If you’re a business owner and are eligible for a solo 401k, you might be wondering how it fares against other more popular retirement plans like the traditional and Roth IRAs. This is not a fair comparison since a solo 401k is the far superior account with higher contribution limits, investment options, and doesn’t have any income requirements or limits. A traditional or Roth IRA is easier to open but contribution limits are 10x lower than the solo 401k, and have income limits that prevent high income earners from contributing or getting a tax deduction.

You’re allowed to have all three accounts at the same time, but if you’re considering which one should be given priority, here’s everything you need to know about the solo 401k vs traditional and Roth IRAs.

Set up a new solo 401k in under 10 minutes

Contribute up to $66,000 and invest in any asset class with tax-free compounding.

Anyone who makes money from a business, freelancing, or a side hustle is eligible, as long as you have no employees.

Overview

Before we dive deeper into the finer details, here’s an overview of the three accounts side by side.

FeatureSolo 401kTraditional IRARoth IRA
EligibilityBusiness owners and self-employed individuals with no full-time employees.Anyone with earned income.Anyone with earned income.
RestrictionsMust not have any full-time employees who are at least 21 years of age, and have worked over 500 hours per year for 3 consecutive 12-month periodsYou get no tax deductions if your MAGI is over $83,000.You cannot contribute if your MAGI is over $153,000.
Contribution limits$66,000 if under 50 years of age. $73,500 if 50 years of age or older.$6,500 if under 50 years of age. $7,500 if 50 years of age or older.$6,500 if under 50 years of age. $7,500 if 50 years of age or older.
Investment optionsAny asset class including alternative assets.Traditional assetsTraditional assets
Roth accountYesNoYes
Tax deductionYes, up to $66,000 ($73,500 if age 50+)Yes, up to $6,500 ($7,500 if age 50+)No
WithdrawalsQualified withdrawals start at the age of 59½. Qualified withdrawals start at the age of 59½.Contributions can be withdrawn at any age. Earnings must be withdrawn after the Roth IRA is at least 5 years old + you reach 59½ years of age.
RMDYes, starting at 73 years of age.Yes, starting at 73 years of age.No

Eligibility

Solo 401k: The Solo 401k is meant for self-employed individuals, freelancers, or business owners with no employees who are at least 21 years of age, and have worked over 500 hours per year for 3 consecutive 12-month periods (other than your spouse).

Traditional and Roth IRA: Unlike a solo 401k, IRAs aren’t just for business owners. Anyone with earned income can open and contribute to a traditional or Roth IRA.

Income limits

Solo 401k: No income limits or minimum requirements. You can contribute to a solo 401k whether you run a million dollar business or a weekend side hustle.

Roth IRA: You cannot contribute to a Roth IRA if your income is too high. Roth IRA income limits are changed each year by the IRS adjusting for inflation. Here are the numbers for 2023.

  • If your MAGI is $138,000 or less, you can contribute up to the maximum Roth IRA contribution limit of $6,500 ($7,500 if age 50+).
  • If your MAGI is over $138,000 but less than $153,000, your contribution limit gets reduced.
  • If your MAGI is over $153,000, you cannot contribute at all.

Traditional IRA: Unlike a Roth IRA, a traditional IRA has no income limits on contributions. However, tax deductions could get reduced to zero if you earn a high income and also receive a 401k or other retirement plan at work. 

  • To get the full tax deduction on your traditional IRA contribution, your modified adjusted gross income (MAGI) must be $73,000 or less for 2023.
  • If your MAGI is over $73,000 but less than $83,000, you’ll get a partial tax deduction.
  • If your MAGI is over $83,000, you get no tax deduction.

Contribution limits

Solo 401k: A solo 401k has the highest contribution limits of any retirement plan, 10x the limit of a traditional and Roth IRA. For 2023, you can contribute up to $66,000 if you’re under 50 years of age, and up to $73,500 if you’re 50 years of age or older.

Traditional and Roth IRA: For 2023, you can contribute up to $6,500 into a traditional or Roth IRA if you’re under 50 years of age, and up to $6,500 if you’re 50 years of age or older. Contributions are aggregated across all of your IRAs. For example, if you’re under 50 years of age and contribute $5,000 into a Roth IRA, you only have $1,500 in room remaining to contribute to your traditional IRA.

Investment options

Solo 401k: Major institutions offer solo 401k plans that can only invest in traditional assets, but the best solo 401k plans offer unlimited investment options through self-directed accounts with checkbook control. You can invest your solo 401k funds in traditional assets and alternative assets like real estate, crypto, and private equity.

Traditional and Roth IRA: IRAs are limited to investing in just traditional assets like stocks, bonds, mutual funds, and ETFs. If you want to invest your IRA in alternative assets, you would need to open a self-directed IRA (SDIRA).

Also read: The Best Roth IRAs

Roth contributions

Solo 401k: You can contribute up to $22,500 into a Roth solo 401k for 2023, or up to $30,000 if you’re at least 50 years of age. You can also perform a mega backdoor solo 401k and be able to contribute up to $66,000 ($73,500 if age 50+) entirely into your Roth solo 401k. This feature is only offered by a few solo 401k plan providers, like the Carry Solo 401k.

Traditional IRA: No Roth contributions allowed.

Roth IRA: You can contribute up to $6,500 into your Roth IRA for 2023, or up to $7,500 if you’re at least 50 years of age.

Withdrawals

Solo 401k: You can start to take withdrawals from your solo 401k when you reach the eligible withdrawal age of 59½. Withdrawals from your Roth solo 401k have one additional withdrawal rule: you must be 59½ years of age, and your account must be at least 5 years old. Early withdrawals are hit with a 10% early distribution penalty plus income taxes on your withdrawn amount. Withdrawals from your pre-tax solo 401k account are taxed as regular income, and withdrawals from your Roth solo 401k account are tax-free.

Traditional IRA: You can take withdrawals from your traditional IRA once you reach the age of 59½. Early withdrawals are hit with a 10% penalty plus income taxes. Qualified withdrawals after the age of 59½ are taxed as regular income since contributions were made with pre-tax income.

Roth IRA: With a Roth IRA, you’re allowed to withdraw your contributions at any age without penalties or fees. However, to withdraw earnings, you must wait until your Roth IRA is at least 5 years old, and you’re at least 59½ years of age. Qualified withdrawals in retirement are completely tax-free since your contributions were made with post-tax income.

Required minimum distributions (RMD)

A solo 401k and traditional IRA have required minimum distributions. You must start taking distributions from your account once you reach the age of 73. You can check how much your required minimum distributions are in this RMD table.

A Roth IRA has no RMD rules and you can keep your money compounding tax-free as long as you’re alive.

Solo 401k vs Traditional IRA vs Roth IRA: What should business owners choose?

To be fair, you can open and contribute to all three accounts every year. But if you qualify for a solo 401k, it should be prioritized over your IRA. When you look at the tax benefits, contribution limits, and investment options of all three accounts, it’s not a fair comparison. The solo 401k is the far superior account. It has 10x the contribution limits of a traditional or Roth IRA, unlimited investment options, no income limits or minimum requirements, and comes with both pre-tax and Roth accounts.