SOLO 401K OVERVIEW & FAQ
- What is a solo 401k? A solo 401k is a 401k plan for self-employed individuals or small business owners, offering the highest contribution limits, freedom to invest in any asset class (including alternative assets), tax-free compounding, and a Roth option. As the name implies, a solo 401k is a 401k that is established by an individual, rather than by an employer.
- Who is eligible for a solo 401k? Any self-employed individual or business owner is eligible as long as they have no employees, including part-time employees who have reached 21 years of age, and have worked over 500 hours per year for 3 consecutive 12-month periods (the only exception to this employee rule is a spouse). There are no age or income limits; you’re eligible whether you own a full-time business or a weekend side hustle.
- Do I qualify if I also have a full-time job? Yes, even if you have a full-time job, you can open a solo 401k as long as you have self-employed business activity with no employees. You can make contributions to both your 401k at work, and to your solo 401k.
- Do I need to be incorporated? No, any business form is eligible, whether you operate under a sole proprietorship, partnership, LLC, or corporation.
- What is the contribution limit? The solo 401k contribution limit for 2023 is $66,000 ($73,500 if age 50+). On the employee side, you can contribute up to $22,500 ($30,500 if age 50+). On the employer side, you can contribute up to 25% (up to 20% if you’re not incorporated) of your compensation. Total employee and employer contributions must not exceed the solo 401k contribution limit.
- Are solo 401k contributions tax deductible? There are two parts to a solo 401k: pre-tax and Roth. Pre-tax solo 401k contributions are made with pre-tax income and gives you a tax deduction for the year, but you get taxed when you withdraw in retirement. Roth solo 401k contributions are made with post-tax income, and you pay zero taxes when you withdraw in retirement.
- What is the Roth contribution limit? While employer contributions must always be pre-tax, employee contributions can be either pre-tax, Roth, or both. If you max out your employee contributions into a Roth solo 401k, the contribution limit is $22,500 for 2023 ($30,000 if age 50+)
- When is the contribution deadline for 2022? You have until the federal tax filing deadline (March 15, 2023 for S-Corps, Multi-Member LLCs, and Partnerships, and April 18, 2023 for C-Corps, Sole Props)
- When can you withdraw from a solo 401k? You can take qualified distributions from your solo 401k plan with no penalties once you reach the age of 59½. Early withdrawals are subject to a 10% penalty plus income tax on the withdrawn amount.
If you’re self-employed, that means you don’t have access to the most popular investment plan in America: The corporate 401k. And without an employer-sponsored retirement account, you’re on your own when comes to planning for your retirement.
However, corporate 401k plans aren’t the best retirement plans. You get very limited investment options, usually consisting of around a dozen mutual funds. You can’t invest in cool stuff like crypto, real estate, private equity, or even individual stocks. Still, it’s nice to have a retirement account created by your company. At least you have something, and it basically forces you to plan for your future.
Fortunately, self-employed individuals have access to something that’s even better. It lets you invest in any asset class (real estate, private equity, mutual funds, individual stocks of companies you like, and even your favorite meme coins), offers tax-free compounding, a Roth option, and the highest contribution limits of any retirement account out there.
Enter the solo 401k.
Before we begin, download the Solo 401k Handbook: Everything you need to know about the solo 401k in a handy PDF format.
What is a solo 401k?
Also known as a one-participant plan, a solo 401k is a retirement account created for self-employed individuals and business owners with no employees. While it’s less popular than a regular 401k, Roth IRA or SEP IRA, the solo 401k has more benefits and bigger tax-advantages than any other retirement plan.
Main Benefits & Tax-Advantages
- Highest contribution limit: The contribution limit for 2023 is $66,000 ($73,500 if you’re over the age of 50). In comparison, a pre-tax 401k plan has a contribution limit of $22,500 ($23,000 if you’re over 50 years old). With a Roth IRA, it’s just $6,500 ($7,500 if you’re over 50).
- Tax-free compounding: You pay zero taxes when you sell assets for a profit or earn an income from your assets. All profits go straight back into your solo 401k account to be reinvested.
- Roth option: Contribute up to $22,500 ($30,000 if over 50) to a Roth account for 2023 and pay zero taxes when you make withdrawals in retirement.
- Tax-free Roth withdrawals: Contributions to a Roth option are made with after-tax dollars, and you pay zero taxes when you withdraw from the account in retirement.
- Ability to do a mega backdoor Roth: The mega backdoor Roth strategy can be used with a solo 401k plan and it allows you to contribute the entire $61,000 limit to a Roth account.
- Tax deductions: Contributions made to your pre-tax solo 401k get deducted from your taxable income. If you prefer, you can even deduct up to $66,000 for 2023 by making all of your contributions as pre-tax.
- Invest in any asset class: With most retirement accounts, your investment options are limited to traditional assets like stocks, mutual funds, ETFs, and bonds. With a solo 401k, you’re allowed to invest in any asset class, with a few exceptions.
- Unlimited rollovers: You can rollover as much as you want from another retirement account and it doesn’t affect your contribution limits for the year.
