Solo 401(k)

In short

A friend of mine ran a small bakery for years, and she told me the hardest part of saving was never the saving. It was finding the right place to put the money. If you work for yourself and have no employees besides a spouse, a Solo 401(k) may be that place. It lets one person act as both the boss and the worker, so you can save from each role. The employee side and the employer side each have their own limit, and the IRS publishes both every year. The plan is opened at a brokerage that offers it, and the law allows contributions only from self employment income. Once the plan holds more than a set amount, the plan requires an annual report to the IRS. Read the plan documents and ask the provider what it charges before you sign anything.

The whole of it

What it is

I once watched a plumber friend spend a whole Saturday sorting his receipts, and he said, half joking, that he wished somebody had told him about retirement accounts for people like him. If you are holding a business card with only your own name on it, this is for you. A Solo 401(k) is a retirement plan for a self employed person with no full time employees other than a spouse. It goes by other names too, such as an individual 401(k) or a one participant 401(k). The name changes but the idea does not.

Think of it as a container. You do not own the investments by owning the container. You simply put money in, and the container decides how that money is taxed. Some Solo 401(k) plans let you choose a traditional side, where you get a tax break now and pay tax later. Some also offer a Roth side, where you pay tax now and withdrawals can be tax free later if the rules are met. Not every provider offers both, so the plan document matters.

The big draw is room. A person who is both owner and worker can often put away more than in many other plans for the self employed. That is the whole reason people look at it.

How it works

A neighbor of mine, a freelance photographer, once told me she felt like two people at tax time. She was right, and the plan treats her that way. You wear two hats, and each hat has its own way to contribute.

The first hat is the employee. As the worker, you can defer part of your pay into the plan. The IRS sets a yearly limit on these employee deferrals, and it is the current figure, which the official source publishes each year. If you are old enough, the law allows an extra catch up amount on top, and the age and amount are the current figure, which the official source publishes each year and the current figure, which the official source publishes each year.

The second hat is the employer. As the boss of your own business, you can also make a profit sharing contribution. This is a percent of your pay, and the limit on that percent is the current figure, which the official source publishes each year. For a sole proprietor, the pay used in that math is not the same as your raw profit. It is your net earnings after the deduction for half of self employment tax and after the plan contribution itself. That sounds like a puzzle, and it is a bit of one, so many people use the worksheets in IRS Publication 560.

Both hats share one overall cap. The total of the employee deferral and the employer contribution cannot pass a limit set each year, which is the current figure, which the official source publishes each year. Catch up money sits on top of that cap.

You can only contribute if you have earned income from the business. Savings from a rainy year with no profit do not count. You also have to set up the plan on time. The plan must be established by a deadline set by law, and the IRS explains the timing for employee deferrals and employer contributions on its pages about one participant 401(k) plans.

When money comes out, the usual retirement rules apply. Taking it out before the age set by law can bring a tax and a penalty, with some exceptions. The age is the current figure, which the official source publishes each year and the penalty percent is 10 for 2025 (source, checked 9/27/2026). The plan may also require withdrawals to start at a certain age, called required minimum distributions, and that age is 73 for 2024 (source, checked 9/27/2026).

The numbers, and where to find yours

I have noticed that people trust a number more when they can look it up themselves. So here is where to look. The IRS posts the yearly limits in its retirement plan limits announcement, and it keeps a page on one participant 401(k) plans with the basics. IRS Publication 560 covers retirement plans for small business and walks through the self employed math.

Your own numbers come from your own year. You need your net profit from Schedule C if you are a sole proprietor, or your pay from the business if it is an S corporation. You also need your age by year end, because catch up money depends on it. And you need to know how much you already put into any other 401(k), such as one at a day job. The employee deferral limit is shared across all your plans, so a day job deferral eats into the room you have in the Solo plan.

Keep it simple. Write the figures down before you open the plan. Then check each one against the IRS page for the current year.

A worked example

Let me tell you about a woman I will call Dana. Dana is a 45 year old graphic designer who runs her own business as a sole proprietor. She has no employees. Last year her net profit on Schedule C was $80,000. To keep the math plain, I will use round figures and skip the finer points of the exact worksheet, so please treat this as a picture and not as a tax return.

Dana first figures her self employment tax. Multiply $80,000 by 0.9235 and you get $73,880. Then multiply that by 0.153 and you get about $11,304. Half of that, about $5,652, is deductible. So her profit after that deduction is $80,000 minus $5,652, which is $74,348.

Now suppose Dana wants to defer $15,000 as the employee. She might pick that number because it fits her budget. Say it is under the yearly limit, which is the current figure, which the official source publishes each year.

For the employer side, Dana uses the percent that applies to her. The IRS worksheets lower the rate for a sole proprietor to account for the contribution itself. For a plain picture, say the effective rate works out to 20 percent of her pay after the self employment tax deduction. Twenty percent of $74,348 is about $14,870.

Add the two. $15,000 plus $14,870 is $29,870. That is the total she would put in, and it needs to sit under the overall cap, which is the current figure, which the official source publishes each year. For this example it does.

See what happened there. On an $80,000 profit, she saved nearly $30,000. In a plan with only an employer side, the room would be smaller. That extra room is the reason the plan exists.

Dana also learns one more thing. Because her account is traditional, the $29,870 lowers her taxable income. If her tax rate on the last dollars she earns is 22 percent, then $29,870 times 0.22 is about $6,571 less tax that year. Her real rate may differ, and she should check it with a tax professional.

Where it goes wrong

I have made my share of mistakes with paperwork, so I say this with a friendly hand on your shoulder. Most trouble with this plan comes from small things people miss.

The first trap is hiring. The plan is meant for an owner with no full time employees other than a spouse. If you hire a worker who must be covered, the plan may need to change or end. The rules about who counts are set by the law and the plan document, so read them before you hire.

The second trap is the day job. A person with a job and a side business can save in both plans. But the employee deferral limit is one limit across all the plans, so the two deferrals together must not pass it. If they do, the excess has to be fixed, and that takes paperwork.

The third trap is the filing. Once plan assets pass a set amount at year end, the plan requires a yearly information return, Form 5500-EZ. The amount is the current figure, which the official source publishes each year. Missing it can mean penalties. The IRS explains who has to file on its Form 5500-EZ pages.

The fourth trap is the clock. The plan must be set up by a deadline, and contributions have their own deadlines. Waiting until the last week is a risk. Some providers need days to open an account.

The fifth trap is cost. Some providers charge fees for the account, for the funds inside it, or for trading. Fees come out of your savings every year. A fee that looks tiny can add up over decades, so ask for the full fee list in writing.

Last, a plain note. Withdrawals before the age set by law can bring a tax and a penalty. Think of the money as set aside, not on call.

Questions to answer before you leave this page

Do you have self employment income this year, and do you have any employees besides a spouse? Have you checked the current IRS limits for the employee deferral, the employer contribution, and the overall cap? Do you also save in a plan at another job, and if so, how much of the shared employee limit is already used? Does the provider you are looking at offer a Roth side, a loan feature, and a way to roll money in from an old account? What does the provider charge each year, and where is that written down? Do you know the deadline to set up the plan and the deadline to make contributions for this year? Will your plan assets pass the amount that triggers Form 5500-EZ, and who will file it? And have you talked with a tax professional or read IRS Publication 560 so the numbers on your own return match what you meant to do?