Solo 401(k): How Self-Employed Individuals Maximize Retirement Savings

Employee Contributions: The Salary Deferral

The employee contribution is the amount you defer from your self-employment income into the Solo 401(k). In 2024, the employee deferral limit is $23,000 ($30,000 if age 50 or older, including catch-up). You can choose to make these contributions as pre-tax (traditional) or Roth, or a combination of both. The ability to make Roth contributions to a Solo 401(k) is a major advantage over SEP IRAs, which do not offer a Roth option.

To calculate the employee deferral, you simply contribute up to $23,000 from your compensation. For self-employed individuals, compensation is defined as your net earnings from self-employment (net profit minus the deductible portion of self-employment tax). You can change the amount or percentage of your deferral at any time during the year, unlike with a SEP IRA where contributions must be set by the tax filing deadline. This flexibility makes the Solo 401(k) ideal for freelancers and gig workers whose income fluctuates throughout the year. You can even set up automatic contributions from your business bank account to your Solo 401(k) to make saving consistent.

Employer Contributions: The Profit Share

The employer contribution (also called the profit-sharing contribution) is a contribution you make to your Solo 401(k) as the employer. As a self-employed individual, you can contribute up to 25% of your net earnings from self-employment as the employer. The total of employee and employer contributions cannot exceed $69,000 ($76,500 with catch-up) in 2024.

Calculating the employer contribution for self-employed individuals requires a special formula because your compensation is reduced by the employer contribution itself. The effective rate is 20% of your net profit (after deducting half of self-employment tax). Example: You earn $150,000 in net self-employment profit. First, deduct half of self-employment tax (approximately $10,598), leaving net earnings of $139,402. The maximum employer contribution is 20% of $139,402 = $27,880 (or 25% if calculated with the special IRS formula). Combined with the employee deferral of $23,000, your total Solo 401(k) contribution is $50,880 — well below the $69,000 limit. If your net earnings were higher, you could contribute more. At $200,000 net profit, the combined limit is approximately $54,500 ($23K employee + $31.5K employer). To reach the full $69,000 limit in 2024, you need approximately $255,000 in net profit ($23K employee + $46K employer).

Roth Solo 401(k): Tax-Free Growth Option

One of the best features of a Solo 401(k) is the ability to designate contributions as Roth. Roth contributions are made with after-tax dollars, but all growth and qualified withdrawals are tax-free — including both employee and employer contributions. Not all Solo 401(k) providers offer the Roth option, so choose a provider who does if after-tax savings appeal to you.

The Roth Solo 401(k) works like a Roth IRA but with much higher contribution limits. In 2024, a self-employed person under 50 can contribute up to $69,000 in Roth money to a Solo 401(k) if their income supports it. However, the employee Roth deferral is limited to $23,000 ($30,000 with catch-up). The employer profit-sharing contribution can be designated as Roth only if the plan document allows it. Some providers treat employer contributions as pre-tax only. Check with your provider before setting up the plan. For self-employed individuals who expect to be in a higher tax bracket in retirement or who already have significant pre-tax savings, the Roth Solo 401(k) is an excellent way to build tax-free retirement savings. Our self-directed IRA and Solo 401(k) guide covers advanced investment options for these accounts.

Solo 401(k) Loan Provisions

Another advantage of the Solo 401(k) over a SEP IRA is the ability to take loans from the plan. If your Solo 401(k) plan document allows loans, you can borrow up to 50% of your vested account balance or $50,000 (whichever is less). The loan must be repaid with interest (usually prime rate + 1-2%) over a maximum term of 5 years (longer if used to purchase a primary residence).

Loans from a Solo 401(k) are appealing because you pay interest to yourself (back into your account), not to a bank. The loan does not count as taxable income, and there is no early withdrawal penalty. However, there are risks. If you fail to repay the loan, the outstanding balance is treated as a distribution and is subject to income tax plus a 10% early withdrawal penalty if under 59.5. If you leave self-employment (close your business), the loan must be repaid within a short period (typically 60-90 days) or it becomes a taxable distribution. The ability to take loans makes the Solo 401(k) more flexible than a SEP IRA for entrepreneurs who may need access to their retirement savings for business or personal needs. See our 401(k) rollover guide for rules on rolling other retirement accounts into a Solo 401(k).

Solo 401(k) vs SEP IRA: Which Is Better?

The SEP IRA and Solo 401(k) are the two most popular retirement plans for self-employed individuals. The SEP IRA is simpler to set up and administer, with no annual filing requirements until you have $250,000+ in plan assets. Contribution limits for a SEP IRA in 2024 are 25% of net earnings (effectively 20% for self-employed) up to $69,000 — the same as a Solo 401(k). However, the SEP IRA has several key disadvantages compared to the Solo 401(k).

