Solo 401(k) contribution structure showing $23,500 employee deferral plus $46,500 employer profit-sharing for $70,000 total in 2025

The Savvy Investor's Guide

Solo 401(k) Complete Guide for Self-Employed Workers (2025)

/

James Heppe-Smith

/

, , ,

Important Educational Disclaimer

This article provides educational information about Solo 401(k) retirement plans and does not constitute financial, investment, or tax advice. Solo 401(k) rules are complex and vary by provider, business structure, and individual circumstances. Contribution calculations depend on your specific business income, entity type, and other factors.

Before opening a Solo 401(k), consult with a qualified tax professional or financial advisor who can analyze your unique situation. The IRS rules governing Solo 401(k) plans are subject to change. Provider features, fees, and investment options vary significantly. This guide is current as of November 2025.

Savvy Investor Guide is not a registered investment advisor and does not provide personalized financial recommendations.

Solo 401(k) Complete Guide for Self-Employed Workers (2025)

If you’re self-employed, a freelancer, or running a side hustle with no employees, you can contribute up to $70,000 to a Solo 401(k) in 2025 ($73,500 if you’re 50 or older, $77,250 if you’re 60-63). That’s nearly three times the $7,000 IRA limit and significantly more than what you can sock away in a SEP IRA. The Solo 401(k) is the most powerful retirement savings vehicle available to self-employed individuals, yet most don’t even know it exists.

Here’s the remarkable part: you contribute to your Solo 401(k) as both the employee and the employer. As the employee, you can defer up to $23,500 of your income. As the employer, you can contribute an additional 25% of your compensation (or 20% of your net self-employment income if you’re a sole proprietor). This dual structure creates contribution limits that dwarf every other retirement account option.

This comprehensive guide walks you through everything you need to know about Solo 401(k) plans. You’ll learn who qualifies, how contribution limits work for different business structures, which providers offer the best plans, how to set up your account step-by-step, and advanced strategies like the mega backdoor Roth within your Solo 401(k). Whether you’re a consultant earning $200,000, a freelance designer bringing in $75,000, or running a side business with $30,000 in profit, a Solo 401(k) could dramatically accelerate your retirement savings.

Table of Contents

What is a Solo 401(k)?

A Solo 401(k), also called an Individual 401(k) or Self-Employed 401(k), is a retirement account designed specifically for business owners with no full-time employees other than themselves and their spouse. It works exactly like the 401(k) your W-2 friends have at their corporate jobs, but you’re both the employee and the employer. This dual role is what makes the Solo 401(k) so powerful.

Think of it this way: when you worked for someone else, you contributed to your 401(k) through payroll deductions (the employee contribution), and your employer maybe kicked in a match (the employer contribution). With a Solo 401(k), you do both. You make employee deferrals from your business income, and you also make employer profit-sharing contributions. These two buckets combine to create contribution limits that leave traditional and Roth IRAs in the dust.

The Solo 401(k) has been around since 2001, created by the Economic Growth and Tax Relief Reconciliation Act. But despite being available for over 20 years, many self-employed workers don’t know about it. Financial institutions don’t advertise Solo 401(k)s as aggressively as IRAs because they’re more complex to administer and serve a smaller market. That’s your opportunity—understanding this account gives you a massive advantage over other self-employed individuals who are stuck with IRAs or SEP IRAs.

Key Features of Solo 401(k) Plans

  • High contribution limits: Up to $70,000 in 2025 (or $73,500 if 50+, $77,250 if 60-63)
  • Roth option available: Make after-tax Roth contributions that grow tax-free
  • Loan provision: Borrow up to $50,000 or 50% of account value (not available with IRAs)
  • Creditor protection: Strong protection from lawsuits and bankruptcy
  • Catch-up contributions: Additional $7,500 if you’re 50 or older ($11,250 if 60-63)
  • Mega backdoor Roth: Some providers allow after-tax contributions beyond the $23,500 limit
  • Simple administration: No annual filing requirement unless plan assets exceed $250,000

Real Example: Solo 401(k) vs IRA Savings

Scenario: Sarah, 35, is a freelance marketing consultant earning $120,000 net self-employment income.

IRA Option: Maximum $7,000 annual contribution
Solo 401(k) Option: $23,500 (employee) + $22,800 (employer 20% of $114,000) = $46,300 total

Difference: Sarah saves an extra $39,300 per year with a Solo 401(k). Over 25 years at 8% returns, that’s an additional $2.85 million in retirement savings.

Who Qualifies for a Solo 401(k)?

The eligibility rules for Solo 401(k) plans are straightforward but strict. You qualify if you meet these two requirements:

1. You have self-employment income. This includes income from freelancing, consulting, contract work, running a sole proprietorship, LLC, S-corporation, C-corporation, or partnership. Side hustle income counts too. If you earn $500 from freelance writing on weekends, that qualifies.

2. You have no full-time employees (other than your spouse). This is the critical restriction. If you hire even one employee who works more than 1,000 hours per year (roughly 20 hours per week), you can’t use a Solo 401(k). Part-time workers under 1,000 hours are fine. Contractors who you pay via 1099 don’t count as employees.

Your spouse can participate in your Solo 401(k) if they work in the business. They get their own $23,500 employee deferral limit plus employer contribution, effectively doubling your household’s retirement savings capacity.

