- A solo 401(k) is a retirement plan for business owners with no employees.
- The plan comes with much higher contribution limits than an employer-sponsored 401(k).
- You're still eligible to open a solo 401(k) even if you have income from other jobs.
Self-employment comes with many challenges, including missing out on the convenience of being automatically enrolled in retirement plans like employer-sponsored 401(k)s or pensions. These retirement plans provide powerful growth-earning opportunities, tax advantages, and the convenience of automatic payroll deductions.
Fortunately, business owners have several good alternatives to grow their savings, including a solo 401(k) plan. A solo 401(k) is considered one of the best retirement plans for building long-term wealth and deferring a portion of your income regardless of whether you have a second job or side gig.
Learn how to maximize solo 401(k) contributions and the tax benefits you can earn in return.
Introduction to solo 401(k) plans
What is a solo 401(k)?
A solo 401(k), otherwise referred to as a one-participant 401(k), is a robust retirement savings plan for self-employed business owners without employees. Like a traditional 401(k) plan, a solo 401(k) is a tax-advantaged account that builds wealth through investment opportunities and compound interest.
"The advantages of a solo 401(k) are that contributions are tax-deductible, earnings grow tax-deferred, and assets aren't taxed until withdrawn at retirement," says Marigny deMauriac, CFP and founder of DeMAURIAC.
Roth solo 401(k) plans also exist, but traditional solo 401(k) plans are more common.
According to Jennifer Lee, an accredited wealth management advisor and owner of Modern Wealth LLC, the advantage of opening a solo 401(k) is the large contribution limit — one of the highest available. Since you can contribute as an employer and an employee, you can maximize your contributions.
You can also choose from a much broader range of assets than you can with a traditional employer-sponsored 401(k). For instance, you can invest in index funds, mutual funds, ETFs, stocks, and bonds.
Who is eligible for a solo 401(k)?
To qualify for a solo 401(k), you must be a business owner with no employees. If you have employees, consider alternatives like a SEP IRA or SIMPLE IRA.
Self-employed business owners without employees qualify for a solo 401(k) plan regardless of age or income. Moreover, the money you earn from self-employment doesn't have to be your only source of income. You can still open a solo 401(k) even if you have a full-time job or side gig.
How to open a solo 401(k)
Opening a solo 401(k) is simple, as you can do it with most brokers. You will need an Employer Identification Number (EIN), a plan adoption agreement, and an application to start. Once approved, you can begin making contributions and choosing your investments.
If you don't have an EIN, applying for one is easy — you can submit your application on the IRS website.
Solo 401(k) contribution limits 2024
Employee contribution limits for solo 401(k)
You can contribute to your solo 401(k) plan as both an employee and an employer, allowing you to contribute double the savings you would with a traditional or Roth 401(k). The total allowed employee and employer contribution to a solo 401(k) in 2024 is $69,000.
"You can make profit-sharing contributions, as well as pre-tax salary contributions as your own employee," deMauriac explains.
In 2024, you can contribute up to $23,000 or 100% of your income as an employee, whichever is less. If you are 50 or older, you can make an additional catch-up contribution of $7,500 per year.
Employer contribution limits for solo 401(k)
Although employee contributions can be made with pre- or after-tax dollars, all employer contributions must be made on a pre-tax basis. You can contribute up to 25% of your compensation as an employer. But your employer contribution can't exceed the annual compensation limit.
Annual solo 401(k) compensation limit
Annual compensation is the total amount of money an employee earns over a year, including additional benefits. The IRS limits the amount of an employee's annual compensation can be considered when deciding employer and employee contribution limits. In 2024, the annual compensation limit is $345,000.
If your annual compensation exceeds this limit, the exceeding compensation can't be used to calculate your employer contribution.
For example, if you made $400,000 in 2024 and want to contribute to your solo 401(k) as an employer, your contribution limit is calculated using the $345,000 annual limit rather than your yearly earnings of $400,000. Thus, the 25% of your compensation to make your employer contribution is applied to the maximum limit of $345,000.
