What Is a Solo 401(k) for Self-Employed?

Employee vs. Employer Contribution — How It Adds Up

The Solo 401(k) has two contribution buckets. As the employee, you can defer up to $23,000 in 2024 (plus $7,500 catch-up if 50+), regardless of income. As the employer, your business can contribute up to 25% of W-2 wages (S-corp) or ~20% of net self-employment income (sole prop/partnership). Example: a sole proprietor with $150,000 net SE income can contribute roughly $23,000 (employee) + $27,685 (employer) = $50,685 total. Compare that to a SEP-IRA, which is capped at the same employer percentage but allows no separate employee deferral — at lower income levels, the Solo 401(k) wins by a wide margin.

Who Qualifies and When to Open One

Any self-employed person — sole proprietor, LLC owner, S-corp owner, independent contractor — with no full-time W-2 employees (other than a spouse) can open a Solo 401(k). You must establish the plan by December 31 of the tax year you want to start (though SECURE 2.0 extended the employer contribution deadline to the tax filing deadline). Many brokerage firms (Fidelity, Vanguard, Schwab) offer free Solo 401(k) plans. If your plan has over $250,000 in assets, you must file Form 5500-EZ annually with the IRS.

Roth Option and Loan Feature

Unlike a SEP-IRA, a Solo 401(k) can include a Roth option — employee deferrals can go in after-tax for tax-free growth. You can also take a loan from your Solo 401(k) (up to 50% of the vested balance or $50,000, whichever is less) without a penalty, unlike an IRA. However, if you hire a full-time employee, you must convert to a full 401(k) plan and cover that employee. Work with a CPA or financial professional to ensure your contributions are calculated correctly each year.