- Loan option: You can borrow up to 50% of your plan value up to a maximum of $50,000.
- No income requirements: It doesn’t matter if you make $500 a month with a side business or $500,000 a year. Any self-employed business activity makes you eligible as long as you have no employees.
Rules & features overview
|Eligibility Rules||Any self-employment activity with no employees, including part-time employees who are at least 21 years of age, and have worked over 500 hours per year for 3 consecutive 12-month periods. Your spouse is the only exception.|
|Contribution Limits||For 2023, the contribution limit is $66,000 – $73,500 if you’ll be at least 50 years old by December 31, 2023.|
|Roth contributions||$22,500 ($30,000 if you’re over 50) of the $66,000 contribution limit can be put into a Roth solo 401k. Some plan providers (like the Carry Solo 401k) also support a mega backdoor Roth solo 401k, which allows you to contribute up to $66,000 into a Roth account.|
|Tax deductions||Pre-tax solo 401k contributions are paid with pre-tax dollars and get deducted from your taxable income for the year. If you choose to make all your contributions as pre-tax, you could potentially get a tax deduction of up to $66,000 for 2023 ($73,500 if age 50+).|
|Tax-free compounding||With a solo 401k, you don’t pay any taxes on any gains in your account. All profits go straight back into your account to be reinvested.|
|Investment options||You can invest in any asset from traditional assets like stocks, bonds, mutual funds, and ETFs to alternative assets like real estate, crypto, and private equity.|
|Withdrawal rules||You can take qualified distributions when you reach the age of 59½. Any earlier withdrawals will be subject to a 10% early distribution penalty plus income taxes on the amount withdrawn.|
|Withdrawal taxes||Qualified distributions from a pre-tax solo 401k get taxed as regular income. The amount in taxes owed depends on your tax bracket and tax rates at the time of withdrawal. Qualified distributions from a Roth solo 401k are completely tax-free.|
|Required minimum distributions||A solo 401k has required minimum distributions. You must start taking distributions from your account when you reach the age of 73.|
There are only two eligibility rules with a solo 401k:
- You must have self-employment activity.
- You must not have any employees, including part-time employees who are at least 21 years of age, and have worked over 500 hours per year for 3 consecutive 12-month periods (excluding your spouse).
To qualify for a solo 401k, you only need to have some form of self-employment activity without any full-time employees or part-time employees who are at least 21 years of age, and have worked over 500 hours per year for 3 consecutive 12-month periods. You’re still allowed to work with 1099 contractors, part-time W-2 employees that work under 500 hours per year, employees under 21 years of age, and union and non-resident alien employees.
The only exception to the no-employees rule is your spouse. They can work however much they want in your business and both of you will still be qualified for a solo 401k. As the business owner (and your own employee) you still get to have the full benefits of a solo 401k plan. Additionally, your spouse can also create their own solo 401k, also as your employee.
All business entities are eligible for a solo 401k
Any type of business structure is eligible for a solo 401k. Whether you’re operating as a sole proprietorship, LLC, partnership, C corp, or S corp, all entities qualify as long as you have self-employment income with no employees.
Common eligibility misconceptions
I’m not eligible because my business is incorporated. Many people believe that they don’t qualify for a solo 401k if they’re not sole proprietorships. This is false. The business entity you have doesn’t matter. All structures are qualified for a solo 401k as long as you meet the two eligibility rules: Self-employment activity + no employees (other than your spouse).
I’m not eligible because I have a full-time job. Even if you have a full-time job, you can open a solo 401k as long as meet the two eligibility rules. You’re allowed to contribute to both a solo 401k and a 401k at your company.
I’m not eligible because my side hustle doesn’t make much money. A solo 401k has no income limits. Any sort amount of self-employment income is considered eligible for a solo 401k.
I’m not eligible because I have a partner in the business who is not my spouse. Business owners with partners can open a solo 401k as long as they meet the no-employees rule. Partners will simply be excluded from your plan by your plan provider.
How contributions work
With a solo 401k plan, you make contributions as both the employer and the employee.
With a traditional 401k plan at a corporate company, you make contributions to your account as an employee, and the company you work for can make contributions to your account as the employer. With a solo 401k, since you own your own business, you make contributions for both sides, which gives you much higher limits, and more flexibility and control in your contribution allocations.
How solo 401k contributions are broken down:
The solo 401k contribution limit is $66,000 ($73,500 if you’ll be at least 50 years of age by December 31, 2023) for 2023.
This limit is broken down into two sides: The employer side and the employee side, each having their own contribution limits and rules.
- As an employee, you could contribute up to 100% of your compensation, up to $22,500 ($30,000 if age 50+) for 2023.
- As an employer, you could contribute up to 25% of your compensation if your business is incorporated (approximately 20% if your business is not incorporated).
- Employee contributions can either be pre-tax, Roth, or both.
- Employer contributions can only be pre-tax.
- Employee and employer contributions must not exceed the annual solo 401k contribution limit.
