Solo 401(k): The Retirement Game-changer for Self-Employed Entrepreneurs

Chad Rixse, CRPS®
Jun 17
5 min read

Updated: 3 days ago

An illustration depicts a man in a dark suit and gold tie working at a desk. He is looking at a laptop and holding papers in his left hand. A white coffee mug sits on the left side of the desk. In the background, there's a window on the left, a plant, and a bookshelf on the right. Above the man's head, in the background, are three large, light-brown icons: a bar graph with an upward arrow, a dollar sign, and a shield. The text at the bottom of the image reads "Solo 401(k): The Retirement Gamechanger for Self-Employed Entrepreneurs".

The Retirement Dilemma for Entrepreneurs

As a self-employed entrepreneur, you've mastered the art of wearing multiple hats. You're the CEO, the marketing department, the sales team, and sometimes even the coffee runner. However, amid all these roles, there is one critical position that often gets overlooked: the role of a retirement planner.

Without an employer-sponsored retirement plan, many entrepreneurs find themselves at a disadvantage when it comes to saving for the future. But what if there were a retirement vehicle specifically designed for solo business owners that offers contribution limits that far exceed those of traditional IRAs?

Enter the Solo 401(k) – perhaps the most powerful retirement tool you've never heard of.

What Exactly Is a Solo 401(k)?

A Solo 401(k), also known as an Individual 401(k) or Self-Employed 401(k), is a retirement plan specifically designed for business owners with no full-time employees other than themselves and, potentially, their spouse. Unlike traditional 401(k) plans that come with complex administration requirements, the Solo 401(k) offers similar benefits with significantly less paperwork and headaches.

The magic of this retirement vehicle lies in its dual-contribution structure. As a self-employed individual, you get to contribute as both:

The employee (yourself)
The employer (your business)

This dual-contribution capability is what makes the Solo 401(k) a true game-changer for entrepreneurs' retirement planning.

Who Qualifies for a Solo 401(k)?

You may be eligible for a Solo 401(k) if:

You have self-employment income (whether as a sole proprietor, LLC, partnership, or corporation)
You have no full-time employees other than yourself and your spouse
You don't anticipate hiring full-time employees in the near future

Part-time employees who work less than 1,000 hours per year generally don't affect your eligibility, making this plan flexible for many small business structures.

A candid photograph shows a woman with short, dark, curly hair and glasses, wearing a white top, a tan blazer, and jeans. She is sitting in an office chair at a light-colored desk, looking down at papers she holds in her hands, with a warm smile on her face. A laptop is open on the desk to her left, along with a pen holder. The background shows a large window with natural light, a side table with a lamp, and a wooden cabinet, indicating a modern office or home office setting. In the upper left corner of the image, there is a large, rounded white text box with the words "Solo 401(k)" in brown font.

The Contribution Advantage: Why Entrepreneurs Love Solo 401(k)s

The contribution limits for Solo 401(k)s are what truly set them apart from other retirement vehicles. For 2025, you can contribute:

As the employee: Up to $23,500 if you're under 50, or $31,500 if you're 50 or older (thanks to the $7,500 catch-up contribution), or $34,750 if you’re between the ages of 60 and 63.

As the employer: Up to an additional 25% of your compensation (if you pay yourself W-2 wages) or 20% of your net self-employment income (if you're a sole proprietor).

These two contribution types combine for a maximum potential contribution of $70,000 in 2025 ($77,500 if you're 50 or older; $81,250 if you’re aged 60-63).

To put this in perspective, a regular IRA limits you to just $7,000 in contributions ($8,000 if you're 50 or older). Even a SEP IRA, while generous, doesn't allow for catch-up contributions or Roth options.

Example: The Solo 401(k) in Action

Let's look at how this might work for Jennifer, a 45-year-old consultant who nets $150,000 from her business:

As an employee, Jennifer can contribute the full $23,500.
As the employer, she can contribute an additional 20% of her net self-employment income, which equals $30,000.
Total contribution: $53,500 for the year

That's $53,500 Jennifer can potentially deduct from her taxable income while building her retirement nest egg – far more than what would be possible with most other retirement vehicles.

Traditional vs. Roth Options: Flexibility to Choose Your Tax Advantage

Another powerful feature of Solo 401(k)s is the ability to choose between traditional (pre-tax) and Roth (after-tax) contributions for the employee portion:

Traditional contributions: Reduce your current taxable income, with taxes paid when you withdraw in retirement.

Roth contributions: Made with after-tax dollars, but grow tax-free and can be withdrawn tax-free in retirement.

This flexibility allows you to strategize your tax situation both now and in the future – something not all retirement plans offer.

An infographic illustrating the difference between Traditional 401(k) and Roth 401(k) accounts, split vertically down the middle into two contrasting sections.

The left section, on a light blue background, represents "Traditional 401(k)". It features a stack of money bundles with yellow bands and the text "tax-deferred growth" with a small sparkle icon.