Common Scenarios That Qualify

  • Full-time freelancer or consultant: You left corporate America to consult or freelance full-time.
  • Side hustle with W-2 job: You have a 9-to-5 job but also earn money from freelance work, rental properties managed as a business, or selling products online.
  • Solo business owner: You run an LLC or incorporated business by yourself (or with your spouse).
  • Independent contractor: You receive 1099-NEC forms instead of W-2s.
  • Partnership: You and your business partner(s) own the business but don’t have other employees.
  • Multiple businesses: You own several businesses with no employees. You can consolidate under one Solo 401(k) or maintain separate plans.

Scenarios That Don’t Qualify

  • You hire a full-time employee: Even one full-time employee disqualifies you from Solo 401(k). You’d need to switch to a regular 401(k) plan with higher costs and compliance requirements.
  • You own another business with employees: If you’re a partner in a business with employees, those employees might count against your Solo 401(k) eligibility in your other business due to IRS controlled group rules.
  • Zero self-employment income: If your business loses money or breaks even, you can’t make employer profit-sharing contributions (though you might be able to make employee deferrals if you have positive net earnings).

Critical Rule: The No-Employee Requirement

If you hire your first full-time employee, your Solo 401(k) must convert to a regular 401(k) by the end of that calendar year. This means higher costs, more paperwork, and annual Form 5500 filing requirements. Plan for this transition before you hire—it’s one of the most common Solo 401(k) mistakes.

Part-time workers (under 1,000 hours annually) and independent contractors don’t trigger this rule. Keep meticulous records of contractor agreements and hours worked by any part-time help.

2025 Contribution Limits Explained

Understanding Solo 401(k) contribution limits requires thinking in two buckets: the employee deferral and the employer profit-sharing contribution. These combine to create the total contribution limit, which varies based on your age and income.

Employee Deferral Limit

As the employee, you can contribute up to $23,500 in 2025 through salary deferrals. This limit is the same whether you’re a sole proprietor, LLC owner, or S-corp shareholder. If you’re 50 or older, you get an additional $7,500 catch-up contribution for a total of $31,000. If you’re ages 60-63 in 2025, your catch-up increases to $11,250 for a total of $34,750 (this is a new provision from the SECURE 2.0 Act).

These deferrals can be traditional (pre-tax), Roth (after-tax), or a combination. You decide how much goes where based on your tax situation.

Employer Profit-Sharing Limit

As the employer, you contribute up to 25% of your compensation. But there’s a catch: the definition of “compensation” changes based on your business structure.

For S-corporations and C-corporations: Compensation is your W-2 wages. If you pay yourself $100,000 in W-2 income, you can contribute 25% of that ($25,000) as an employer contribution.

For sole proprietors, single-member LLCs, and partnerships: Compensation is your net self-employment income after deducting one-half of your self-employment tax. The contribution rate is effectively 20% of your net self-employment income (not 25%) because you must factor in the self-employment tax deduction and the fact that your contribution reduces your compensation. Don’t worry—this sounds more complicated than it is. The calculator below does the math automatically.

Total Contribution Limit

The IRS caps your total Solo 401(k) contributions (employee deferrals + employer contributions) at $70,000 in 2025. Add catch-up contributions if you’re eligible: $77,500 for ages 50-59, or $80,250 for ages 60-63.

Here’s a crucial point: you can max out the employee deferral ($23,500) regardless of your income, as long as you have at least that much in net self-employment income. But the employer contribution depends on your profit level. Lower income? You’ll hit the percentage limit before you reach $70,000. Higher income? You’ll hit the $70,000 cap before you reach 25% of compensation.

Contribution Limits by Age (2025)

Under Age 50:

  • Employee deferral: $23,500
  • Employer contribution: Up to 25% of compensation (20% for sole proprietors)
  • Total maximum: $70,000

Age 50-59:

  • Employee deferral: $31,000 ($23,500 + $7,500 catch-up)
  • Employer contribution: Up to 25% of compensation
  • Total maximum: $77,500

Age 60-63:

  • Employee deferral: $34,750 ($23,500 + $11,250 enhanced catch-up)
  • Employer contribution: Up to 25% of compensation
  • Total maximum: $80,250

How Contributions Work with Variable Income

Self-employment income fluctuates. One year you might earn $150,000, the next year $80,000. Your Solo 401(k) contributions flex with your income—that’s one of its advantages over defined benefit plans. In high-income years, max out your contributions. In leaner years, contribute less or skip employer contributions entirely while still making employee deferrals.

You don’t commit to a specific contribution amount when you open the plan. You have until your tax filing deadline (including extensions) to make employer profit-sharing contributions for the previous year. Employee deferrals must be made during the calendar year, but employer contributions can happen in April (or October with an extension) of the following year.

If You Have Both W-2 and Self-Employment Income

The $23,500 employee deferral limit is per person, not per plan. If you have a W-2 job with a 401(k) and also have self-employment income, your combined employee deferrals to both plans can’t exceed $23,500. But you can still make employer profit-sharing contributions to your Solo 401(k) based on your self-employment income.

