Solo 401(k)

A solo 401(k) (also called a one-participant 401(k)) is a retirement plan for self-employed people with no employees. It combines the advantages of a 401(k) — high contributions, loan options — with simplicity suitable for solo operators.

How it works

A solo 401(k) lets you contribute as both employer and employee. As the employee, you can defer up to $23,500 per year (2024). As the employer, you can contribute up to 25% of net self-employment income. Combined, these can total around $69,000 per year.

For example: a freelancer earning $100,000 in net self-employment income could contribute $23,500 as salary deferral plus $19,000 as employer contribution (roughly 25% of remaining income after employer contribution), for a total of about $42,500.

Employee vs. employer contributions

Employee deferral: You contribute up to $23,500 in pre-tax salary deferral, similar to deferring from a paycheck.

Employer contribution: You (as the employer) contribute 25% of net self-employment income after the employer contribution is made. This is calculated as roughly 20% of gross self-employment income.

The combination allows much higher contributions than an IRA, which tops out at $7,000.

Roth solo 401(k)

Some solo 401(k) plans allow Roth contributions — after-tax employee deferrals that grow tax-free. This is not available in a traditional IRA, making it valuable for high earners.

Loan option

Unlike a traditional IRA or SEP IRA, a solo 401(k) allows you to borrow against your balance (up to 50% or $50,000, whichever is less). This provides emergency liquidity and is useful for large purchases (home down payment, equipment).

Loans must be repaid with interest, and if you fail to repay, the outstanding balance is treated as a withdrawal and taxed plus penalized.

Setup and administration

A solo 401(k) is moderately complex to set up and administer:

• Setup: You can open one at a brokerage (Fidelity, Vanguard, Schwab, E*TRADE) or through a solo 401(k) provider.
• Annual filing: If the account balance exceeds $250,000 at year-end, you must file Form 5500-SF (simplified form), which costs $0 and takes an hour.
• No employees: If you hire an employee, you cannot maintain a solo 401(k); you must roll it to another plan or stay at a smaller balance.

Solo 401(k) vs. SEP IRA

For most solo operators, a SEP IRA is simpler. A solo 401(k) is better if you want the loan option or Roth deferrals.

Withdrawal and RMD

Standard IRA-like rules apply:

• Penalty-free withdrawal at 59½.
• 10% penalty (plus income tax) for withdrawal before 59½ (with exceptions).
• Required minimum distributions begin at age 73.

See also