What a Solo 401(k) Is and Who Can Use One

A Solo 401(k) is a retirement plan for self-employed people with no employees

A Solo 401(k), also called a solo(k) or individual 401(k), is a retirement savings plan designed for people who work for themselves and have no employees on payroll. You set it up through a financial institution — a brokerage, bank, or insurance company — and you are both the employer and the employee on the account. This means you can contribute money in two ways: as an employee (through salary deferrals) and as an employer (through profit-sharing contributions).

The main reason people choose a Solo 401(k) over other self-employed retirement plans is the contribution limit. For 2024, you can set aside up to $69,000 per year (or $76,500 if you are 50 or older), which is significantly higher than what you can put into a SEP IRA or a Solo Roth IRA. If your self-employment income is modest, you will not hit that ceiling, but the option is there if your business grows.

You must open and fund a Solo 401(k) by December 31 of the tax year you want to use it for, though you can set up the plan as late as your tax filing important date (including extensions) if you have not yet filed your return for that year.

Key Takeaways

• A Solo 401(k) is only available to self-employed people with no employees, including sole proprietors, partners in partnerships, and S-corp owners who take a salary.
• You contribute as both employee and employer, which allows you to save up to $69,000 per year (or $76,500 at age 50+) in 2024.
• You must open the plan by December 31 of the year you want to use it, though you can fund it later if you file an extension.
• Solo 401(k)s require annual paperwork (Form 5500-N if your balance exceeds $250,000) and ongoing compliance, making them more complex than SEP IRAs.
• Loans against your Solo 401(k) balance are allowed, which is an option not available with most other self-employed retirement plans.

Who can open a Solo 401(k)

You can open a Solo 401(k) if you are self-employed and have no employees. This includes sole proprietors (people who run a business as themselves), partners in a partnership, and owners of an S-corporation or C-corporation who take a W-2 salary. The key word is "no employees" — if you have even one person on your payroll, you cannot use a Solo 401(k) and must offer a plan that covers all may be able to access employees.

A spouse who works in your business counts as an employee, so if you are married and both of you work in the business, you each need your own Solo 401(k), not one shared account. Your spouse's plan is separate and has its own contribution limits.

If you have a business with no payroll but you hire contractors, that does not disqualify you. Contractors are not employees, so you can still use a Solo 401(k). However, once you hire your first W-2 employee, you must switch to a different plan type.

How contributions work: employee and employer sides

A Solo 401(k) has two contribution buckets, and understanding the difference matters for your taxes and your savings strategy. The employee deferral is money you contribute from your own paycheck or business income, up to $23,500 per year in 2024 (or $29,000 if you are 50 or older). This is the part that reduces your taxable income dollar-for-dollar.

The employer contribution is the second bucket. As the employer, you can contribute up to 20 percent of your net self-employment income (after accounting for the self-employment tax deduction). This is where the higher overall limit comes from. If you are a W-2 employee in your own S-corp, your employer contribution is based on your W-2 wages, not your total business income.

The total of both contributions cannot exceed $69,000 in 2024 (or $76,500 at age 50+). If your business income is $50,000, you will not be able to contribute the full $69,000 — your contributions are capped by what you actually earned. You calculate your exact contribution limit on Schedule C (if you are a sole proprietor) or your business tax return.

Solo 401(k) vs. SEP IRA: when to choose each

Both plans are designed for self-employed people, but they work differently. A SEP IRA is simpler to set up and maintain — you do not file annual paperwork with the IRS, and you can open one as late as your tax filing important date. You contribute only as an employer (up to 20 percent of net self-employment income), so the maximum is lower than a Solo 401(k). A SEP IRA is the better choice if you want minimal paperwork and your income is moderate.

A Solo 401(k) requires more setup and ongoing compliance, including filing Form 5500-N with the IRS once your account balance exceeds $250,000. However, it allows you to contribute as both employee and employer, which means a higher overall limit. A Solo 401(k) is also the only self-employed plan that lets you borrow against your balance — you can take a loan up to $50,000 or half your account balance, whichever is less, and repay it over five years. If you think you might need access to your retirement savings in an emergency, a Solo 401(k) offers that flexibility.