Example: You work full-time and contribute $18,000 to your employer’s 401(k). You also earn $50,000 from freelance consulting. You can contribute an additional $5,500 in employee deferrals to your Solo 401(k) ($23,500 limit – $18,000 already contributed = $5,500 remaining). Plus, you can contribute roughly $9,500 as an employer contribution (20% of $47,500 net self-employment income after deducting half of SE tax).

Solo 401(k) Contribution Calculator

Use this calculator to determine your maximum Solo 401(k) contribution based on your business income and structure. The calculator automatically handles the complex math for sole proprietors (including the self-employment tax adjustment) and provides separate calculations for S-corps.

Calculate Your Maximum Contribution

Employee Deferral Limit: $0
Employer Contribution Limit: $0
Your Total Maximum Contribution: $0

Calculator Notes

For sole proprietors: The calculator automatically reduces your contribution by the self-employment tax deduction. This is why your effective employer contribution rate is 20%, not 25%.

For S-corp owners: Make sure you’re paying yourself reasonable W-2 wages. The IRS scrutinizes S-corps that pay minimal wages to avoid payroll taxes.

If you have a W-2 job: Remember that your employee deferral limit ($23,500) applies across all 401(k) plans combined. The calculator accounts for this.

Solo 401(k) vs SEP IRA vs SIMPLE IRA

Self-employed workers have three main retirement account options: Solo 401(k), SEP IRA, and SIMPLE IRA. Each has distinct advantages. Here’s how they compare for a self-employed individual earning $150,000 in net self-employment income.

Feature Solo 401(k) SEP IRA SIMPLE IRA
Max Contribution (2025, under 50) $70,000 $70,000 $16,500
Contribution for $150k income $53,500
($23,500 employee + $30,000 employer)		 $30,000
(20% of net income)		 $16,500
Catch-up (Age 50+) $7,500 (ages 50-59)
$11,250 (ages 60-63)		 None $3,500
Roth Option Yes (employee deferrals) No No
Loan Provision Yes (up to $50,000) No No
Employee Eligibility No employees allowed
(spouse OK)		 All employees 21+ with $750+ earnings All employees with $5,000+ earnings
Setup Complexity Moderate
(adoption agreement + bank account)		 Very simple
(open account like IRA)		 Moderate
(IRS Form 5304-SIMPLE)
Annual Filing Form 5500-EZ if assets >$250k None None
Contribution Deadline Employee: 12/31
Employer: Tax deadline + extensions		 Tax deadline + extensions Employee: 12/31
Employer: 12/31
Best For High earners with no employees who want maximum contributions + Roth option + loans Solo business owners who want simplicity and don’t need employee deferrals Small businesses with employees who want easy setup

Which Plan Should You Choose?

Choose Solo 401(k) if:

  • You want to contribute more than $30,000 per year
  • You want the option to make Roth contributions
  • You might need to borrow from your retirement account
  • You’re 50+ and want to make catch-up contributions
  • You have no employees (other than a spouse)
  • You want to do a mega backdoor Roth strategy (some providers only)

Choose SEP IRA if:

  • You want extremely simple setup and administration
  • Your income varies significantly year to year
  • You might hire employees eventually
  • You’re earning under $150,000 and won’t exceed the SEP contribution limit
  • You already have traditional IRAs and want to keep all retirement savings in IRA accounts for pro-rata rule simplicity

Choose SIMPLE IRA if:

  • You already have employees and need a low-cost plan to cover them
  • Your business earns modest income (under $75,000)
  • You want to minimize administrative complexity

The Clear Winner for Most Self-Employed Workers: Solo 401(k)

For high-earning self-employed individuals without employees, the Solo 401(k) beats both SEP IRA and SIMPLE IRA. The combination of higher contribution limits, Roth option, and loan provisions makes it the superior choice despite slightly more setup complexity.

Example: A 45-year-old consultant earning $150,000 can contribute $53,500 to a Solo 401(k) but only $30,000 to a SEP IRA. That extra $23,500 per year, compounded over 20 years at 8%, equals an additional $1.07 million at retirement.

Best Solo 401(k) Providers (2025)

Not all Solo 401(k) providers are created equal. The big differences: fees, investment options, Roth availability, loan provisions, and whether they support after-tax contributions for mega backdoor Roth strategies. Here’s how the major providers compare.

Provider Account Fees Investment Options Roth Option Loans After-Tax Contributions
Fidelity Solo 401(k) $0 annual fee Full range: stocks, bonds, ETFs, mutual funds (including low-cost index funds) Yes Yes No
Charles Schwab Individual 401(k) $0 annual fee Full range: stocks, bonds, ETFs, mutual funds Yes Yes No
Vanguard Individual 401(k) $20/year per fund (waived with $50k+ balance) Vanguard funds only (excellent low-cost index funds) Yes Yes No
E*TRADE Solo 401(k) $0 annual fee Full range: stocks, bonds, ETFs, mutual funds Yes Yes No
TD Ameritrade Individual 401(k) $0 annual fee Full range: stocks, bonds, ETFs, mutual funds Yes Yes No
Guideline Solo 401(k) $8/month ($96/year) Limited to specific fund menu Yes No No
Self-Directed IRA/401(k) Custodians
(Equity Trust, IRA Financial, etc.)		 $500-$2,000/year Alternative investments: real estate, private equity, notes, crypto Yes Yes Sometimes available

Detailed Provider Analysis

Fidelity Solo 401(k) – Best Overall

Why we recommend it: Zero fees, excellent platform, full investment menu including Fidelity Zero index funds (0.00% expense ratios), strong customer service, and easy online setup. Fidelity makes opening a Solo 401(k) as simple as opening an IRA.

