The complete guide to solo 401(k)

Being self-employed offers numerous advantages, but one significant challenge is the absence of an employer-sponsored retirement plan.

For entrepreneurs and small business owners without employees, a Solo 401(k) is an excellent solution. This retirement account mimics many features of traditional employer-sponsored plans while catering to the unique needs of self-employed individuals.

Let’s dive deeper into what a Solo 401(k) is, its benefits, and how to establish one.

What Is a Solo 401(k)?

A Solo 401(k), also known as a one-participant 401(k), is a retirement savings plan designed specifically for self-employed individuals or business owners with no employees.

The IRS rules stipulate that a Solo 401(k can only be used if you do not have full-time employees, although your spouse may participate if they work for your business.

Quick Facts About Solo 401(k)s

• Eligibility: Must be a business owner without employees; no age or income restrictions.
• Contribution limits: Up to $69,000 in 2024 (or $70,000 in 2025), with a catch-up contribution of $7,500 for individuals aged 50 or older.
• Taxes on contributions: Traditional Solo 401(k) contributions are pre-tax, while Roth contributions are after-tax.
• Qualified distributions: Traditional distributions are taxed as income, while Roth distributions are tax-free.
• Setup requirements: You need an employer identification number (EIN) to establish the account.

Contribution Limits and Rules

One of the main benefits of a Solo 401(k) is the flexibility in contribution limits. For 2024, you can contribute up to $69,000.

To maximize contributions, it helps to think of yourself as both the employee and the employer:

• Employee role: You can contribute up to $23,000 in 2024, or 100% of your compensation (whichever is lower). Those aged 50 or older can add a catch-up contribution of $7,500.
• Employer role: You can add profit-sharing contributions of up to 25% of your net self-employment income.

For those between the ages of 60 to 63, catch-up contributions rise to $11,250 in 2025, thanks to the SECURE 2.0 Act.

Tax Advantages of Solo 401(k) Plans

With a Traditional plan, you reduce your taxable income in the year of contribution, but distributions are taxed later.

Conversely, Roth contributions offer no immediate tax break, but withdrawals in retirement are tax-free.

If you anticipate higher income in retirement, a Roth Solo 401(k) may be the better choice. Otherwise, a Traditional plan could provide more immediate benefits. Remember, early withdrawals before age 59½ typically result in penalties and taxes.

Can My Spouse Participate in a Solo 401(k)?

Yes! Your spouse can contribute to your Solo 401(k) if they earn income from your business. This effectively doubles your household’s retirement savings potential.

As an employee, your spouse can contribute up to the employee limit, and as the employer, you can add profit-sharing contributions.

How to Open a Solo 401(k)

Establishing a Solo 401(k) is straightforward. Follow these steps:

• Obtain an EIN: You need an employer identification number to set up the account.
• Choose a Provider: Many online brokers offer Solo 401(k) accounts, providing access to a variety of investment options like mutual funds, ETFs, and stocks.
• Complete Required Paperwork: Fill out the plan adoption agreement and account application provided by your broker.
• Make Contributions: Ensure employee contributions are made by the calendar year-end and employer contributions by the tax filing deadline.

Once your Solo 401(k) is active, maintaining it involves some additional responsibilities. Plans with over $250,000 in assets require filing Form 5500-SF annually. Monitoring contributions and investment performance is essential to stay on track with your retirement goals.

A Solo 401(k) is an indispensable tool for self-employed individuals looking to secure their financial future.

With high contribution limits, tax advantages, and spousal participation, it stands out as one of the most versatile retirement plans available. If you’re ready to take control of your retirement, consider setting up a Solo 401(k) today!