Catch up contributions
A solo 401k gives people over the age of 50 an additional $7,500 for 2023.
If you’ll be at least 50 years old by December 31st of the year you want to contribute, you’re eligible to make catch-up contributions. The best part is, that’s more money you can put into your Roth solo 401k. In order for catch-up contributions to be applied, you must first max out your employee contribution limits. Catch-up contributions cannot be applied if you do not max out your employee limit.
Also view: Solo 401k Contribution Calculator
Tax-free compounding and a Roth option
The solo 401k comes with two different accounts: A pre-tax solo 401k and a Roth solo 401k. Both accounts have tax-free compounding. You don’t pay any taxes when you sell or make money from your investments.
- With the pre-tax solo 401k, you contribute with pre-tax dollars (income that you haven’t paid taxes on yet), get an income tax deduction for the year, and pay taxes when you make withdrawals in retirement.
- With the Roth solo 401k, you contribute with post-tax dollars (income that you’ve already paid taxes on). You don’t get any immediate tax advantages, but you pay zero taxes when you withdraw from your account in retirement.
Employer contributions must be made into a pre-tax solo 401k account. Employees, however, can choose whether they want to contribute to a pre-tax account or Roth account.
Tip: With the Mega Backdoor Roth solo 401k, you can contribute up to $66,000 entirely into a Roth account for 2023.
There are two types of solo 401k plans: Prototype and non-prototype. Solo 401k plans offered by major institutions are all prototype plans. These are free or low-cost plans that come with limited features, and only let you invest in traditional assets like stocks, bonds, mutual funds, and ETFs. Most prototype plans don’t come with a Roth account and only let you make contributions as pre-tax. And some still require that you mail in a physical check in order to make a contribution.
Non-prototype plans are more versatile solo 401k accounts (usually with a more modern, user-friendly interface) that offer the full suite of features that come with a solo 401k like a Roth option, mega backdoor Roth, and the ability to invest in any asset class including alternative assets like real estate, cryptocurrencies, precious metals, and private equity.
Non-prototype plans are self-directed solo 401k plans with checkbook control. When you sign up for an account, your solo 401k plan trust gets its own EIN, and bank and brokerage accounts. As the trustee of the plan, you get checkbook control over those accounts and can write checks directly when you want to make an investment. There’s no need to formally request investments to be made through a custodian, like you would with a self-directed IRA. Instead, you have full control over your solo 401k funds and can invest in anything from traditional assets to alternative assets.
Also read: The Best Solo 401k Plan Providers
Same as most other retirement plan, you have to wait until you’re 59½ years old to start taking qualified distributions. If you withdraw early, you’ll be hit with a 10% fee plus income taxes on the amount drawn. If you wait until you’re 59½ or older, there are no penalties for withdrawing.
Taxes on withdrawals
Withdrawals made from a pre-tax solo 401k account will be taxed as regular income according to your tax bracket and tax rates at the time of withdrawal. Withdrawals made from a Roth solo 401k are completely tax-free.
Required minimum distributions
The solo 401k has required minimum distributions (RMD). Once you turn 73 years of age, you’ll have to start taking distributions from your account every year, until emptied. The amount of RMD you’re required to take is calculated by taking your solo 401k account balance as of December 31, the previous year, and dividing it by your life expectancy factor. You can use the RMD table for calculations.
If you miss your RMD, you’ll be hit with a penalty of 50% of the amount you were supposed to withdraw. For example, if your required minimum distribution was supposed to be in the amount of $10,000, you would owe $5,000 of it in penalties.
Is a solo 401k better than a SEP IRA?
A common question that’s asked is: Why open a solo 401k if I can just get a SEP IRA? The SEP IRA also has a $61,000 contribution limit, and it’s more common than a solo 401k because it’s easier to open an account.
However, the downside is that there’s no Roth account, no catch-up contributions, no access to alternative investments, and it’s entirely funded by employer contributions (no employee contributions with a SEP IRA).
A SEP IRA is entirely funded by employer contributions, which is calculated by 25% of your income (20% if you’re not incorporated). That usually means that you’ll need to have a higher income in order to max out the same $61,000 contribution limit.
To max out a SEP IRA in 2022:
- If you’re incorporated, you’ll need to make $244,000 a year (25% of $244,000 is the contribution limit of $61,000).
- If you’re not incorporated, you’ll need to make $305,000 a year (20% of $305,000 is $61,000).
To max out a solo 401k in 2022:
- If you’re incorporated, you’ll need to make $182,500 a year. That’s $61,500 less than a SEP IRA.
- If you’re not incorporated, you’ll need to make $223,000 a year. That’s $82,000 less than SEP IRA.
Also read: SEP IRA vs Solo 401k
A rollover is one of the easiest, fastest ways to fund your solo 401k account, and there’s no limit on how much you can rollover. You can rollover as much as you want from your other retirement plans, and it won’t affect your contribution limits for the year.
You can rollover almost any type of retirement plan into a solo 401k including:
- Another 401k plan
- