Self-Employed 401(k): What You Need to Know

If you’re running your own business, the solo 401(k) — also known as a one-participant 401(k) — offers enhanced flexibility and control over your contributions, investment choices, and tax planning for your retirement.

This guide offers everything you need to know to leverage this powerful retirement vehicle to its full potential.

What is a solo 401(k) and do you need one?

A solo 401(k) is a retirement savings plan designed to cover a business owner with no employees, or that person and their spouse. It offers similar benefits to a traditional 401(k) but allows you to wear two hats — employee and employer — meaning you can contribute in both roles, significantly boosting your retirement savings potential.

Why should you consider a solo 401(k)?

If you’re self-employed, the solo 401(k) can be a game-changer for your retirement planning. It offers high contribution limits, giving you the opportunity to save more than you could with other retirement accounts. Plus, it provides the flexibility to choose how you invest your funds, from mutual funds and stocks to ETFs.

Beyond its savings potential, the solo 401(k) also gives you more control over your retirement planning. You’re not limited to what an employer offers — you decide how much to contribute and where to invest your money. This level of autonomy makes it an attractive option for self-employed individuals who want to take their retirement planning into their own hands.

Are there downsides to a solo 401(k)?

While a solo 401(k) offers many benefits, there are some drawbacks to consider. One of the biggest challenges is the administrative responsibility. You’ll need to keep detailed records and, once your account balance exceeds $250,000, file an annual Form 5500-EZ with the IRS.

Additionally, a solo 401(k) is only available to businesses without full-time employees. If you plan to grow your business and hire staff, you’ll need to transition to a different retirement plan.

Who can open a solo 401(k)?

The one-participant 401(k) plan is simply a traditional 401(k) plan that covers a business owner with no employees, or that person and his or her spouse. These plans have the same rules and requirements as any other 401(k) plan. If you meet these criteria, a solo 401(k) can be one of the best retirement savings tools at your disposal.

Which providers offer solo 401(k) plans?

Several reputable financial institutions offer solo 401(k) plans. Each provider offers different features, such as investment options, fees, and online tools. 

Compare your options to find a provider that aligns with your retirement goals and offers user-friendly account management tools.

How does a solo 401(k) work?

A solo 401(k) works by allowing you to contribute to your retirement savings in two ways — as both the employee and the employer. This dual role means you can make higher contributions compared to other retirement plans.

What are the tax benefits of a solo 401(k)?

Both traditional and Roth 401(k)s have tax advantages — the difference lies in when those benefits occur.

With a traditional solo 401(k), your contributions are tax-deductible, which can lower your taxable income now. Alternatively, with a Roth solo 401(k), your withdrawals are tax-free later, during your retirement.

These tax advantages can help reduce your overall tax burden now or in the future, depending on which account type you choose.

What’s the difference between traditional and Roth solo 401(k) accounts?

The main difference between traditional and Roth solo 401(k) accounts is when you pay taxes. With a traditional account, your 401(k) contributions are made pre-tax, reducing your taxable income now. However, you’ll pay taxes on your withdrawals in retirement.

With a Roth solo 401(k), you contribute after-tax dollars now, meaning there’s no immediate tax break. But in retirement, your withdrawals are entirely tax-free, including any investment gains.

How much can you contribute to a solo 401(k)?

For 2025, self-employed individuals can contribute up to $23,500 as the employee. If you’re over 50, you can make an additional catch-up contribution of $7,500, bringing the total to $31,000. As the employer, you can contribute up to 25% of your compensation as defined by the plan, with a combined total limit of $69,000 (or $76,500 if you’re 50 or above).

When do you need to set up your plan?

To contribute to a solo 401(k) for a given tax year, the plan must be established by December 31 of that year. Contributions, however, can be made until your tax filing deadline, including extensions. This flexibility allows you to maximize your contributions while managing your cash flow.

How does a solo 401(k) compare to other retirement plans?

If you’re considering a solo 401(k), it’s helpful to compare it to other retirement plans available to self-employed individuals.

What is a SEP IRA?

A SEP IRA (Simplified Employee Pension) is another retirement plan for self-employed individuals and small business owners. It’s easier to set up than a solo 401(k) and has similar contribution limits. However, a SEP IRA doesn’t allow for employee contributions — only employer contributions are permitted. It also lacks the Roth option available in a solo 401(k).

What is a SIMPLE IRA?

A SIMPLE IRA (Savings Incentive Match Plan for Employees) is typically used by small businesses with up to 100 employees. It allows both employer and employee contributions but has lower contribution limits compared to a solo 401(k). For most self-employed individuals, a solo 401(k) offers greater flexibility and higher savings potential.

How do you set up a solo 401(k)?

Setting up a solo 401(k) may seem daunting, but it’s relatively straightforward if you follow these five steps.

Step 1: Choose a provider

Start by selecting a financial institution that offers solo 401(k) plans. Compare fees, investment options, and account management tools to find the best fit for your needs.

Step 2: Complete the paperwork

Fill out the necessary forms provided by your chosen institution. This will include information about your business and the plan’s setup.

Step 3: Create a plan document

The IRS requires a formal plan document outlining the rules of your solo 401(k). Most providers will supply this as part of their setup process.

Step 4: Open the account

Once the paperwork is complete, your provider will open your solo 401(k) account. You can then begin making contributions.

Step 5: Start contributing

With your account set up, you can start contributing as both the employee and the employer. Keep track of your contributions to ensure you stay within the annual limits.

Track your 401(k) savings

Setting up a solo 401(k) is just the first step — you also need to monitor your savings to make sure your retirement plan stays on track. While your 401(k) provider will have a website to track your account balance, it only shows part of the picture.

Using a tool like Quicken Simplifi can give you a more complete view of your retirement savings. Simplifi lets you track all your retirement accounts and investments in one place, helping you see your progress toward your long-term goals. Regularly reviewing your savings ensures you stay on course and make adjustments as needed to secure a comfortable retirement.