The right section, on a dark blue background, represents "Roth 401(k)". It shows a blue cloud from which golden streams of light or water pour down onto a patch of green plants, suggesting growth. Below the cloud, the text reads "tax-free growth" with several small sparkle icons.

Setting Up Your Solo 401(k): Easier Than You Think

Contrary to what many entrepreneurs believe, establishing a Solo 401(k) is relatively straightforward:

Choose a provider: Many major brokerages offer Solo 401(k) plans with minimal or no setup fees.
Complete the paperwork: You'll need to adopt a plan document and complete an application. Most providers have streamlined this process.
Get an EIN: If you don't already have one for your business, you'll need to obtain an Employer Identification Number from the IRS.
Set up your investment account: Once approved, you can fund your account and begin selecting investments.
Meet the deadlines: The plan must be established by December 31st of the tax year, though you can fund the employer portion until your tax filing deadline (including extensions).

Simplified Administration: Less Paperwork, More Peace of Mind

Unlike traditional 401(k) plans that require complex annual testing and reporting, Solo 401(k)s have minimal administrative requirements:

No annual filing requirement (Form 5500-EZ) until your plan assets exceed $250,000
No nondiscrimination testing
No complex ERISA compliance requirements

This simplified administration makes the Solo 401(k) not only powerful but also practical for busy entrepreneurs who lack the time for excessive paperwork.

Solo 401(k) vs. Other Retirement Plans: A Clear Winner for Many

When compared to other self-employed retirement options, the Solo 401(k) often comes out ahead:

vs. SEP IRA:

Solo 401(k) allows for higher total contributions for most income levels
Solo 401(k) offers Roth options; SEP IRAs don't
Solo 401(k) allows for catch-up contributions if you're over 50

vs. SIMPLE IRA:

Solo 401(k) has much higher contribution limits
Solo 401(k) offers more flexibility in contribution amounts

vs. Traditional/Roth IRA:

Solo 401(k) has significantly higher contribution limits
Solo 401(k) has no income limitations for participation

An infographic displaying three glass jars, each representing a different retirement account type, filled with stacks of golden coins, set against a background of blue bar graphs and an orange upward-trending arrow.

From left to right:

Solo 401(K): A smaller jar filled with fewer stacks of coins.

SEP IRA: A medium-sized jar filled with more stacks of coins than the Solo 401(k).

Traditional IRA: The largest jar, filled with the most stacks of coins.

Behind the jars, an orange line graph with a jagged, upward trend is visible. A prominent, thick orange arrow runs from the bottom left to the top right, signifying growth or progress, passing through the base of the jars and extending upwards. The overall background features a grid pattern, suggesting a financial chart or spreadsheet.

Loan Provisions: Access to Funds If Needed

Unlike many retirement plans, Solo 401(k)s can include loan provisions that allow you to borrow from your retirement savings if necessary. While we generally advise against tapping retirement funds early, this feature provides peace of mind for entrepreneurs whose incomes may fluctuate.

Typically, you can borrow up to 50% of your vested account balance, up to a maximum of $50,000. These loans must be repaid within five years (longer for primary home purchases) and require regular repayment with interest (which you're paying back to yourself).

Is a Solo 401(k) Right for You?

The Solo 401(k) is an ideal fit if:

You're self-employed with no full-time employees (besides a spouse)
You want to maximize your retirement contributions
You desire tax flexibility with traditional and Roth options
You appreciate simplified administration requirements
You might benefit from potential loan provisions

However, if you plan to hire employees soon or prefer the absolute simplest retirement vehicle (even at the cost of lower contribution limits), other options might be better suited to your needs.

Next Steps: Getting Started with Your Solo 401(k)

If you believe a Solo 401(k) might be the right fit for your entrepreneurial journey, here are some next steps:

Evaluate your retirement savings goals and how much you can realistically contribute each year
Research providers who offer Solo 401(k) plans (including major brokerages like Fidelity, Vanguard, and Charles Schwab)
Consider consulting with a financial advisor who specializes in retirement planning for self-employed individuals to ensure this is the best strategy for your specific situation.
Establish your plan before December 31 to make contributions for the current tax year.
Develop a consistent contribution strategy that works with your business's cash flow.

At The 401(k) Advisor, we specialize in helping entrepreneurs make smart decisions about retirement planning and tax strategies. If you'd like to explore whether a Solo 401(k) is right for your situation or need help setting one up, our team is here to assist you in taking this critical step toward financial independence.

Your entrepreneurial spirit helped you build your business – now let it help you create a retirement worthy of your hard work.

Investment advisory services provided through Forefront Wealth Partners. Investing in securities involves risks, including the potential for loss of principal. There is no guarantee that any investment plan or strategy will be successful. This article was generated with the assistance of artificial intelligence and subsequently reviewed and edited by a human financial advisor to ensure accuracy and relevance. While AI can help synthesize information and generate content, it does not replace the expertise and judgment of a qualified financial professional.