Solo 401(k) Explained

The Solo 401(k) — also called an Individual 401(k) or one-participant 401(k) — is the most flexible and often the most powerful retirement account for self-employed individuals with no employees. It combines the high contribution limits of a 401(k) with the simplicity of being your own boss. You can contribute as both employee and employer, choose between traditional and Roth contributions, and potentially save up to $70,000 per year in 2025.

How It Works

Unlike a regular 401(k) offered by a large employer, a Solo 401(k) is designed for business owners with no full-time employees (a spouse can be included). You wear two hats — employee and employer — and can contribute in both capacities.

Employee contribution (2025): Up to $23,500 (or $31,000 if you're 50+). This is the same limit as any other 401(k). You can choose pre-tax (traditional) or after-tax (Roth). This contribution comes off the top regardless of your income level.

Employer contribution: Up to 25% of your net self-employment income (after the self-employment tax deduction). This is always pre-tax.

Total combined limit (2025): $70,000 ($77,500 if 50+). This is the same total as a SEP IRA, but the way you get there is different — and that difference matters enormously at lower income levels.

Why Solo 401(k) Often Beats SEP IRA

The big advantage shows up when your income is under $200,000. With a SEP IRA, you can only contribute 20% of net self-employment income. With a Solo 401(k), you get the employee contribution first, then add the employer contribution on top.

Example at $80,000 net income:

• SEP IRA maximum: ~$14,850 (about 20% of net after SE tax deduction)
• Solo 401(k) maximum: $23,500 (employee) + ~$14,850 (employer) = ~$38,350

That's more than double the contribution — and more than double the tax deduction. At the 22% bracket, the extra contribution saves about $5,200 in taxes annually.

At $300,000+ income, the two accounts converge because both hit the same $70,000 total cap. But for most self-employed individuals earning under $200,000, the Solo 401(k) is clearly superior.

The Roth Option

This is a feature the SEP IRA simply doesn't have. With a Solo 401(k), your employee contributions can be designated as Roth — after-tax money that grows and is withdrawn tax-free. This is incredibly valuable for younger self-employed individuals who expect their income (and tax rates) to rise.

You could, for example, put $23,500 as a Roth contribution (no tax deduction now, but tax-free forever) and add an employer contribution of 20% of net income as traditional (tax-deductible now, taxed on withdrawal). This gives you tax diversification — both pre-tax and after-tax retirement money.

Additional Features

Loans: Many Solo 401(k) plans allow you to borrow up to $50,000 or 50% of the account balance, whichever is less. You pay yourself interest. This is an emergency feature — not ideal for regular use, but useful as a safety net.

No pro-rata rule issues: Unlike a SEP IRA, a Solo 401(k) doesn't interfere with the Backdoor Roth IRA strategy. The 401(k) balance is not included in the pro-rata calculation for IRA conversions. If you plan to use the Backdoor Roth, this is a significant advantage.

Rollover friendly: You can roll over old 401(k)s and traditional IRAs into your Solo 401(k). This can be strategically useful — rolling a traditional IRA into the Solo 401(k) clears the way for clean Backdoor Roth conversions.

Setup and Administration

You can open a Solo 401(k) at Fidelity, Schwab, or Vanguard for free. The setup requires an EIN (Employer Identification Number) from the IRS, which takes about five minutes to get online.

Important deadlines: The plan must be established by December 31 of the tax year (unlike a SEP IRA, which can be set up until the filing deadline). Employee contributions must be made by December 31. Employer contributions can be made until your tax filing deadline, including extensions.

If your account exceeds $250,000 in total assets, you must file Form 5500-EZ annually with the IRS. This is simple and can be done yourself — but it's an administrative step that doesn't exist for SEP IRAs.

Who Should Choose Solo 401(k)

Choose Solo 401(k) if:

• Your self-employment income is under $200,000 (higher contribution than SEP)
• You want a Roth option
• You plan to use the Backdoor Roth IRA
• You want the option to take loans
• You don't mind the slightly more complex setup

Choose SEP IRA if:

• Your income is very high ($250,000+) and the contribution amounts converge
• You want the absolute simplest setup with zero administration
• You missed the December 31 deadline to establish a plan this year