Looking for a simple, implementable solutions that builds retirement savings while simultaneously minimizes tax?
It’s hard to find a more efficient solution than a Solo 401k.
Flexible Contributions. Maximum tax savings. Easy Administration.
Outside of cash flow constraints, it’d be hard to find a compelling reason for a solopreneur to avoid contributing to a Solo 401k.
Here’s what you need to know to get started.
What is a Solo 401(k)?
A Solo 401(k) is a straight-forward retirement plan for self-employed individuals and business owners with no full-time employees other than a spouse.
It provides higher contribution limits than SEP IRA and other similar plans, significant tax advantages, simple administration, and flexible annual contribution amounts and investment options.
Who is Eligible for a Solo 401(k)?
- Self-employed individuals or business owners (including freelancers and side hustles).
- No employees except for a spouse (You can work with contractors and part-time W-2 employees – More info on the exact rules here).
- No income requirements to participate.
2025 Solo 401(k) Contribution Limits
- Employee Contributions – Up to $23,500 if under 50, $30,500 if 50 or older.
- Employer Contributions – Up to 25% of compensation (or 20% for sole proprietors).
- Total Contribution Limit – $70,000 if under 50, $77,500 if 50 or older.
- Roth Option – Employee contributions can be made as Roth (after-tax).
Key Benefits of a Solo 401(k)
Tax Advantages
- Tax-Deferred Growth – No taxes on investment growth until withdrawal (pre-tax contributions).
- Roth Option – After-tax contributions with the benefit of tax-free growth and withdrawals in retirement.
- Tax Deductible Contributions – Pre-tax contributions reduce taxable income.
Investment Flexibility
- Unlike most workplace 401k plans, Solo 401k’s have more options when it comes to investment choices. It’s as simple as opening up an account at a major custodian (Schwab, Fidelity, Vanguard) and funding the account within the IRS guidelines.
Solo 401k Loan Provisions
- You can borrow up to 50% of the Solo 401k’s value, up to a max loan of $50,000.
Adding a Spouse to a Solo 401(k)
If your business generates enough income, bringing your spouse into the business can effectively double your household’s Solo 401(k) contributions.
By including your spouse in the plan –
- Each spouse can contribute up to the annual employee limit ($23,500 if under 50, $30,500 if 50+).
- Employer contributions can be made separately for both spouses, up to 25% of their individual compensation.
- The total combined contribution limit for a couple could reach $140,000 in 2025 ($155,000 if both are 50+).
- This strategy significantly enhances retirement savings while maximizing tax benefits.
Mega Backdoor Roth Strategy - Possible, but takes some work
It’s possible to have a plan that is designed to allow additional after-tax contributions to be converted into a Roth Solo 401(k).
There is some administration complexity to this approach compared to utilization of a major custodian’s standard Solo 401k plan, so do your research or talk to a professional before adopting a self-directed 401k.
Why a Solo 401(k) is Better Than a SEP IRA
It’s getting harder and harder to identify scenarios where recommending a SEP IRAs for self-employed business owners is more effective than utilizing a Solo 401k.
Here’s a few reasons why –
- Higher Contributions at Lower Income Levels – Solo 401(k)s allow higher contributions at lower earnings given the option to make employee deferrals.
- Catch-Up Contributions – Individuals over 50 can contribute an additional $7,500, which SEP IRAs do not allow.
- Preserves More of the Qualified Business Income Deduction (QBID) – Given Solo 401(k)s have an employee contribution component, they reduce taxable income less than SEP IRAs, preserving more of the 20% QBID benefit.
- Backdoor Roth IRA Contributions – Solo 401(k)s allow contributions without triggering the pro-rata rule, making backdoor Roth IRA contributions easier.
- Mega Backdoor Roth 401(k) – Some plans allow for after-tax contributions to be converted to a Roth. This ramps up one’s ability to quickly build their tax-free retirement assets.
Final Thoughts
For a solo business owner, the Solo 401k is likely the quickest way to maximize retirement savings.
These plans give you the option to rapidly reinvest business profits in a diversified investment account for future growth, all while receiving a valuable tax benefit.
Finally, please note there are tax reporting requirements (Form 5500) when your balance is +$250,000, so keep good records.
Your CPA will thank you.
If you have questions or would like to learn more, please schedule time with me here so we can have a personalized conversation.
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Ryan Nelson, CPA, CFP® is a Wealth Advisor based out of Minneapolis / St. Paul and serves clients virtually across the United States. Outside of work Ryan enjoys collecting memories by traveling to tropical locations with loved ones, hosting family and friends at his lake home in Northwest Wisconsin, running, searching for great Italian food, and enjoying an americano from an independent coffee shop.
This material is intended for informational/educational purposes only and should not be construed as investment, tax, or legal advice, a solicitation, or a recommendation to buy or sell any security or investment product. Hypothetical examples contained herein are for illustrative purposes only and do not reflect, nor attempt to predict, actual results of any investment. The information contained herein is taken from sources believed to be reliable, however accuracy or completeness cannot be guaranteed. Please contact your financial, tax, and legal professionals for more information specific to your situation. Investments are subject to risk, including the loss of principal. Because investment return and principal value fluctuate, shares may be worth more or less than their original value. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. Past performance is no guarantee of future results. Talk to your financial advisor before making any investing decisions.