What Is a Solo 401(k)?

Owning your own business comes with a lot of benefits. You work at your own pace on your schedule, you make the rules, and you get to make pretty much all the decisions . . . after all, you’re the boss. 

But there are downsides too—like shouldering all the risk, wearing all the hats, and not having access to the same retirement options enjoyed by those who choose to work for someone else.

Since the most effective investing vehicle for Baby Steps Millionaires is their dependable 401(k), you’re probably wondering what’s available to you as an entrepreneur (besides paying the self-employment tax and pretty much flying solo).

Fear not. You do have retirement savings options as a business owner—and they’re pretty awesome! Let’s check out the benefits of the solo 401(k).

What Is a Solo 401(k)?

A solo 401(k)—also known as a one-participant 401(k) or individual 401(k)—is a retirement savings plan created specifically for self-employed individuals and small-business owners with no employees.

The solo 401(k)’s high contribution limits, tax advantages and ability to include a spouse in the plan make it a very attractive option for a lot of “solopreneurs” out there.

Who Is Eligible for a Solo 401(k)?

Solo 401(k)s are great for sole proprietors, independent consultants or owner-entrepreneurs with their own S or C corporation. But a key distinction of the solo 401(k) is that, no matter how your business is structured, you can’t have any employees—this plan is just for you (and your spouse!).

Pro tip: If you already have employees or decide to hire employees in the future, you’ll need to find a different type of retirement plan, like a SEP-IRA, a SIMPLE IRA or a full-fledged 401(k).

How Does a Solo 401(k) Work?

First, you’ll need an Employer Identification Number (EIN) to open an account—even if you’re a sole proprietor. The solo 401(k) allows you the flexibility of choosing to invest with either traditional (pretax contributions) or Roth (after-tax contributions). You could postpone the tax bill, but we recommend getting it out of the way up front with the Roth option because it lets your retirement savings grow tax-free, plus you won’t have to pay taxes on your withdrawals in retirement. Win-win!

Solo 401(k) Basics

	Traditional	Roth
Business owner eligibility	Yes, as long as you don’t have any employees	Yes, as long as you don’t have any employees
Spouse eligibility	Yes	Yes
Taxes on contributions	Deferred until withdrawal	Paid when earned
Taxes on distributions	Paid at regular federal income tax rates when withdrawn from account	None, but your plan has to be at least five years old
RMDs	Subject to RMDs (Required Minimum Distributions)	No RMDs
How to open	Requires an EIN	Requires an EIN1

How Much Can I Contribute to a Solo 401(k)?

When the IRS looks at your business, they see two people: the employer and the employee. That means you’re able to contribute to your retirement plan as both parties. This is one of the most attractive features of the solo 401(k) because it means you could invest a lot more. Why? Because when you put your employer hat on, you get to decide how much the company is going to plunk away in there.

Employee Contribution Limits

Your contributions as an individual employee max out at $23,500 in 2025, plus there are two catch-up provisions this year that allow those who are a little older to invest even more.

• If you’re age 50 and older, you’re allowed an additional catch-up contribution of $7,500—bringing your total contribution limit up to $31,000.
• If you’re between 60 and 63 years old, you get an even bigger catch-up contribution of $11,250—for a total contribution limit of $34,750.²

It’s important to note here that all these contributions can be made with pretax dollars (traditional) or after-tax dollars (Roth). If you’re getting closer to retirement and your Roth account hasn’t been open for at least five years, you could face hefty taxes and penalties on any distributions until it is.³

Employer Contribution Limits

Here’s where the solo 401(k) gets pretty cool. You can make big contributions as a business owner—basically the same as an employer match for a conventional 401(k). There are different rules depending on how your business is legally structured:

• If your business is organized as a corporation (think C or S, with your wages reported on IRS Form W-2), your max employer contribution is 25% of your annual compensation.⁴
• If your business is organized as a sole proprietorship or partnership, your max employer contribution is 25% of your net adjusted self-employment income—a number you find after deducting half of your self-employment tax and any contributions you’ve made to yourself (IRS Publication 560 explains this in detail). It’s a difficult number to find, so we recommend talking to a tax pro about your specific situation.⁵

Pro Tip: Many businesses are organized as LLCs. If that’s you, your contribution limits as the business owner will depend on whether you report your wages on a W-2. This is a function of how your company is legally structured (as well as state law), so if you own an LLC, check with an investment pro.

How much will you need for retirement? Find out with this free tool!

Spoiler alert: The IRS sets the maximum income you can use to calculate your contributions at $350,000 (with exceptions, of course).⁶ That means if you’re allowed to contribute 25%, your max employer contribution is $87,500. Still . . . it’s probably a lot more than a regular job ever provided for your retirement!

Combined Contribution Limits

Because the IRS thinks ahead about everything, there are also limits on your total contributions (employee and employer contributions added together), and these trump all the limits we’ve covered so far. For 2025:

• If you’re under 50, your total combined limit is $70,000.
• If you’re 50 or older (but not 60–63), your total combined limit is $77,500 (which includes your $7,500 catch-up contribution).
• If you’re 60–63, your total combined limit is $81,250 (which includes your bigger $11,250 catch-up contribution).⁷

Let’s put it all together with an example. Let’s say you’re 43 years old, own an S corporation with no employees, and make $400,000 in 2025. As an employee, you could contribute $23,500 to your solo 401(k), and the employer (your S corporation) could max out contributions at $87,500. However, because of the total combined limit rule, your employer contributions will max out at $46,500 to avoid crossing the $70,000 threshold.

