Solo 401k

Are you a small business owner trying to plan a retirement for yourself? A Self-Employed 401(k)—also called a solo-401(k) or an individual 401(k)—is a special savings option for small-business owners who don't have any employees (apart from a spouse). That makes these accounts a very good fit for sole proprietors and independent consultants who are looking for a retirement plan similar to one they might get from working at a larger company.

In many ways, the Self-Employed 401(k) works the same way as a standard 401(k). Participants make contributions from their pre-tax earnings, and those savings can be invested in a range of vehicles to grow tax-deferred until withdrawn in retirement.

However, the self-employed 401(k) does come with one crucial difference. Because participants are acting as both employer and employee, they can set aside more money each year than they could under a traditional 401(k), IRA, or other small business retirement account. Those high contribution limits, plus relatively easy plan administration, make the Self-Employed 401(k) an appealing option for business owners who meet the plan's requirements and want a significantly higher savings potential.

Everything About a Solo 401(k)

What is a Solo 401(k)?

A Solo 401(k) is essentially a traditional 401(k) plan adapted for a business with a single participant (or a married couple who are both owners). It functions similarly to an employer-sponsored 401(k) but allows the business owner to act as both the employee and the employer. This dual role unlocks substantial contribution potential and offers unique benefits.

Who is Eligible for a Solo 401(k)?

The primary eligibility requirement for a Solo 401(k) is that you must be self-employed or a business owner with no full-time employees other than yourself or your spouse. This means:

• Sole Proprietors: If you operate under your Social Security Number (SSN) and file Schedule C.

• LLCs (Single-Member or Multi-Member where all members are owners/spouses): If your LLC is taxed as a sole proprietorship, partnership, or corporation.

• Partnerships: If all partners are owners and no other employees exist.

• S-Corporations and C-Corporations (Owner-Only): If you are the sole employee or your only other employee is your spouse.

• Independent Contractors and Freelancers: As long as you generate self-employment income.

Important Note on Employees:

• 1099 contractors do not count as employees and will not affect your eligibility.

• Part-time employees can generally be excluded if they work less than 1,000 hours per year, or less than 500 hours per year in two consecutive years. Exceeding these thresholds makes them eligible employees for a retirement plan, which would disqualify you from a Solo 401(k).

Key Features and Benefits of a Solo 401(k)

1. High Contribution Limits: This is the most significant advantage. A Solo 401(k) allows you to contribute in two capacities:

   • As an Employee (Elective Deferral): For 2025, you can contribute up to $23,500 of your self-employment income (or 100% of your compensation, whichever is less).

   • As an Employer (Profit-Sharing Contribution): You can contribute up to 25% of your "net self-employment earnings" (for sole proprietorships/single-member LLCs, this is typically 20% of your net Schedule C income after deducting half of self-employment taxes) or 25% of W-2 wages if your business is incorporated.

   • Combined Limit (2025): The total combined contribution (employee + employer) cannot exceed $70,000 for those under age 50.

   • Catch-Up Contributions (2025): If you are age 50 or older, you can contribute an additional $7,500 as an employee catch-up contribution, bringing your total employee contribution to $31,000. For those aged 60-63, there's an enhanced catch-up of $11,250, increasing the total employee contribution to $34,750. This means the overall combined limit for individuals 50 and over can reach $77,500 (or $81,250 for ages 60-63).

   • Spousal Contribution: If your spouse earns income from the business, they can also participate and make contributions up to the same limits, potentially doubling the total amount saved by the household.

2. Tax Advantages:

   • Traditional Solo 401(k): Contributions are typically pre-tax, meaning they reduce your taxable income in the year they are made. Earnings grow tax-deferred until withdrawal in retirement.

   • Roth Solo 401(k): Many providers offer a Roth option. Contributions are made with after-tax dollars, but qualified withdrawals in retirement are entirely tax-free. There are no income limitations for contributing to a Roth Solo 401(k), unlike Roth IRAs.

   • Tax-Deferred Growth: Investments within the plan grow without being subject to annual taxes.

3. Loan Provision: Unlike SEP IRAs, a Solo 401(k) often allows you to borrow from your plan balance. You can typically borrow up to the lesser of $50,000 or 50% of your account balance. This can be a valuable source of liquidity in a pinch.