Investment options: All Fidelity mutual funds, 3,400+ no-transaction-fee mutual funds from other companies, thousands of ETFs and stocks, bonds, CDs. The FZROX (US total market), FZILX (international), FXNAX (bond) combo gives you a complete three-fund portfolio at 0.00% cost.

Limitations: No after-tax contributions for mega backdoor Roth. If that’s important to you, you’ll need a specialized provider.

Best for: Most self-employed individuals who want low-cost index fund investing with maximum flexibility.

Charles Schwab Individual 401(k) – Excellent Alternative

Why it’s great: Zero fees, intuitive platform, excellent research tools, strong index fund selection (SCHB, SCHF, SCHZ, etc. with expense ratios around 0.03%), and fantastic customer service. Schwab recently acquired TD Ameritrade, creating the largest brokerage by assets.

Unique advantage: Schwab’s Intelligent Portfolios robo-advisor can be used within your Solo 401(k) for automated, low-cost portfolio management if you prefer hands-off investing.

Best for: Investors who value research tools and comprehensive wealth management beyond just the 401(k).

Vanguard Individual 401(k) – Index Fund Purists

Why Vanguard: The gold standard for low-cost index investing. If you want to own Vanguard Total Stock Market Index Fund (VTSAX, 0.04%), Total International (VTIAX, 0.11%), or Total Bond Market (VBTLX, 0.05%), Vanguard is the obvious choice. The $20/year fund fee disappears once your balance hits $50,000.

Limitations: You can only invest in Vanguard funds. No individual stocks, no non-Vanguard ETFs. The platform is functional but not as polished as Fidelity or Schwab. Customer service can be slow.

Best for: Vanguard loyalists who are committed to the three-fund portfolio approach and don’t need platform bells and whistles.

E*TRADE Solo 401(k) – Active Traders

Why E*TRADE: If you want to actively trade within your Solo 401(k), E*TRADE’s platform is excellent. Advanced charting, options trading capabilities (available in 401k but must be approved), and extensive research tools.

Considerations: Most people shouldn’t be actively trading in retirement accounts due to the impossibility of tax-loss harvesting, but E*TRADE gives you the tools if that’s your strategy.

Best for: Experienced traders who want active management capabilities in their Solo 401(k).

Self-Directed Solo 401(k) – Alternative Asset Investors

What they offer: Self-directed Solo 401(k) custodians like Equity Trust, IRA Financial, and The Entrust Group allow you to invest in non-traditional assets: real estate, private equity, tax liens, cryptocurrency, precious metals, private notes, and more.

Costs: Expect annual fees of $500-$2,000 depending on asset complexity. Some charge transaction fees on top.

Benefits: If you’re a real estate investor who wants to buy rental properties inside your Solo 401(k), or you want to invest retirement funds in a startup you believe in, self-directed custodians make this possible. Some also support after-tax contributions for mega backdoor Roth.

Risks: Alternative assets are illiquid, hard to value, and come with prohibited transaction rules that can disqualify your entire plan if violated. Seek professional advice before going this route.

Best for: Sophisticated investors with specific alternative asset strategies.

Our Provider Recommendation

For 90% of self-employed workers: Fidelity Solo 401(k)

Zero fees, excellent platform, complete investment menu, and straightforward setup make Fidelity the default choice. You can’t go wrong here.

If you’re a Vanguard loyalist: Vanguard Individual 401(k)

The $20/year fee is negligible if you’re already committed to Vanguard funds. The platform is adequate and the funds are best-in-class.

If you need alternative assets: Equity Trust or IRA Financial

These self-directed custodians charge higher fees but unlock investment options impossible at traditional brokers. Only go this route if you have specific expertise in the alternative asset class.

Setup Process by Business Entity

Opening a Solo 401(k) takes more effort than opening an IRA, but it’s not difficult. The process varies slightly depending on your business structure. Budget 1-3 hours for initial setup, mostly spent reading the adoption agreement and gathering business documentation.

Setup for Sole Proprietors and Single-Member LLCs

This is the simplest scenario. Here’s your step-by-step process:

Step 1: Get your Employer Identification Number (EIN)

Even if you’re a sole proprietor who’s been using your Social Security Number for taxes, you need an EIN to open a Solo 401(k). Apply for free at IRS.gov. You’ll get your EIN instantly online. Takes 10 minutes.

Step 2: Choose your provider and start the application

Go to your chosen provider’s website (we recommend Fidelity). Search for “Solo 401(k)” or “Individual 401(k).” You’ll complete an online application that asks for your business name, EIN, Social Security Number, business address, and expected income.

Step 3: Complete the adoption agreement

The adoption agreement is the legal document that establishes your Solo 401(k) plan. It’s pre-written by your provider—you’re not drafting a custom plan. You’ll make a few elections: traditional vs Roth contributions, loan provisions (yes or no), and vesting schedule (immediate for solo plans). The provider guides you through this. Read everything carefully but don’t overthink it. Most people choose “allow both traditional and Roth” and “allow loans.”