The choice often comes down to income level and complexity tolerance. If you earn under $60,000 per year, a SEP IRA will likely let you save as much as you need with less paperwork. If you earn significantly more or want the loan option, a Solo 401(k) is worth the extra work.

Opening and funding your Solo 401(k)

You open a Solo 401(k) by contacting a financial institution that offers them — common providers include Fidelity, Charles Schwab, E*TRADE, and Vanguard, though many banks and insurance companies also offer them. You will complete an process and choose your investment options (stocks, bonds, mutual funds, or other investments depending on the provider). The plan document itself is usually a template provided by the financial institution, not something you draft from scratch.

The important date to open the plan is December 31 of the tax year you want to use it for. However, you do not have to fund it by that date. If you file an extension on your tax return, you can fund the plan as late as your extended important date (usually October 15). This matters if you do not know your final income until you are preparing your return.

Once the plan is open, you make contributions throughout the year or in a lump sum before your tax filing important date. If you are an employee deferring salary, you typically set up automatic payroll deductions. If you are making an employer contribution, you can contribute it all at once when you file your return.

Annual paperwork and compliance requirements

A Solo 401(k) requires more paperwork than a SEP IRA. Once your account balance reaches $250,000, you must file Form 5500-N (the simplified version for small plans) with the IRS each year. This form reports your plan's activity and is due by July 31 of the following year (or October 31 if you file an extension). If your balance stays under $250,000, you do not file this form.

You also need to keep records of your contributions, investment performance, and any loans you take. If you take a loan from your Solo 401(k), you must track the repayment schedule and make sure you repay it on time — if you do not, the IRS treats it as a withdrawal and you owe income tax plus a 10 percent penalty if you are under 59½.

Some financial institutions charge annual maintenance fees for Solo 401(k)s, typically $100 to $300 per year. Ask about fees when you are comparing providers, as they can add up over time.

Withdrawals, loans, and what happens at retirement

You can withdraw money from your Solo 401(k) once you reach age 59½, and you owe income tax on the withdrawal. If you withdraw before 59½, you owe income tax plus a 10 percent early withdrawal penalty, unless an exception applies (such as a financial hardship, though the rules are strict). You must begin taking required minimum distributions (RMDs) at age 73, based on your account balance and life expectancy.

One unique feature of a Solo 401(k) is the loan option. You can borrow up to $50,000 or 50 percent of your account balance, whichever is less, and you have up to five years to repay it. The interest rate is set by your plan provider and is typically reasonable. If you leave your business or cannot repay the loan, the outstanding balance is treated as a withdrawal and you owe taxes and penalties.

If you hire your first employee, you cannot keep the Solo 401(k) — you must roll it into a different plan type that covers all may be able to access employees, such as a SEP IRA or a straightforward IRA. You can roll the balance into an IRA without tax consequences, but you need to act before the important date to avoid penalties.

Frequently Asked Questions

Can I have a Solo 401(k) and a regular 401(k) at the same time?

No. If you are an employee at another company and participate in their 401(k), your total employee deferrals across all plans cannot exceed $23,500 per year in 2024. Your Solo 401(k) employee deferrals count toward this limit. However, employer contributions to your Solo 401(k) are separate and do not count toward the employee deferral limit.

What happens to my Solo 401(k) if I hire an employee?

You must stop using the Solo 401(k) and move to a plan that covers all may be able to access employees, such as a SEP IRA or straightforward IRA. You can roll your Solo 401(k) balance into a traditional IRA without tax consequences. You have until the end of the year to make this transition, though it is best to do it as soon as you hire someone to avoid compliance issues.

Can I take a loan from my Solo 401(k) to buy a house?

Yes, you can borrow from your Solo 401(k) for any reason, including a down payment on a house. You can borrow up to $50,000 or 50 percent of your balance, whichever is less, and repay it over five years. The interest rate is set by your plan provider. If you do not repay the loan, the outstanding balance is treated as a withdrawal and you owe income tax plus a 10 percent penalty if you are under 59½.

Do I need a Solo 401(k) if I only earn a small amount from self-employment?

Not necessarily. If you earn under $5,000 per year from self-employment, you might not need a retirement plan at all. If you earn more but want simplicity, a SEP IRA or a Solo Roth IRA may be a better fit. A Solo 401(k) makes the most sense if you earn a significant amount and want to save the maximum allowed or if you want the loan option.