4. Flexible Investment Options: Most Solo 401(k) plans offered by major brokerages provide a wide range of investment choices, including stocks, bonds, mutual funds, exchange-traded funds (ETFs), and sometimes even alternative investments like real estate (though this might require a specialized provider and higher fees).

5. Rollover Options: You can roll over funds from other qualified retirement plans (like previous employer 401(k)s, 403(b)s, or Traditional IRAs) into your Solo 401(k), consolidating your retirement assets.

6. Potential for "Mega Backdoor Roth": Some Solo 401(k) plans allow for after-tax contributions beyond the standard employee deferral and employer profit-sharing. These after-tax contributions can then be converted to a Roth Solo 401(k) or Roth IRA, offering a way to get more money into a tax-free Roth account, regardless of income. This strategy is complex and requires a plan that specifically allows for after-tax contributions and in-plan Roth rollovers/conversions.

Disadvantages and Considerations

1. Administrative Responsibilities: While simpler than a full-fledged employer 401(k), a Solo 401(k) still requires some administrative upkeep.

   • Form 5500-EZ: If your Solo 401(k) plan assets reach or exceed $250,000 by the end of the year, you are required to file IRS Form 5500-EZ annually. This form reports information about your retirement plan.

   • Plan Document Maintenance: You'll need to maintain plan documents and ensure your plan remains compliant with IRS regulations. Most providers handle much of this, but it's important to understand your responsibilities.

   • "Recurring and Substantial" Contributions: The IRS generally requires contributions to be "recurring and substantial" for the plan to remain active.

2. No Full-Time Employees: As mentioned, if you plan to hire full-time employees (other than your spouse), a Solo 401(k) will no longer be suitable. You would then need to consider a different type of retirement plan, such as a SEP IRA or a traditional 401(k) for small businesses.

3. Complexity vs. SEP IRA: While more flexible, a Solo 401(k) is generally more complex to set up and administer than a SEP IRA. A SEP IRA has minimal paperwork and no annual filing requirements, regardless of asset size.

4. Fees: While many major brokerages offer Solo 401(k)s with low or no setup/maintenance fees, some specialized providers, especially those offering self-directed options with alternative investments, may have higher fees.

Solo 401(k) vs. SEP IRA

It's common for self-employed individuals to weigh these two options. Here's a quick comparison:

FeatureSolo 401(k)SEP IRAEligibilitySelf-employed or business owner with no employees (except spouse).Any business (sole prop, partnership, corp) with or without employees. If employees, contributions must be made for all eligible employees at the same rate as the owner.Contribution TypesEmployee: Up to $23,500 (2025), plus catch-up. Employer: Up to 25% of eligible compensation.Employer Only: Up to 25% of eligible compensation (or 20% of net self-employment income for sole props/single-member LLCs).Contribution LimitsHigher total limits due to dual employee/employer contributions ($70,000 under 50, $77,500/$81,250 50+ in 2025).Up to $70,000 (2025) but often lower in practice for sole proprietors due to calculation method (limited to 20% of net self-employment income).Catch-Up ContributionsYes, for ages 50+.No.Roth OptionYes, many providers offer a Roth Solo 401(k).No, only traditional (pre-tax) contributions.Loan ProvisionYes, generally allowed (up to $50,000 or 50% of balance).No.Administrative BurdenMore extensive (requires plan document, Form 5500-EZ if assets >= $250k).Minimal (simpler setup, no annual IRS filing requirements).Ideal ForSelf-employed individuals who want to maximize contributions, desire Roth option, and/or need loan access, and have no employees.Self-employed individuals who prioritize simplicity, or businesses that might hire employees in the future and want a straightforward plan for all (though this can get expensive if maximizing owner contributions and then matching for all employees). Easier to set up and administer than a Solo 401(k).

How to Start a Solo 401(k) (Step-by-Step Guide)

Starting a Solo 401(k) involves several key steps. While the specific paperwork might vary slightly by provider, the general process is as follows:

Step 1: Confirm Your Eligibility

• Before anything else, ensure you meet the primary Solo 401(k) eligibility criteria: you are self-employed or a business owner with no full-time employees other than yourself or your spouse.