Step 4: Wait for approval (1-3 weeks)

Your provider reviews your application. Fidelity typically approves within 5-10 business days. Others may take longer. You’ll receive account numbers and login credentials.

Step 5: Fund your account

Once approved, you can make contributions. Employee deferrals come from your business income (you’ll need to track these separately from business expenses). Employer contributions can be made by business check or electronic transfer. Keep meticulous records of which contributions are employee vs employer—you’ll need this for tax reporting.

Step 6: File IRS Form 5500-EZ (if required)

You must file Form 5500-EZ annually if your plan assets exceed $250,000 at year-end. Until you cross that threshold, no filing is required. Form 5500-EZ is simpler than the Form 5500 that larger companies file, but it’s still paperwork. Budget $300-$500 to have a CPA handle it, or file yourself (due July 31 for the prior year).

Setup for S-Corporations and C-Corporations

The process is nearly identical to sole proprietors with a few key differences:

Key difference #1: You’re already on payroll

As an S-corp or C-corp owner, you should be paying yourself W-2 wages through payroll. Your employee deferrals come from these wages. You’ll need to set up a payroll deduction for your 401(k) contributions, just like a regular company 401(k). Many payroll processors (Gusto, ADP, Paychex) can integrate with your Solo 401(k), or you can manually transfer funds each payroll period.

Key difference #2: Employer contributions are company expenses

Your corporation makes the employer profit-sharing contribution as a company expense. This reduces corporate taxable income. For S-corps, this flows through to your personal return. For C-corps, it’s a deduction for the corporation.

Key difference #3: Corporate resolution

Some providers ask for a corporate resolution (a formal document stating the corporation adopts the 401(k) plan). This is usually a one-page form. Your provider may provide a template, or you can find one online. Have your board (probably just you) “vote” to adopt the plan. File this with your corporate records.

Setup for Partnerships

Partnerships can be tricky. Each partner needs to be included in the Solo 401(k) plan—you can’t have one partner participate and another not participate. Contribution calculations get complex because partnership income allocation may not equal 401(k) contribution allocations.

If you’re in a partnership, strongly consider hiring a CPA with 401(k) experience to help set up the plan correctly. The cost ($500-$1,500) is worth avoiding IRS headaches.

Critical Deadline: December 31 for Plan Establishment

You must establish your Solo 401(k) by December 31 of the year for which you want to make employee deferrals. If you open the plan on January 15, 2026, you CANNOT make 2025 employee contributions—only 2026 contributions.

However, employer profit-sharing contributions can be made up until your tax filing deadline (including extensions) for the previous year. So a plan opened January 15, 2026 can receive employer contributions for 2025 if done by April 15, 2026 (or October 15 with an extension).

Bottom line: If you want to maximize 2025 contributions, open your Solo 401(k) before December 31, 2025.

Roth Solo 401(k) Option

Every major Solo 401(k) provider offers Roth contributions for the employee deferral portion. This is a powerful option that combines the high contribution limits of a 401(k) with the tax-free growth of a Roth IRA.

How Roth Solo 401(k) Works

You can designate some or all of your $23,500 employee deferrals as Roth contributions. These go in after-tax (you don’t get a tax deduction now), but they grow completely tax-free and come out tax-free in retirement. It’s like a Roth IRA, but with a $23,500 contribution limit instead of the $7,000 IRA limit, and no income restrictions.

The employer profit-sharing portion must be traditional (pre-tax). The IRS doesn’t allow Roth employer contributions. So if you’re contributing the full $53,500 ($23,500 employee + $30,000 employer), you can make the $23,500 Roth but the $30,000 employer piece is traditional.

Traditional vs Roth: Which Should You Choose?

This decision hinges on your current tax rate versus your expected retirement tax rate.

Choose Roth Solo 401(k) if:

  • You expect higher tax rates in retirement (because you’ll have substantial retirement income)
  • You’re early in your career with lower current income (and thus lower current tax rate)
  • You want tax diversification (some traditional, some Roth)
  • You’ve already maxed traditional retirement accounts and want more Roth space
  • You believe tax rates will increase in the future

Choose Traditional Solo 401(k) if:

  • Your current tax rate is high (32%+ bracket) and you expect lower rates in retirement
  • You want to reduce this year’s taxable income
  • You’re in your peak earning years
  • You have a large mortgage or other itemized deductions that reduce the value of the 401(k) deduction

The smart middle ground: Split your contributions. Many self-employed workers do half traditional, half Roth. This gives you tax deduction benefits now and tax-free growth for retirement. You can adjust the split year by year based on your tax situation.

Real Example: Roth Solo 401(k) Power

Scenario: Marcus, 32, is a freelance software developer earning $180,000. He contributes $23,500 to his Roth Solo 401(k) annually for 30 years.

Total contributions: $705,000 (in after-tax dollars)

Value at age 62 (at 9% annual returns): $3.2 million

Tax-free growth: $2.5 million

Taxes owed at withdrawal: $0

By paying taxes upfront, Marcus turns $705,000 of after-tax money into $3.2 million tax-free. If he’d done traditional contributions, he’d owe roughly $720,000 in taxes on withdrawal (at 24% rate), netting him $2.48 million. The Roth strategy puts an extra $720,000 in his pocket.

