This Solo 401K overview has been updated with information for the 2023 & 2024 tax years. This is the second of a multi-part series on retirement accounts for self-employment income. I previously gave an overview of SEP IRAs. In this article, I’ll provide an overview of Solo 401Ks. I have started and contributed to both a SEP IRA and a Solo 401K, which has given me experience with each. In a separate article I’ll also cover the SIMPLE IRA. Those who have or plan to have self-employment income (via 1099 income or otherwise) should hopefully find these overviews informative.
What is a Solo 401K (Individual 401K)?
The Solo 401K has a ridiculous amount of alternative names, but they all refer to the same type of account. It is also commonly referred to as an Individual 401K (or i401K), Solo-K, Self-Employed 401K, Uni-K, and One-Participant 401K, among others. The IRS officially refers to Solo 401Ks as “One-Participant 401Ks”, but I have never heard anyone use that terminology, so we’ll stick to Solo 401Ks for this article.
Despite the plethora of nicknames, they all refer to the same thing: a 401K plan covering a self-employed individual (an income generating business owner with no employees), or that person and his or her spouse.
There are a few key differences between the employer-sponsored 401Ks that most of us are used to and Solo 401Ks, which we’ll cover in a bit. Outside of those differences, Solo 401Ks very closely resemble Traditional 401Ks and Roth 401Ks we are already familiar with.
What are the Qualifications to Create & Contribute to a Solo 401K?
Unlike the SEP IRA, the Solo 401K has no age or income restrictions. In order to be able to contribute to one, your contributions must come from self-employment income in that year.
As with the SEP IRA, you do not need to be full-time self-employed in order to be eligible. You could be part-time self-employed or earn a side income from a secondary job or side hustle. And having a Traditional 401K through another employer does not exclude you from being able to start and maintain a separate Solo 401K.
You also do not need to have a registered corporation (LLC, S-Corp, etc.) in order to be eligible.
The other qualifier is that you cannot employ any full-time employees, outside of the exception of a spouse. Full-time employees are considered to be those that work an average of at least 30 hours per week for his/her employer.
Solo 401K Contributions: Employer & Employee
The defining difference between standard employer 401K plans and Solo 401Ks is that you can make contributions as an “employee” (similar to standard 401Ks) and as an “employer” (similar to SEP IRAs).
As a result, you can contribute much more of your self-employment income to a Solo 401K than you can to a SEP IRA or SIMPLE IRA.
2023 & 2024 Solo 401K Maximum Contribution Limits
The great thing about Solo 401Ks is the ability to contribute as both an employer and an employee and how it can potentially boost your retirement savings to another level.
To recap, the maximum 401K contribution for an “employee” are as follows:
2023 Solo 401K Maximum Contribution (Employee-Only):
- Standard: $22,500
- Catch-Up Contribution (age 50+): $7,500
- Total with Catch-Up (age 50+): $30,000
2024 Solo 401K Maximum Contribution (Employee-Only):
- Standard: $23,000
- Catch-Up Contribution (age 50+): $7,500
- Total with Catch-Up (age 50+): $30,500
Contributions can’t exceed 100% of compensation. This maximum is a combined maximum between any other employer 401K and your Solo 401K. For example, if you are under age 50 and contribute $10,000 to your day job employer-sponsored 401K in 2024, you can then only contribute $13,000 ($23,000 – $10,000) to your Solo 401K as an employee. Things get a little more interesting with maximum employer 401K contributions.
2023 Solo 401K Maximum Contribution (Employee + Employer):
- Standard: $66,000
- Catch-Up Contribution (age 50+): $7,500
- Total with Catch-Up (age 50+): $73,500
2024 Solo 401K Maximum Contribution (Employee + Employer):
- Standard: $69,000
- Catch-Up Contribution (age 50+): $7,500
- Total with Catch-Up (age 50+): $76,500
And, again, contributions cannot exceed 100% of compensation. The maximum tax deductible contribution as an employer is 25% of post-contribution net earnings (same as the SEP IRA). For more on this, check out the IRS rate table for self-employed contributions and my previous post on SEP IRAs.
Solo 401K Contribution Deadlines
There are essentially two different deadlines for Solo 401K contributions.
- “Employee” contributions: have the same end of calendar year deadline as other 401Ks (December 31 each year).
- Non-corporation “employer” contributions: are generally due by the tax deadline for the previous calendar year (typically April 15 in the subsequent year), though extensions are possible.
If a contribution comes between January 1st and the tax deadline, you can characterize it for the previous or the present calendar year. Contributions for a calendar year must be made prior to filing your taxes for that year, or an amended tax return will be needed.
Solo 401K Contribution Calculators
If you want to double-check your math on how much you can contribute to Solo 401Ks and compare to other retirement accounts, here are a few Solo 401K contribution calculators to play with:
- Vanguard’s retirement plan contribution calculator
- AARP’s Solo 401K plan calculator
- CalcXML retirement plan calculator
Can you Contribute to Both an Employer 401K and a Solo 401K?
If you have employers, outside of yourself, you can contribute to both your employer sponsored 401Ks and make contributions to your own Solo 401K as an employer and an employee.
Are there Roth Solo 401Ks?
Yes. Contributions to Solo 401Ks can be pre (Traditional) or post (Roth) tax, unlike SEP IRAs, which are pre-tax only.
Note that as with employer Roth 401Ks, only employee contributions can be classified as after-tax Roth contributions. All employer contributions are pre-tax and will be placed into a pre-tax Solo 401K.
Can you Roll a Solo 401K Into an IRA?
Yes. You can do a 401K to IRA rollover with a pre-tax Solo 401K to a Traditional IRA, SEP IRA, or even a Roth IRA (with tax implications) – just as you can a Traditional 401k. You can also roll over a Roth Solo 401K to a Roth account.
You can even roll a Traditional or Roth 401K in to a Solo 401K, or into a Roth Solo 401K, but there may be tax implications in doing so, so make sure that you are aware of them.
As with all traditional-to-Roth retirement plan rollovers, any amount you roll over is considered taxable income in the year that you roll it over. Make sure you understand all of the tax implications for doing so as well.
Where Can you Open a Solo 401K?
Some of the discount brokers highlighted in my “how to start an online broker account” article have a Solo 401K option, but they are rare. Vanguard, Schwab, and Fidelity all offer Solo 401Ks. Always be sure to research minimum balance requirements and any associated fees, including account maintenance or inactivity fees before creating your account.
Investment offerings available for Solo 401Ks can vary as well, per broker. And some may not offer a Roth contribution option. Do your homework before creating a new account.
Any Other Considerations to be Aware of?
One notable downside to Solo 401Ks is that they can require more paperwork and administrative responsibilities than IRAs. You are generally required to file an annual report on IRS Form 5500-EZ if your Solo 401K has $250,000 or more in assets at the end of the year.
Other Solo 401K Resources:
If you have any questions, definitely consult with a tax professional and/or a brokerage firm.
Outside of the Solo 401K resources highlighted earlier, you should also check out the following articles:
- IRS One-Participant 401K page
- IRS Publication 560, Retirement Plans for Small Business, under “Qualified Plans”
- IRS Publication 4222, 401K Plans for Small Businesses
Solo 401K Discussion:
- Have you opened a Solo 401K? If so, why?
- Who is your broker?
- What Solo 401K tips do you have?
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