Solo 401(k)
A 401(k) plan for self-employed individuals with no employees (other than a spouse). Combines employee salary deferrals with employer profit-sharing for very high contribution limits.
What is a Solo 401(k)?
A Solo 401(k) (also called a one-participant 401(k) or individual 401(k)) is a retirement plan for self-employed workers with no full-time employees other than themselves and a spouse. It is structured like a regular 401(k), but the business owner plays both roles: employee and employer.
Key features
- Employee contribution: same annual salary deferral limit as any 401(k), all the way up to 100% of compensation
- Employer contribution: an additional profit-sharing contribution of up to 25% of net self-employment income
- Combined cap: the total of both sides is capped at an IRS dollar limit each year (much higher than a SEP IRA at most income levels)
- Roth option: many plans allow Roth (after-tax) contributions on the employee side
- Loans available: many plans let the owner borrow against the balance, a feature SEP and IRAs lack
- No employees allowed: adding a non-spouse full-time employee generally forces a conversion to a SEP or a full 401(k)
- Form 5500-EZ: required once the balance exceeds a threshold
Solo 401(k) vs. SEP IRA
For most self-employed income levels, the Solo 401(k) allows a larger total contribution because the employee salary deferral is on top of the profit-sharing piece. It also supports Roth and loans. The trade-off is more paperwork.
A high-earning freelancer or solo consultant can often shelter tens of thousands of dollars per year with a Solo 401(k), the single largest tax break available to most self-employed workers.