Roth Solo 401(k) vs Roth IRA: Key Differences

Feature Roth Solo 401(k) Roth IRA
Contribution Limit $23,500 (employee portion only) $7,000
Income Limits None Phase-out starts $150k single / $236k married
Required Minimum Distributions Yes, starting age 73
(but can roll to Roth IRA to avoid)		 No RMDs during owner’s lifetime
Early Withdrawal of Contributions Subject to 10% penalty before 59½ Contributions can be withdrawn anytime penalty-free
Best For High earners who want massive Roth contributions Everyone, but especially those prioritizing flexibility

Mega Backdoor Roth Strategy Within Solo 401(k)

Here’s where Solo 401(k) plans can get really interesting for high earners: after-tax contributions beyond the $23,500 employee deferral limit, converted to Roth. This is the mega backdoor Roth strategy, and it’s incredibly powerful—but only certain Solo 401(k) providers support it.

How Mega Backdoor Roth Works in a Solo 401(k)

Remember the $70,000 total contribution limit? In a standard setup, you hit that limit with your $23,500 employee deferral plus employer profit-sharing. But what if your compensation is high enough that the employer contribution maxes out before reaching $70,000?

Example: You’re an S-corp owner paying yourself $200,000 in W-2 wages. Your maximum contributions are $23,500 (employee) + $50,000 (employer 25% of $200k) = $73,500. But the 2025 limit is $70,000. You’re capped at $70,000.

Now, what if your Solo 401(k) plan allows after-tax contributions? You could contribute $23,500 as traditional or Roth, $46,500 as employer (25% of $186,000, which factors in the employer contribution reducing compensation), and still have room to contribute more after-tax dollars up to the $70,000 limit.

These after-tax contributions grow tax-deferred, but here’s the magic: if your plan allows in-plan conversions, you immediately convert those after-tax contributions to Roth. This is the mega backdoor Roth. You’ve now put significantly more into Roth than the $23,500 employee Roth limit.

The Problem: Most Solo 401(k) Providers Don’t Support This

Fidelity, Schwab, Vanguard, and E*TRADE’s standard Solo 401(k) plans do NOT allow after-tax contributions beyond the employee deferral limit. Their plans max you out at employee deferral + employer contribution = $70,000 total.

To do mega backdoor Roth in a Solo 401(k), you need either:

  • A self-directed Solo 401(k) custodian that writes custom plan documents allowing after-tax contributions (Equity Trust, IRA Financial, some others)
  • A specialized Solo 401(k) provider focused on this feature (MySolo401k, Rocket Dollar, Alto)
  • A Third-Party Administrator (TPA) who sets up a custom plan ($1,500-$5,000 setup cost, $500-$1,500 annual admin)

Is mega backdoor Roth worth the extra cost and complexity for a Solo 401(k)? It depends on your income and situation.

When Mega Backdoor Roth Makes Sense for Solo 401(k)

You’re a great candidate if:

  • You’re an S-corp or C-corp owner with W-2 wages above $200,000
  • You’ve maxed out employee deferrals ($23,500) and employer contributions but haven’t hit the $70,000 limit
  • You want to put more money into Roth accounts beyond the standard limits
  • You’re willing to pay setup and annual fees ($500-$2,000/year) for this capability
  • You have decades until retirement for the Roth money to grow

Skip mega backdoor Roth if:

  • You’re not hitting the standard $70,000 Solo 401(k) limit anyway
  • You’re a sole proprietor with income under $250,000 (you’ll max out at regular limits)
  • The extra fees outweigh the benefit
  • You’re close to retirement (less time for Roth growth to compound)

For more details on implementing the mega backdoor Roth strategy, including step-by-step instructions and provider comparisons, see our comprehensive Mega Backdoor Roth guide.

Simpler High-Contribution Strategy

Instead of paying $1,500-$5,000 to set up a custom Solo 401(k) for mega backdoor Roth, most self-employed workers are better off maxing the standard Solo 401(k) ($70,000), then contributing to a taxable brokerage account. You lose the Roth tax-free growth, but you gain simplicity and lower costs. Tax-loss harvesting in the taxable account can partially offset the tax disadvantage.

Solo 401(k) Loan Provisions

Unlike IRAs, Solo 401(k) plans can offer loan provisions. This means you can borrow from your own retirement savings without taxes or penalties, as long as you follow IRS rules and repay the loan on time.

Solo 401(k) Loan Rules

How much can you borrow? The lesser of $50,000 or 50% of your vested account balance. If your Solo 401(k) has $200,000, you can borrow $50,000. If it has $60,000, you can borrow $30,000 (50%).

Repayment terms: Generally, you must repay within 5 years. If you’re borrowing to buy a primary residence, the repayment period can extend to 15 years. You must make at least quarterly payments of principal and interest.

Interest rate: You set the rate (within IRS guidelines), typically prime rate plus 1-2%. Around 9-10% as of late 2025. The interesting part: you’re paying interest to yourself, not a bank. The interest goes back into your 401(k).

Default consequences: If you don’t repay, the outstanding loan balance is treated as a distribution. You owe income taxes plus a 10% early withdrawal penalty if you’re under 59½. This can create a nasty tax bill.

Should You Take a Solo 401(k) Loan?

