Solo 401(k) for Business Owners

How the Solo 401(k) Works

The Solo 401(k) has two contribution components, and understanding both is key to maximizing your retirement savings. The employee contribution (also called an elective deferral) allows you to contribute up to $23,500 per year as an employee of your own business, regardless of how much you earn. This is the same limit that employees at large companies have in their workplace 401(k) plans. If you are 50 or older, you can add a $7,500 catch-up contribution, bringing the employee portion to $31,000.

The employer contribution (also called a profit-sharing contribution) allows your business to contribute up to 25% of your compensation. For sole proprietors and single-member LLC owners, compensation means net self-employment income after deducting half of self-employment tax. For S-corporation owners, it is 25% of your W-2 salary from the S-corp. The employer contribution is a business expense that reduces your taxable business income.

The combined total of employee and employer contributions cannot exceed $70,000 per year (2025), or $77,500 with the catch-up contribution. At moderate income levels, the fixed $23,500 employee contribution represents a large share of total savings capacity, which is why the Solo 401(k) dramatically outperforms the SEP IRA for business owners earning $40,000 to $100,000.

Contribution Examples by Income Level

The real advantage of the Solo 401(k) becomes clear when you compare it to a SEP IRA at various income levels. These examples assume a sole proprietor or single-member LLC:

Net self-employment income: $50,000. Solo 401(k): $23,500 employee contribution plus approximately $9,300 employer contribution (20% of adjusted net income) equals $32,800 total. SEP IRA: approximately $9,300 total (20% of adjusted net income). The Solo 401(k) allows $23,500 more in contributions, saving roughly $5,600 to $7,600 in federal income tax depending on your bracket.

Net self-employment income: $80,000. Solo 401(k): $23,500 employee plus approximately $14,900 employer equals $38,400 total. SEP IRA: approximately $14,900 total. The Solo 401(k) still allows $23,500 more.

Net self-employment income: $150,000. Solo 401(k): $23,500 employee plus approximately $27,900 employer equals $51,400 total. SEP IRA: approximately $27,900 total. The gap is still the full employee contribution amount.

Net self-employment income: $280,000 or more. Both the Solo 401(k) and SEP IRA reach the $70,000 maximum. At this income level, the employer contribution alone reaches $70,000 (25% of $280,000), so the employee contribution no longer adds capacity. The SEP IRA becomes equally effective and simpler to administer.

The Roth Option

One of the most valuable features of the Solo 401(k) is the ability to make Roth contributions on the employee portion. Roth contributions are made with after-tax dollars, meaning they do not reduce your current taxable income. However, the contributed money and all of its growth are withdrawn completely tax-free in retirement, provided you are at least 59.5 years old and the account has been open for at least five years.

The Roth option is particularly valuable for business owners who expect to be in a higher tax bracket in retirement than they are now (common for entrepreneurs in early business years), who want a portion of their retirement income to be completely tax-free, or who are already earning enough to be in a high bracket and want to diversify their tax exposure. You can split your employee contribution between traditional and Roth in any proportion. The employer contribution is always pre-tax, regardless of how you designate the employee contribution.

This Roth feature is a major advantage over the SEP IRA, which only allows pre-tax contributions. Business owners who want Roth retirement savings and earn too much for direct Roth IRA contributions ($161,000 single, $240,000 married filing jointly in 2025) can use the Solo 401(k) Roth option to get tax-free retirement growth without the complexity of backdoor Roth IRA conversions.

How to Open a Solo 401(k)

Opening a Solo 401(k) requires adopting a plan before December 31st of the year you want to start contributing. Unlike a SEP IRA, which can be opened retroactively until your tax filing deadline, the Solo 401(k) plan must exist by year-end for employee contributions. Employer contributions can be made until the tax filing deadline, but the plan itself must be established by December 31st.

Most major brokerages offer free Solo 401(k) plans. Fidelity, Charles Schwab, and Vanguard all provide Solo 401(k)s with no setup fees, no annual fees, and access to their full range of investments. The setup process takes 30 to 60 minutes online and involves providing your business information, EIN, personal identification, and selecting plan features (traditional only, or traditional plus Roth).

The plan documents include an adoption agreement and a basic plan document that the brokerage provides. You keep these in your records; they are not filed with the IRS unless your plan balance exceeds $250,000 in total assets, at which point you must file Form 5500-EZ annually. This is a simple one-page form that reports the plan balance and can be filed electronically.

Employee Contribution Deadlines

The deadline for employee contributions depends on your business structure. Sole proprietors and single-member LLCs must make employee contributions by December 31st of the tax year. You cannot retroactively make employee contributions after year-end, even if you file an extension. This is a critical distinction: if you want to make employee contributions for 2025, you must deposit the money by December 31, 2025.

S-corporation and C-corporation owners face a different deadline. Employee contributions must be made from payroll, so they should be withheld from paychecks throughout the year or by the last paycheck of the year. In practice, many S-corp owners run a special paycheck in December that withholds a large employee contribution to maximize their annual deferral.

Employer contributions (the 25% profit-sharing portion) can be made until the tax filing deadline, including extensions, for all business types. This gives you the same flexibility as a SEP IRA for the employer portion, allowing you to wait until you know the final year's numbers before deciding on the employer contribution amount.

Loans From Your Solo 401(k)

If your plan document allows it (and most brokerage Solo 401(k) plans do), you can borrow up to 50% of your account balance or $50,000, whichever is less. The loan must be repaid within five years (unless used to purchase a primary residence, which allows up to 15 years) with interest that you pay to yourself. The interest rate is typically prime rate plus 1%, and the payments go back into your own retirement account.

The loan feature provides a safety valve that SEP IRAs do not offer. If you face a cash crunch and need access to retirement funds, a Solo 401(k) loan avoids the 10% early withdrawal penalty and income tax that would apply to a distribution. However, if you fail to repay the loan on schedule, the outstanding balance is treated as a distribution, triggering both income tax and the 10% penalty. Use loans sparingly and only when you have a clear repayment plan.

Solo 401(k) vs SEP IRA: Quick Comparison

• Contribution limits under $100K income: Solo 401(k) wins significantly due to the employee contribution
• Contribution limits over $280K income: Both reach the same $70,000 maximum
• Roth option: Solo 401(k) offers it, SEP IRA does not
• Setup deadline: Solo 401(k) must be established by December 31st; SEP IRA can be opened until tax filing deadline
• Administrative complexity: SEP IRA is simpler (no plan documents, no annual filings)
• Loan option: Solo 401(k) allows loans; SEP IRA does not
• Employees: Solo 401(k) is limited to businesses with no employees (except spouse); SEP IRA works with employees but requires equal percentage contributions

For most self-employed business owners earning under $150,000 per year, the Solo 401(k) provides meaningfully higher contribution limits and the Roth option, making it worth the slightly more involved setup process. The retirement planning guide covers how to choose between all available account types based on your specific situation.