The simple answer to this question is that SEP IRAs are retirement accounts opened by freelancers while 401(k)s are retirement accounts administered by larger companies for their employees. Both accounts allow for people to sock away large amounts of pre-tax income — as of 2018, both SEPs and 401(k)s permit individuals to deposit 25% of their income, or $55,000, whichever number is smaller, per year.
401(k)s have one big advantage over SEPs, in that employers often contribute annually to employees’ 401(k)s — freelancers don’t have that kind of free money spigot available to them. But SEPs have it all over 401(k)s in that it’s up to you — and not your employer or account administrator — to invest your SEPs money as you see fit.
Now here’s the fine print. Small business owners with one or more employees can also open SEPs as a vehicle to invest in their employees’ retirements. And 401(k)s are not necessarily out of reach to those who work for themselves. Sole proprietorships (businesses run and owned by one person with no employees) can open what’s called an individual 401(k), alternately known as a Solo-ks, or uni-Ks. Individual 401(k)s are not as easy to open as SEPs, but they have one clear advantage for those who work for themselves and are able to set aside a large percentage of their income for retirement: whereas SEPs allow account holders to contribute 20% of their income, Individual 401(k)s allow both employer and employee — in this case one person — to contribute to the account, so a hypothetical sole-proprietor making $100,000 would be able to put away nearly $50,000 into a solo-k versus the SEP holder’s $25,000 limit.