Good reasons to borrow:

  • Emergency expenses (you’d otherwise tap high-interest credit cards)
  • Business opportunity (using retirement funds to invest in your business)
  • Home down payment (you’re borrowing at lower rates than other options)
  • Short-term cash flow crunch (you can repay within months)

Bad reasons to borrow:

  • Vacation, car, consumer purchases
  • Stock market speculation (“I’ll repay when my trade pays off”)
  • Business is struggling (high risk you won’t be able to repay)
  • You’re close to retirement (missed growth opportunity cost is high)

The main downside: money you borrow isn’t invested in the market. If you borrow $40,000 and the market returns 12% that year, you miss out on $4,800 in gains. You’re paying yourself 9% interest, but the market grew 12%. Net opportunity cost: 3%.

Loan Gotcha: Leaving Self-Employment

If you shut down your business or take a W-2 job, your Solo 401(k) loan may become immediately due. Most plan documents require full repayment within 60-90 days of leaving self-employment. If you can’t repay, the balance becomes a taxable distribution.

This is a major risk factor if you’re considering borrowing from your Solo 401(k) while your business is unstable or you’re contemplating a job change.

7 Common Solo 401(k) Mistakes to Avoid

1. Missing the December 31 Establishment Deadline

You must open your Solo 401(k) by December 31 to make employee deferrals for that year. Employer contributions can be made later (up to your tax filing deadline), but employee deferrals MUST be made during the calendar year. Don’t procrastinate.

2. Incorrectly Calculating Contribution Limits

Sole proprietors frequently miscalculate employer contributions by forgetting to deduct half of their self-employment tax. The effective contribution rate is 20%, not 25%, of net self-employment income. Use the calculator in this guide or consult a CPA.

3. Hiring Employees Without Converting the Plan

The moment you hire a full-time employee (1,000+ hours per year), your Solo 401(k) must convert to a regular 401(k) or terminate. This means higher costs, annual 5500 filings, and nondiscrimination testing. Plan ahead if you’re going to hire—consider whether a SEP IRA might be better for your growing business.

4. Contributing Too Much

Excess contributions trigger IRS penalties and must be returned with earnings. This is messy. Double-check your math. If you have a W-2 job plus self-employment income, remember the $23,500 employee deferral limit applies across ALL plans combined.

5. Not Keeping Separate Records

Track employee deferrals separately from employer profit-sharing contributions. Come tax time, you need to report these correctly on your return. Employee deferrals are reported on your Form 1040 (Schedule C, E, or F), while employer contributions are deducted as a business expense. Use separate bank transfers or label them clearly in your accounting software.

6. Forgetting About Required Minimum Distributions (RMDs)

Solo 401(k)s require RMDs starting at age 73 (as of 2025). Roth IRAs don’t have RMDs during your lifetime, but Roth 401(k)s do. If you want to avoid RMDs on your Roth Solo 401(k) balance, roll it to a Roth IRA before age 73.

7. Neglecting the Form 5500-EZ Filing

Once your Solo 401(k) exceeds $250,000, you must file Form 5500-EZ annually by July 31. Missing this deadline results in IRS penalties ($250/day up to $150,000). Set a reminder or hire a CPA to handle it.

The Biggest Mistake: Not Opening One

The single biggest Solo 401(k) mistake is not opening one at all. Hundreds of thousands of self-employed workers are leaving money on the table by sticking with IRAs when they qualify for Solo 401(k)s with 5x-10x higher contribution limits.

If you’re self-employed and have no employees, there’s no reason to delay. Open your Solo 401(k) before December 31 to maximize this year’s tax savings.

Frequently Asked Questions

Can I have both a Solo 401(k) and a regular 401(k) from a W-2 job? +

Yes, you can contribute to both, but your total employee deferrals across both plans can’t exceed $23,500 in 2025 ($31,000 if 50+). However, you can still make employer profit-sharing contributions to your Solo 401(k) based on your self-employment income. This lets you save significantly more than just your W-2 401(k) allows.

Example: You contribute $18,000 to your employer’s 401(k) at work. You also have $60,000 in side hustle income. You can contribute $5,500 more in employee deferrals to your Solo 401(k) ($23,500 – $18,000) plus about $11,400 in employer contributions (20% of $57,000 after SE tax adjustment), totaling $16,900 additional retirement savings.

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

Once you hire a full-time employee (working 1,000+ hours per year), your Solo 401(k) must either convert to a regular 401(k) plan or terminate by December 31 of that year. Regular 401(k) plans have higher costs ($1,500-$5,000 annually), require annual 5500 filings, and must cover eligible employees. Part-time workers under 1,000 hours don’t trigger this requirement.

Many business owners maintain a Solo 401(k) while using contractors (1099 workers) instead of employees to avoid this complication. Just ensure your contractor relationships meet IRS standards—misclassifying employees as contractors creates bigger problems than 401(k) compliance.

Can my spouse participate in my Solo 401(k)? +

Absolutely. If your spouse works in the business (even part-time), they can participate and make their own contributions up to the same limits: $23,500 employee deferral plus employer contribution based on their compensation. This effectively doubles your household’s retirement savings capacity.

