Solo 401(k): The Best Retirement Plan for Self-Employed Workers
How one-person businesses can shelter up to $70,000 per year in tax-deferred retirement savings
What Is a Solo 401(k)?
A solo 401(k), also called an individual 401(k) or one-participant 401(k), is a retirement plan designed for self-employed people with no full-time employees other than a spouse. It works exactly like a regular employer 401(k), but you’re both the employee and the employer, which means you can make contributions on both sides.
For 2025, the total contribution limit is $70,000 if you’re under 50, or $77,500 if you’re 50 or older. That’s significantly more than a SEP IRA or traditional IRA allows.
Contribution Limits: Two Buckets
| Component | 2025 Limit | Who Makes It |
|---|---|---|
| Employee elective deferral | $23,500 ($31,000 if 50+) | You, as the employee |
| Employer profit-sharing | Up to 25% of compensation | You, as the employer |
| Total combined maximum | $70,000 ($77,500 if 50+) | Both sides combined |
The employee side is a flat dollar amount. You can contribute $23,500 regardless of income (as long as you earned at least that much). The employer side is percentage-based: up to 25% of W-2 wages if you’re an S corp, or roughly 20% of net self-employment income if you’re a sole proprietor.
Solo 401(k) vs. SEP IRA: Why the Solo Wins
Both plans allow employer-side contributions. But only the solo 401(k) has the employee deferral component. Here’s why that matters:
Example: A freelancer earning $80,000 net after SE tax adjustment.
SEP IRA maximum: 20% x $80,000 = $16,000
Solo 401(k) maximum: $23,500 (employee) + $16,000 (employer) = $39,500
That’s $23,500 more in tax-deferred savings with the solo 401(k).
The solo 401(k) also offers Roth contributions on the employee side. A SEP IRA is always pre-tax. If you want to split your retirement savings between traditional and Roth, the solo 401(k) gives you that flexibility.
Who Can Open a Solo 401(k)?
You qualify if you meet two conditions:
- You have self-employment income (Schedule C, S corp wages, partnership income, etc.)
- You have no full-time employees other than yourself and your spouse
You can have a full-time W-2 job and still open a solo 401(k) for your side business. But the $23,500 employee deferral limit is shared across all 401(k) plans. If you’re already maxing out your employer’s 401(k), you can only make employer-side contributions to the solo plan.
Roth vs. Traditional Solo 401(k)
The employee deferral can go into either a traditional (pre-tax) or Roth (after-tax) bucket. The employer contribution is always pre-tax.
Consider Roth contributions if:
- You’re in a lower tax bracket now than you expect in retirement
- You want tax-free growth and withdrawals later
- You’re already maxing out other pre-tax deductions
- You live in a no-income-tax state (Florida, Texas) and might move to a high-tax state later
Consider traditional contributions if you’re in a high bracket now and expect lower income in retirement.
Setup and Deadlines
You need to establish the plan by December 31 of the tax year you want to claim the deduction. But you have until your tax filing deadline (including extensions) to actually fund the contributions.
Most brokerages, including Fidelity, Schwab, and Vanguard, offer free solo 401(k) plans. Setup takes about 20 minutes online. You’ll get an EIN for the plan and open a trust account.
Once plan assets exceed $250,000, you’ll need to file Form 5500-EZ with the IRS annually. It’s a simple one-page form, but missing it triggers penalties.
Loan Provisions
Unlike a SEP IRA, many solo 401(k) plans allow you to borrow from your own account. You can take a loan of up to 50% of the plan balance or $50,000, whichever is less. You repay yourself with interest over five years (or longer for a home purchase).
Not every provider offers the loan feature. If that’s important to you, check before opening the account. Fidelity and E*Trade offer it; Vanguard doesn’t.