• Determine your business structure (sole proprietorship, LLC, S-Corp, C-Corp) as this will impact contribution calculations and potentially the type of plan documents needed.

Step 2: Choose Your Solo 401(k) Plan Type (Traditional or Roth)

• Traditional Solo 401(k): Contributions are pre-tax, reducing your current taxable income. Withdrawals in retirement are taxed as ordinary income.

• Roth Solo 401(k): Contributions are made with after-tax dollars. Qualified withdrawals in retirement are tax-free.

• Consider your current and future tax situation. If you expect to be in a higher tax bracket in retirement, a Roth Solo 401(k) might be more advantageous. Many providers allow you to contribute to both a traditional and a Roth component within the same Solo 401(k) plan.

Step 3: Obtain an Employer Identification Number (EIN)

• Even if you are a sole proprietor operating under your SSN, you will generally need an EIN to establish a Solo 401(k) plan, as the IRS views you as both the employer and employee.

• You can apply for an EIN for free on the IRS website. It's a quick online process.

Step 4: Select a Solo 401(k) Provider

• This is a crucial step. Research different providers and compare their:

  • Fees: Look for setup fees, annual maintenance fees, and trading commissions. Many popular brokerages offer no-fee Solo 401(k)s.

  • Investment Options: What types of investments do they offer (stocks, ETFs, mutual funds, bonds, alternative investments)? Do they have a wide selection that aligns with your investment strategy?

  • Customer Service: How easy is it to get support if you have questions?

  • Roth Option: If you want a Roth Solo 401(k), ensure the provider offers it.

  • Loan Provision: If you anticipate potentially needing a loan from your 401(k), confirm this feature is available.

  • Plan Documentation Support: Reputable providers will offer robust support in completing the necessary plan documents.

  Popular Solo 401(k) Providers often include:

  • Fidelity

  • Charles Schwab

  • E*TRADE

  • Vanguard

  • Merrill Edge

  • Specialized providers like My Solo 401k or Rocket Dollar (often for alternative investments or checkbook control).

Step 5: Complete the Plan Documents

• Once you've chosen a provider, they will guide you through the paperwork. This typically includes:

  • Account Application: Basic personal and business information.

  • Plan Adoption Agreement: This document outlines the specific rules and provisions of your Solo 401(k) plan (e.g., contribution types, vesting schedules, loan provisions, etc.). You will "adopt" this pre-approved plan.

  • Beneficiary Designation Forms: To designate who inherits your account in case of your passing.

  • Investment Account Application: To set up the brokerage account where your 401(k) assets will be held and invested.

Step 6: Fund Your Solo 401(k) Account

• Decide how much you want to contribute as both an employee and an employer, keeping the annual IRS limits in mind.

• Employee Contributions: These are often set up as salary deferrals from your business income. You can make these contributions throughout the year.

• Employer Contributions (Profit Sharing): These are typically made after determining your business's net profit for the year. You have until your tax filing deadline (including extensions) to make employer contributions for the previous tax year.

• Transfer funds from your business or personal bank account to your Solo 401(k) investment account. Ensure you correctly designate whether contributions are employee deferrals (traditional or Roth) or employer profit-sharing.

Step 7: Select Your Investments

• Once your account is funded, you can begin investing your contributions. Your chosen provider will offer various investment options.

• Diversify your investments based on your risk tolerance, financial goals, and time horizon until retirement.

Step 8: Maintain Your Solo 401(k) (Ongoing Responsibilities)

• Track Contributions: Keep accurate records of all employee and employer contributions made each year to ensure you stay within IRS limits.

• Monitor Investment Performance: Regularly review your investments and rebalance your portfolio as needed to stay aligned with your financial goals.

• File Form 5500-EZ (if applicable): If your plan assets exceed $250,000 at the end of the calendar year, you must file IRS Form 5500-EZ by July 31st of the following year. Your provider may offer assistance with this.

• Stay Updated on IRS Regulations: Retirement plan rules can change, so it's good practice to stay informed or consult with a tax professional.

By carefully following these steps, you can successfully establish and manage a Solo 401(k), taking advantage of its significant benefits to accelerate your retirement savings as a self-employed individual. Consulting with a financial advisor or tax professional is highly recommended to ensure you optimize your contributions and comply with all regulations specific to your situation.