Pre-tax vs. Roth solo 401(k) contributions
Some tax benefits of solo 401(k) contributions include reducing taxable income. For instance, "if your income is $80,000 and you defer $20,000 into your solo 401(k), you would have an adjusted tax base of $60,000 on your W-2," Lee says.
The money you invest grows tax-deferred until retirement, and you'll pay taxes when you distribute the funds. This is especially handy if you predict you'll be in a lower tax bracket during retirement than your working years.
A Roth solo 401(k) is funded with after-tax dollars, providing the advantage of tax-free growth and withdrawals later in retirement. But unlike a Roth IRA, a Roth solo 401(k) has no income limits.
Solo 401(k) rules and deadlines
How do solo 401(k) withdrawals work?
If you wait until you're 59½ or older, there are no penalties for withdrawing money from your solo 401(k). If you opened a Roth solo 401(k), your withdrawals during retirement are tax-free. If you opened a traditional solo 401(k), your current tax bracket would determine the amount you pay in taxes.
However, there are some downsides you should consider. Like most retirement plans, you'll get hit with taxes and fees if you withdraw the funds before the age of 59½.
RMDs for solo 401(k)s
Remember that if you have a solo 401(k), you'll eventually have to begin taking required minimum distributions (RMDs). You must take your first RMD by April 1, the year after you turn 73. After that, you must take RMDs every year by December 31.
Roth solo 401(k)s are also subject to RMDs, but you can avoid taking them if you roll over your solo 401(k) assets into a Roth IRA. Roth IRAs are not subject to RMDs, so the account money can sit as long as you like.
Comparing solo 401(k) with other retirement plans
Solo 401(k) vs. SEP IRA
A Simplified Employee Pension (SEP) IRA is another retirement plan option for self-employed individuals. Like a solo 401(k), a SEP IRA allows you to contribute as both an employee and an employer up to $69,000 or 25% of your annual income, whichever is less. The compensation limit for business owners to be allowed to set up a SEP IRA is $345,000 in 2024.
SEP IRAs are preferred for small business owners with employees. Employers may also offer employer-match contributions, but all contributions to employees must be equal. A solo 401(k) will suit you better if you don't have employees.
Solo 401(k) vs. Traditional 401(k)
Solo 401(k) plans and traditional 401(k) plans offer similar tax advantages and withdrawal rules. Like a traditional 401(k) plan, a solo 401(k) is funded by pre-tax dollars, giving the account holder an initial tax break and the possibility of being taxed at a lower rate when withdrawing during retirement.
Otherwise, the main differences are 1) that a solo 401(k) has a higher contribution limit, and 2) solo 401(k)s are managed by the account holder rather than the plan provider. You can choose from a much broader range of assets than you would with a traditional employer-sponsored 401(k). However, you won't get the same level of professional insight that standard 401(k) plans have.
FAQs about solo 401(k) contribution limits
What is the maximum employee contribution limit for a solo 401(k)?
The maximum employee contribution limit for a solo 401(k) is $23,000 or 100% of your income in 2024, whichever is less. Employees aged 50 or older can contribute an additional catch-up contribution of $7,500 per year.
Can I contribute both employee and employer contributions to my solo 401(k)?
You can contribute both employee and employer contributions to your solo 401(k) to maximize your total contributions. As an employee, you can contribute up to $23,000 or 100% of your income in 2024, whichever is less. You can contribute up to 25% of your compensation as an employer. If you're 50 or older, you can contribute an additional catch-up contribution of $7,500.
What is the total contribution limit for a solo 401(k) in 2024?
The total contribution limit for a solo 401(k) in 2024 is $69,000 if you're younger than 50. For people who are 50 and older, the total contribution limit in 2024 is $76,500.
How do catch-up contributions work for a solo 401(k)?
Catch-up contributions for a solo 401(k) allow individuals aged 50 or older to contribute an additional $7,500 to their solo 401(k) account. Catch-up contributions allow older employees nearing retirement age to "catch up" on potentially lost growth from when they earned lower salaries.
Are solo 401(k) contributions tax-deductible?
Solo 401(k) contributions are tax-deductible, reducing your annual taxable income. However, you may be able to contribute after-tax dollars as an employee but not as an employer. Roth contributions are not tax-deductible.