That $46,500 is over 11% of your annual compensation, which isn’t bad at all! And that’s the good news about the solo 401(k)—even with all these limits, as a business owner you’re able to invest a whole lot more for your retirement through a solo 401(k) than you’re ever likely to see working for someone else.

Oh, and one last thing: If you work a full-time job with access to a regular 401(k) and have a solo 401(k) at your side business, you need to understand that your 401(k) contribution limit applies to all your combined 401(k) contributions.⁸ In other words, your contributions to all your accounts combined cannot exceed $23,500 for 2025.

What Are the Tax Benefits of a Solo 401(k)?

Solo 401(k)s offer solo entrepreneurs many of the same tax benefits that employees with a regular 401(k) enjoy. Which tax benefits you get depends on whether you choose the traditional or Roth option.

With a traditional solo 401(k), your contributions are funded with pretax dollars. That means your contributions are tax deductible, lowering your taxable income for the year and giving you a tax break. But your money will then grow tax-deferred, meaning you’ll have to pay taxes on all that growth when you make withdrawals in retirement.

If you go with the Roth solo 401(k) option, your contributions are funded with after-tax dollars. Unlike the traditional account, you’ll pay taxes on the money before it goes in, so you won’t get a tax break now. But here’s the good part: Your investments will grow tax-free, and you’ll be able to make tax-free withdrawals in retirement (which is the better bet).

While you get to decide when you pay taxes on your contributions as an individual (by choosing traditional or Roth), your employer contributions generally must go into a tax-deferred account and are tax deductible. But there’s a new twist in 2025. Thanks to the SECURE 2.0 Act, employer contributions can be either:

• Pretax (traditional) and tax deductible
• After-tax (Roth) and included in your taxable income this year.⁹

Just remember that if you decide to tap into your retirement savings before age 59 1/2—regardless of whether it’s Roth or traditional—you’ll have to pay an early withdrawal penalty and any applicable taxes for doing so.

Are There Any Alternatives to the Solo 401(k)?

The solo 401(k) isn’t the only option for the self-employed go-getter. In fact, there are some alternatives that you may want to look into.

SIMPLE IRA

A SIMPLE IRA (Savings Incentive Match PLan for Employees) is a retirement savings plan for small businesses (usually with no more than 100 employees). It’s an easy way for small-business owners to save for their own retirement and contribute to their employees’ retirement savings as well.

You get to decide how much of each paycheck to contribute and, since it’s a tax-deferred account, you won’t have to pay taxes on that money for now (but you will have to pay Uncle Sam when you take it out in retirement).

Simplified Employee Pension (SEP) Plan

A SEP plan allows your “employer self” to contribute to traditional IRAs (SEP-IRAs) that are set up for your “employee self.” There’s one big difference between SEP-IRAs and other retirement plans, though. Only the employer contributes to this plan.¹⁰

SEP-IRAs come with advantages like easy setup, higher annual contribution limits than a traditional IRA, and contributions that are immediately vested—meaning you have full ownership of these assets from day one (the usual withdrawal rules still apply). The SEP is a great way to go if you don’t qualify for a solo 401(k) because your business has employees.

Traditional and Roth Individual Retirement Accounts (IRAs)

With a traditional IRA, you’re able to save for retirement with some pretty sweet tax advantages. The contributions you make to a traditional IRA are tax deductible. And another cool feature is that you’re not limited to only an IRA for your investments—you can invest in both a solo 401(k) and an IRA! Plus, these contributions aren’t typically taxed until you start taking out distributions at retirement age.¹¹

As for the Roth IRA, it’s no secret—we love it! Its rules are a little different from the traditional IRA.

• Contributions to a Roth IRA are not tax deductible.
• Withdrawals are tax-free.
• You’re still able to contribute to your Roth IRA after age 70 1/2.
• As long as you’re alive, you can leave your money in your Roth IRA (there are no RMDs).¹²

For 2025, your total contributions to all your IRAs can’t exceed either of the following:

• $7,000 ($8,000 if you’re 50 or older)
• Your taxable income (if your earned income is less than those limits, that’s your cap for the year)¹³

Of course, this list doesn’t cover every option out there. Other types of retirement plans may work better for you.¹⁴ Whatever you choose, we strongly recommend connecting with an investment professional to help walk you through your options.

How Do I Open a Solo 401(k)?

Opening a solo 401(k) is pretty easy:

1. You’ll need your Employer Identification Number (EIN).
2. Typically, you’ll make arrangements with an investment broker for how your investments will be structured.
3. Your broker will provide you with a plan adoption agreement and an account application.
4. After that’s done, you can set up how you make your contributions.

Pro Tip: If you plan to make contributions this year, make sure your plan is ready to go by December 31, and make all your employee contributions by the end of the calendar year. Employer contributions can typically be made by the tax-filing deadline for the tax year.

Find a SmartVestor Pro!

As a business owner, you’re no stranger to getting scrappy and figuring things out on your own. But with something as important as investing, don’t fly solo. Reach out to an investment pro who can help you set your financial goals.

Find a SmartVestor Pro in your area!

 

This article provides general guidelines about investing topics. Your situation may be unique. To discuss a plan for your situation, connect with a SmartVestor Pro. Ramsey Solutions is a paid, non-client promoter of participating Pros.