Solo 401(k) Guide: Rules, Limits & How to Set One Up
How a Solo 401(k) Works
As both the employee and employer of your business, you wear two hats for contribution purposes. On the employee side, you can defer salary up to the annual 401(k) limit. On the employer side, you can contribute up to 25% of your compensation as a profit-sharing contribution. These two contributions stack on top of each other, allowing significantly higher total contributions than most other self-employed plans.
Solo 401(k) Contribution Limits (2024)
| Contribution Type | 2024 Limit |
|---|---|
| Employee deferral (under 50) | $23,000 |
| Employee deferral catch-up (50+) | Additional $7,500 |
| Employer profit-sharing | Up to 25% of compensation |
| Total combined maximum (under 50) | $69,000 |
| Total combined maximum (50+) | $76,500 |
| Compensation cap | $345,000 |
The key advantage over a SEP IRA shows at lower income levels. A freelancer earning $60,000 can contribute up to $23,000 as an employee deferral plus ~$11,100 as employer profit-sharing (20% of net SE income) = $34,100 total. Under a SEP IRA, the same freelancer could only contribute ~$11,100 (employer contribution only). The Solo 401(k) more than triples the retirement savings capacity.
Roth Solo 401(k) Option
Unlike a SEP IRA, the Solo 401(k) offers a Roth contribution option for the employee deferral portion. Roth contributions go in after-tax, but all growth and qualified withdrawals are tax-free. This is particularly valuable if you expect to be in a higher tax bracket in retirement or want tax diversification.
Note: The employer profit-sharing portion is always pre-tax (traditional). Only the employee deferral can be designated as Roth. Starting in 2024, employer contributions can also be Roth under SECURE 2.0, but not all plan providers support this yet.
Solo 401(k) Loans
If your plan document allows it, you can borrow up to 50% of your vested account balance or $50,000, whichever is less. The loan must be repaid within 5 years (or up to 25 years if used to purchase a primary residence). Interest you pay goes back into your own account. This feature is not available with SEP IRAs or SIMPLE IRAs.
Solo 401(k) vs SEP IRA vs SIMPLE IRA
| Feature | Solo 401(k) | SEP IRA | SIMPLE IRA |
|---|---|---|---|
| Employee deferrals | Yes ($23,000) | No | Yes ($16,000) |
| Employer contributions | Up to 25% of comp | Up to 25% of comp | Match up to 3% or 2% non-elective |
| Total max (under 50) | $69,000 | $69,000 | ~$32,000 |
| Roth option | Yes | No | Yes (since 2023) |
| Loans | Yes | No | No |
| Employees allowed | None (except spouse) | Any number | Up to 100 |
| Form 5500 filing | When assets exceed $250K | Never | Never |
| Setup deadline | December 31 of plan year | Tax filing deadline + extensions | October 1 of plan year |
Who Can Open a Solo 401(k)?
Any self-employed individual with no full-time employees (other than a spouse) can open a Solo 401(k). This includes sole proprietors, independent contractors, freelancers, single-member LLC owners, and partners in a partnership. If you have a side business alongside a W-2 job, you can open a Solo 401(k) for the self-employment income — but be aware that the $23,000 employee deferral limit is shared across all 401(k) plans you participate in.
Setting Up a Solo 401(k)
Step 1: Choose a provider. Fidelity, Schwab, and Vanguard all offer free Solo 401(k) plans. For Roth and loan features, verify the provider supports them — not all do.
Step 2: Obtain an Employer Identification Number (EIN) from the IRS (free, instant online).
Step 3: Complete the plan adoption agreement by December 31 of the year you want the plan to take effect.
Step 4: Make contributions by your tax filing deadline (including extensions).
Step 5: File Form 5500-EZ once plan assets exceed $250,000.
Withdrawal Rules
Standard 401(k) withdrawal rules apply. Withdrawals before age 59½ trigger a 10% penalty plus income tax on pre-tax amounts. Roth withdrawals are tax-free and penalty-free after age 59½ if the account has been open at least 5 years. RMDs begin at age 73 for traditional balances; Roth 401(k) balances are no longer subject to RMDs starting in 2024 under SECURE 2.0.
Key Takeaways
- The Solo 401(k) allows combined contributions of up to $69,000 ($76,500 if 50+) — the highest limits available for self-employed retirement savings.
- Employee deferrals ($23,000) give it a major advantage over SEP IRAs at lower income levels.
- Roth contributions and plan loans make it the most flexible self-employed retirement vehicle.
- You must have no full-time employees other than your spouse to be eligible.
- Must be established by December 31 of the plan year — earlier planning is required compared to a SEP IRA.
Frequently Asked Questions
Can my spouse participate in my Solo 401(k)?
Yes, if your spouse earns income from your business. They can make their own employee deferrals (up to $23,000) and receive employer profit-sharing contributions. This effectively doubles the household contribution capacity — a married couple running a business together can shelter up to $138,000 ($153,000 if both are 50+) annually.
Can I have a Solo 401(k) and a 401(k) at my W-2 job?
Yes, but the $23,000 employee deferral limit is shared across all 401(k) plans. If you max out deferrals at your day job, you can still make employer profit-sharing contributions (up to 25% of self-employment income) to your Solo 401(k).
What happens if I hire an employee?
If you hire a full-time employee (other than your spouse), you no longer qualify for a Solo 401(k). You would need to convert to a standard 401(k) plan (with added compliance costs) or switch to a SEP IRA or SIMPLE IRA.
Can I roll over an old 401(k) or IRA into my Solo 401(k)?
Yes. You can roll over funds from a previous employer’s 401(k), a traditional IRA, or other qualified plans into your Solo 401(k). This is especially useful if you are planning a backdoor Roth IRA conversion — consolidating pre-tax IRA balances into the Solo 401(k) eliminates the pro-rata tax issue.
Is there a minimum income requirement?
No minimum income is required. You can open a Solo 401(k) with any amount of self-employment income. Your contribution is limited by your actual earnings — you cannot contribute more than you earn from the business.