Example: You earn $150,000 and contribute $53,500 to your Solo 401(k). Your spouse does bookkeeping and administration for the business, earning $50,000. They contribute $23,500 + $10,000 = $33,500. Your household saves $87,000 annually in retirement accounts.

Do I need an EIN to open a Solo 401(k)? +

Yes, every Solo 401(k) requires an Employer Identification Number (EIN), even if you’re a sole proprietor who’s been filing taxes using your Social Security Number. The good news: getting an EIN is free and instant at IRS.gov. It takes about 10 minutes to complete the online application.

When is the deadline to make Solo 401(k) contributions? +

Employee deferrals: Must be made during the calendar year (by December 31). You can’t make 2025 employee deferrals in 2026.

Employer profit-sharing contributions: Due by your business tax return deadline, including extensions. For most people, that’s April 15 for the prior year, or October 15 if you file an extension.

The plan itself: Must be established by December 31 of the year for which you want to make employee deferrals. Employer-only contributions can be made to a plan established in the following year.

Can I contribute to both a Solo 401(k) and an IRA? +

Yes, you can contribute to both. Having a Solo 401(k) doesn’t prevent you from contributing to an IRA. However, if you’re covered by a Solo 401(k), your traditional IRA contribution may not be tax-deductible depending on your income (phase-out begins at $79,000 single, $126,000 married in 2025).

Roth IRA contributions aren’t affected by Solo 401(k) participation, but Roth IRA income limits still apply ($150,000-$165,000 single, $236,000-$246,000 married). Consider the backdoor Roth IRA strategy if you’re above these limits.

What investments can I hold in my Solo 401(k)? +

With mainstream providers (Fidelity, Schwab, Vanguard, E*TRADE), you can invest in stocks, bonds, mutual funds, ETFs, CDs, and options. This covers 99% of what investors need.

With self-directed Solo 401(k) custodians, you can invest in alternative assets: real estate, private equity, precious metals, private notes, tax liens, and even cryptocurrency. However, these come with higher fees ($500-$2,000/year) and complex rules around prohibited transactions. Most self-employed workers should stick with traditional brokerages unless they have specific expertise in alternative assets.

How much does it cost to maintain a Solo 401(k)? +

Fidelity and Charles Schwab: $0 annual fees

Vanguard: $20/year per fund (waived with $50,000+ balance)

E*TRADE: $0 annual fees

Self-directed custodians: $500-$2,000/year depending on assets and complexity

Form 5500-EZ filing (if assets exceed $250,000): $0 if you file yourself, or $300-$500 if you hire a CPA

For most people using Fidelity or Schwab, the Solo 401(k) costs nothing to maintain until you exceed $250,000 in assets and must file the annual form.

Can I rollover my old 401(k) into my Solo 401(k)? +

Yes, most Solo 401(k) plans accept rollovers from previous employer 401(k)s, 403(b)s, and traditional IRAs. This lets you consolidate retirement accounts in one place. Some advantages of rolling into your Solo 401(k) instead of an IRA:

  • Stronger creditor protection (401(k)s have unlimited federal protection, IRAs only $1,512,350 in bankruptcy as of 2025)
  • Loan provisions (if your Solo 401(k) allows loans)
  • Avoid pro-rata rule complications if doing backdoor Roth IRA conversions

However, rolling from a traditional IRA into your Solo 401(k) is usually only smart if you need to clear out IRA balances for backdoor Roth purposes. Otherwise, IRAs offer more investment flexibility.

Is a Solo 401(k) better than a SEP IRA? +

For most self-employed workers, yes. Solo 401(k) is better because:

  • Higher contributions: A 45-year-old earning $150,000 can contribute $53,500 to a Solo 401(k) but only $30,000 to a SEP IRA
  • Roth option: Solo 401(k)s allow Roth contributions; SEP IRAs don’t
  • Catch-up contributions: An extra $7,500 at age 50+ ($11,250 at 60-63)
  • Loan provisions: Borrow up to $50,000; SEP IRAs don’t allow loans

SEP IRAs win on simplicity—they’re as easy to set up as a regular IRA. But for high earners wanting to maximize retirement savings, Solo 401(k) is worth the slightly more complex setup.

Conclusion: Take Action on Your Solo 401(k)

The Solo 401(k) is the single most powerful retirement savings tool available to self-employed workers. With contribution limits up to $70,000 in 2025 ($73,500 if 50+, $77,250 if 60-63), Roth options, loan provisions, and the potential for mega backdoor Roth strategies, it dramatically outperforms IRAs and SEP IRAs for anyone serious about retirement savings.

If you’re self-employed with no full-time employees, you qualify. The setup process takes a few hours. The benefits compound for decades.

Next steps:

  1. If it’s before December 31, open your Solo 401(k) now to make 2025 employee deferrals
  2. Choose your provider (we recommend Fidelity for most people)
  3. Calculate your maximum contribution using the calculator in this guide
  4. Make your employee deferrals and employer contributions
  5. Choose your investments (consider a simple three-fund portfolio with index funds)

The difference between maxing a $7,000 IRA and maxing a $70,000 Solo 401(k) over 25 years? About $3 million at retirement. That’s the price of inaction.

Further Reading on Retirement Optimization

Ready to go deeper? Explore these related guides:

In:

, , ,
, , , , , , , , , , , , ,

Leave a Reply