Solo 401(k)

A Solo 401(k), also called an individual 401(k), is a retirement plan designed for self-employed individuals with no full-time employees other than a spouse. It allows both employee salary deferrals (up to $23,500 for 2025) and employer profit-sharing contributions (up to 25% of compensation), potentially enabling total contributions of up to $70,000 or more with catch-up contributions.

The Solo 401(k) is a retirement plan available to self-employed individuals, sole proprietors, and small business owners who have no full-time employees other than themselves and potentially a spouse. It combines the features of a traditional employer 401(k) plan with the flexibility needed by solo business owners.

The Solo 401(k) allows two types of contributions. The employee deferral component allows you to contribute up to $23,500 for 2025 (the same limit as a regular 401(k)). The employer profit-sharing component allows additional contributions of up to 25% of net self-employment income. The combined total for both components cannot exceed $70,000 for 2025 (or $77,500 with the standard catch-up contribution for those 50 and older). For individuals aged 60 to 63, the enhanced catch-up provision under SECURE 2.0 may allow even higher totals.

One significant advantage of the Solo 401(k) over the SEP IRA is the availability of a Roth option for the employee deferral portion. This allows you to make after-tax contributions that grow tax-free and can be withdrawn tax-free in retirement. The employer contribution portion is always pre-tax.

At lower income levels, the Solo 401(k) often allows higher total contributions than a SEP IRA because of the employee deferral component. For example, a self-employed individual earning $60,000 in net income could defer $23,500 as an employee contribution and add roughly $11,100 as an employer contribution, totaling approximately $34,600. With a SEP IRA, the same individual could contribute only about $11,100 (20% of net income after the SE tax deduction).

The Solo 401(k) also permits loans from the plan (up to $50,000 or 50% of the vested balance, whichever is less) and does not create pro-rata issues for backdoor Roth conversions, since 401(k) balances are not included in the IRA pro-rata calculation. However, once plan assets exceed $250,000, an annual Form 5500-EZ filing is required with the IRS.

If you hire full-time employees (other than a spouse), you generally cannot maintain a Solo 401(k) and would need to consider a standard 401(k) or other employer plan. Part-time employees who work fewer than 500 hours per year may be excluded under certain plan provisions, though this area requires careful attention to plan design and compliance.

Why This Matters

The Solo 401(k) may offer the highest retirement contribution potential of any plan available to self-employed individuals, particularly at lower to moderate income levels. Its combination of employee deferrals, employer contributions, Roth options, and loan provisions makes it a versatile tool for building retirement savings while managing your tax situation.

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