The Solo 401(k) allows Roth contributions; the SEP IRA does not. The Solo 401(k) allows loans; the SEP IRA does not. The Solo 401(k) allows higher effective contribution limits for moderate earners because the employee deferral ($23,000) comes before the employer profit share calculation. Example: On $100,000 net profit, the SEP IRA allows approximately $18,587 in contributions (20%). The Solo 401(k) allows $23,000 (employee) + approximately $15,400 (employer 20% of $77K after deferral) = $38,400. That is more than double the SEP IRA limit. If your income is under $150,000, the Solo 401(k) is almost always better because of the employee deferral. If your income is very high ($250,000+), the SEP IRA and Solo 401(k) have similar limits. For business owners who want simplicity, the SEP IRA wins. For those who want maximum savings, Roth options, and loan access, the Solo 401(k) wins. Our SEP IRA and SIMPLE IRA guide provides a detailed comparison of all small business retirement plans.

How to Set Up a Solo 401(k)

Setting up a Solo 401(k) is straightforward but requires an IRS-approved plan document. You cannot use a standard 401(k) plan document from a large employer — you need a plan specifically designed for solo/small business use. Major providers include Vanguard, Fidelity, Schwab, E-Trade, and dedicated Solo 401(k) providers like Solo 401k, My Solo 401k Financial, and Nabers Group. Vanguard and Fidelity offer free Solo 401(k) plans with low-cost index fund options. Dedicated providers offer more flexibility (including checkbook control for real estate investments) but charge setup fees and annual fees.

To set up the plan, you need to adopt a written plan document (provided by your chosen provider), obtain an Employer Identification Number (EIN) from the IRS for the plan, and open a separate trust or custodial account for plan assets. You must also complete Form 5500-EZ annually if plan assets exceed $250,000 at the end of the plan year. This is a simple one-page form filed electronically with the IRS. Many self-employed individuals are intimidated by the paperwork, but most providers handle the plan document and most of the administrative work. The benefits of a Solo 401(k) — higher contribution limits, Roth options, loan provisions — far outweigh the minimal administrative burden for most self-employed people. Our self-directed Solo 401(k) guide covers advanced strategies including real estate investing in a Solo 401(k).

Who is eligible for a Solo 401(k)?

You are eligible for a Solo 401(k) if you are self-employed (sole proprietor, independent contractor, freelancer) or a business owner with no full-time employees other than a spouse. Part-time employees (working fewer than 1,000 hours per year) are allowed. If you hire full-time employees, you must either include them in the plan (defeating the purpose of a Solo 401(k)) or switch to a different plan like a SEP IRA or Simple IRA. A common strategy is to use a Solo 401(k) while you are the only employee, then switch to a SEP IRA or Simple IRA if you hire employees later.

Can I have both a Solo 401(k) and a SEP IRA?

You can have both, but contributions to a SEP IRA reduce your Solo 401(k) employer contribution limit because the SEP IRA contribution is considered an employer contribution. You cannot exceed the $69,000 combined limit across both plans. Most financial advisors recommend picking one plan and maximizing it rather than maintaining both. The Solo 401(k) is generally the better choice because of the higher effective limit for moderate earners and the Roth option. If you already have a SEP IRA, you can roll it into your Solo 401(k) to simplify administration and consolidate assets. Check with your Solo 401(k) provider to confirm they accept rollovers from SEP IRAs.

When is the deadline for Solo 401(k) contributions?

Employee deferral contributions must be made by the end of the plan year (December 31 for calendar-year plans). Employer profit-sharing contributions can be made up to the tax filing deadline, including extensions — typically April 15 (or October 15 with an extension). This flexibility allows you to maximize the employer contribution after you know your exact net earnings for the year. For 2024, you have until April 15, 2025 (or October 15, 2025, with an extension) to make 2024 employer contributions. If you set up the plan late in the year, you can still establish a Solo 401(k) by December 31 and make deferral contributions up to December 31, then make employer contributions later. Some providers allow you to set up a plan after December 31 if you file your taxes with an extension, but setting up by December 31 is safer.

Do I need to file Form 5500-EZ for my Solo 401(k)?

Yes, if your Solo 401(k) plan assets exceed $250,000 at the end of any plan year, you must file Form 5500-EZ with the IRS by July 31 of the following year (or October 15 with an extension). This is a short, one-page form that asks for basic plan information and asset values. The penalty for not filing Form 5500-EZ is $250 per day, up to $150,000. However, the IRS has a penalty relief program for first-time late filers. Most providers offer guidance on Form 5500-EZ filing. If your plan assets are under $250,000, no filing is required for that year. Track your plan balance carefully near the $250,000 threshold. Once you cross it, you must file every year going forward, even if assets drop back below $250,000.

Related Resources