution room but creates the pro-rata problem. At small amounts, the solo 401(k)'s slightly more setup is worth avoiding that headache.

Important Caveats

• This is not tax advice. I built this tool to help model these strategies, but your situation has nuances that a calculator can't capture. Talk to a CPA or tax advisor, especially before setting up a solo 401(k) with after-tax contributions.
• Deadlines matter. For tax years 2023 and later, sole proprietors with no employees can adopt a solo 401(k) plan up until their tax filing deadline (without extensions), per IRS Publication 560. Elective deferrals for that first year must also meet that deadline. SEP IRAs have the same filing-deadline setup rule. Contributions for either can be made until your filing deadline.
• Controlled group and aggregation rules. If you own/control both your W2 employer and your side business, the 415(c) limits may not be separate. This mainly affects people who own the company they W2 at. There are also special aggregation quirks with 403(b) plans that can affect the calculation.
• Form 5500-EZ. Solo 401(k) plans with assets over $250,000 require annual filing with the IRS. SEP IRAs have no such requirement.

Model Your Side Income Strategy

The numbers above are general guidelines. Your actual contribution room depends on your W2 salary, side income, pay frequency, employer match formula, and how you split elective deferrals. Run the Numbers models all of this - add your W2 job and a 1099 contract, and see exactly how your 401(k) limits, taxes, and take-home pay shake out.