A solo 401(k) is a retirement plan for self-employed individuals and some small business owners.
It gives you the chance to contribute more towards retirement savings and comes with some tax advantages.
Using information from the IRS, this guide covers what you should know about a solo 401(k).
What is a Solo 401(k)?
A solo 401(k) is a retirement savings plan designed for small business owners without employees or people who work for themselves.
It offers higher contribution limits than traditional retirement accounts, allowing you to set aside more of your earnings for retirement savings.
How does a self-employed 401(k) work?
A solo 401(k) is a tax-advantaged account that treats you as both an employer and an employee. In doing so, it allows business owners to save more for retirement – including sole proprietors.
Solo 401(k)s offer more flexibility than you might otherwise find with an employer-sponsored retirement savings plan. With solo 401(k)s you can invest in stocks and bonds, as well as real estate or precious metals.
Investors who operate small businesses or work for themselves can use solo 401(k)s to retain more of their earnings.
To be able to contribute to a solo 401(k), you need to earn an income from self-employment and the business can’t offer a different retirement savings plan.
If you run a business or freelance alongside your full-time job, you’re still eligible to participate in a solo 401(k) plan.
Investors who want to diversify in precious metals like gold, silver, platinum, and palladium can do so with a solo 401(k).
The account needs to be managed by a custodian and follow IRS purity standards regulations. Precious metals must be stored at a secure depository.
Bullion you can invest in through a solo 401(k) includes:
Solo 401(k)s meet strict IRS compliance standards. Investors who want to open an account will need to find an IRS-compliant provider and include only IRS-approved assets in the account.
Beginning at age 73, you will need to begin taking required minimum distributions from your solo 401(k) plan. RMDs are based on your account size and life expectancy as determined by the IRS.
Solo 401(k) Contribution Limits
Solo 401(k)s have higher contribution limits than other retirement savings plans, making them a useful way to retain more of your income.
Self-employed wage earners can contribute up to 100% of their income up to the contribution limit.
2025 Contribution Limits
| Contribution | Under age 50 | Age 50 or higher |
|---|---|---|
| Employee Contribution | $23,500 | $31,000 ($42,250 for some individuals ages 60-63 based on income) |
| Employer Contribution | Up to 25% of net self-employment income up to $46,500 | Up to 25% of net self-employment income up to $46,500 |
| Combined Contribution | $70,000 | $77,500 |
Eligibility Requirements
To qualify for a solo 401(k) you must earn income from self-employment. This includes being an owner of a business without employees, a sole proprietor, a freelancer, or an independent contractor.
Other than you and your spouse, your business can’t have any full-time employees. Solo 401(k)s are available for a variety of business types including sole proprietorships, partnerships, LLCs, and corporations.
In order to make a contribution, your business has to generate revenue. Contributions are based on net income after expenses and deductions.
Benefits & Drawbacks
While solo 401(k)s are a good option for individuals earning their own income, there are some things to be mindful of when setting up an account.
Benefits
- Higher contribution limits. A solo 401(k) allows you to contribute as an employee and employer. That allows you to set aside up to 100% of your income, up to the contribution limit.
- Flexibility. Solo 401(k)s allow you to invest in traditional assets like stocks, bonds, and mutual funds, as well as alternative assets like real estate and precious metals.
- Tax advantages. Aside from saving more of your income, solo 401(k)s are tax-advantaged accounts. You can set aside funds with pre-tax income and you also have the option to open a Roth solo 401(k) which allows you to make tax-free withdrawals in retirement.
- Loan option. You can take a loan out of your savings up to $50,000 or 50% of your account’s balance.
Drawbacks
- Extra paperwork. Accounts that are greater than $250,000 in value will have to fill out Form 5500 and file it with the IRS.
- Limited to businesses without employees. You cannot contribute if you have employees and it’s not an option for employees of small businesses.
Solo 401(k) vs. SEP IRA
A SEP IRA is similar to a solo 401(k) in that it allows self-employed individuals to save for retirement, but it comes with different options for business owners.
| Criteria | Solo 401(k) | SEP IRA |
|---|---|---|
| Eligibility | Self-employed individuals and small business owners without employees | Self-employed individuals, small business owners, and businesses with employees |
| Contribution Limits | $23,500 for employees and up to 25% of net earnings for a combined limit of $70,000 ($7,750 with catch up) | 25% of employee compensation up to $70,000 |
| Contribution Options | Pre-tax and after-tax Roth | All contributions are pre-tax, there is no Roth option |
| Loans | Up to $50,000 or 50% of account balance | No loans permitted |
Solo 401(k) vs. Traditional 401(k)
Most investors are used to a traditional 401(k) offered by an employer. While this is the most common retirement savings plan, it is distinct from a solo 401(k).
| Criteria | Solo 401(k) | Traditional 401(k) |
|---|---|---|
| Eligibility | Self-employed individuals and small business owners without employees | Employees of companies with option for employer contribution |
| Contribution Limits | $23,500 for employees and up to 25% of net earnings for a combined limit of $70,000 ($7,750 with catch up) | $23,500 for employees with combined limit of $70,000; employer contribution varies by company |
| Contribution Options | Pre-tax and after-tax Roth | Pre-tax contributions as employee salary deferral |
| Loans | Up to $50,000 or 50% of account balance | Up to $50,000 or 50% of vested balance |
How to Set Up a Solo 401(k)
To set up a solo 401(k) follow these easy steps:
- Determine whether you want to set up a traditional or Roth solo 410(k)
- Choose a provider
- Open an account
- Complete new account documentation, including verifying your identity
- Open a separate bank account for your solo 401(k) funds
- Begin making contributions
- Allocate your contributions into assets
- Develop a system to keep track of your investments.
Is having a Solo 401(k) a good idea?
A solo 401(k) is a good option for individuals earning self-employed income.
These plans have higher contribution limits and greater flexibility allowing you to save more of your income.
There are some additional responsibilities with maintaining a solo 401(k) and depending on your situation, you may need to work with an accountant to ensure you maintain compliance.
If you’re thinking of ways to optimize your savings and meet the eligibility requirements, learn more about how to incorporate a solo 401(k) into your investment strategy.
FAQs
Is a solo 401(k) tax deductible?
Yes, contributions made as the employer can be considered a business expense while sole-proprietors can deduct contributions from their personal income.
Can a sole proprietor have a solo 401(k)?
Yes, a sole proprietor can have a solo 401(k) as long as they meet the eligibility requirements.
Who offers solo 401(k) plans?
Financial firms that offer solo 401(k) plans include Vanguard, Fidelity, and Charles Schwab. SDIRA custodians like Equity Trust also offer solo 401(k) plans.
Can I have a solo 401(k) and a regular 401(k)?
Yes, but contribution limits apply across both accounts.
