What Is a Solo 401(k)? Self-Employed Retirement Plans - NerdWallet (2024)

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What Is a Solo 401(k)? Self-Employed Retirement Plans - NerdWallet? ›

What is a solo 401(k)? A solo 401(k) is a retirement investment account for business owners who have no employees. The plan can only cover the business owner and their spouse, if they have one. A solo 401(k), which the IRS calls a one-participant 401(k) plan, has many of the same features of a traditional 401(k) plan.

A solo 401(k) plan, also called a one-participant 401(k) or a solo K, offers self-employed people an efficient way to save for retirement. There are no age or income restrictions, but participants must be business owners with no employees (apart from spouses).

"The advantages of a solo 401(k) are that contributions are tax-deductible, earnings grow tax-deferred, and assets aren't taxed until withdrawn at retirement," says Marigny deMauriac, founder of DeMAURIAC Financial Consulting and Wealth Management.

When a Solo 401(k) is referred to as a self-directed account, it simply means you can use the account to invest in areas outside of traditional stocks and bonds. That's the primary difference between a self-directed and traditional retirement account — where you put those investment dollars.

The SIMPLE IRA plan has a lower deferral limit than a Solo 401(k) plan. However, unlike a Solo 401(k) plan, the SIMPLE IRA plan uses an IRA-style trust to hold SIMPLE IRA contributions for each employee, rather than a single plan like a 401(k) Plan or other qualified retirement plan.

Entrepreneurs (self-employed individuals) who besides themselves, do not employ any other persons.

There is a downside, however, since setting up and managing the plan is usually a bit more intensive. You'll have to file a special form with the IRS each year if your account balance exceeds $250,000, and you may find that the fees are somewhat higher than what you'd pay for an IRA.

ANSWER: Once you permanently cease self-employment activity, the solo 401k plan will need to be closed and transferred to an IRA or to another employer plan (e.g., your day-time employer's 401k plan).

The alternative is the Roth solo 401(k), which offers no initial tax break but allows you to take distributions in retirement tax-free. In general, a Roth is a better option if you expect your income to be higher in retirement and/or you expect tax brackets to be higher in the future — which experts say is likely.

Paid plans can range between a $300 to $600 per year to open and set up your plan. You get everything that you would get in a free plan in addition to a range of premium features like: Ability to make Roth contributions. Ability to invest in alternative assets like crypto, real estate, and private equity.

Can I contribute 100% of my salary to my Solo 401k? ›

If you're at least 50 years old, you can add a catch-up contribution of $7,500, for a total employee contribution of $30,500. You can choose to contribute up to 100% of your compensation, provided you don't exceed these limits. Feed your brain. Fund your future.

A common question from self-employed individuals is whether they can open and contribute to a Solo 401k if they don't pay themselves a salary or wages. The short answer is no – you must have earned self-employment income to contribute to a Solo 401k.

With a Solo 401k plan, your business it the plan sponsor. Therefore, your business can choose who will be the Solo 401k plan administrator. To keep record-keeping clean and easy, and to cut the fat of extra costs, most Solo 401k accountholders will act as their own Solo 401k plan administrator.

Both SEP IRAs and solo 401(k) accounts are retirement savings vehicles you can use if you're self-employed. The SEP IRA is generally simpler and less expensive to set up, but the solo 401(k) may offer more flexibility and allow bigger contributions.

For example, if Sue, age 40, has an S-Corp instead and earned $100,000 in W-2 wages from her S-corp. She can make up a $23,000 contribution as an employee, and $25,000 (25% * $100,000) in profit-sharing contributions for a total of $48,000.

If you're self-employed and don't employ others, you are eligible to open a solo 401(k). A couple running a business together also qualifies. You can contribute to your solo 401(k) as both employer and employee. You can choose between a traditional plan or a Roth plan.

Some solo 401k plans are free, while others may cost a few hundred dollars per year to maintain. The difference between them is that free plans offer you only the essential features while premium plans offer you more of the premium features that can lead to bigger tax savings and retirement nest eggs.

Which Should I Choose? Which you choose depends on the circ*mstance of your business. Those who have full-time employees can save for retirement using a SEP IRA, while solo practitioners can opt for a solo 401(k) that has higher contribution limits and other advantages.

ANSWER: Once you permanently cease self-employment activity, the solo 401k plan will need to be closed and transferred to an IRA or to another employer plan (e.g., your day-time employer's 401k plan).

A solo 401(k) is a retirement account for anyone who is self-employed or owns a business or partnership with no employees apart from a spouse. In 2024, the maximum you can contribute is $23,000 as the employee plus an additional 25% of compensation as the employer.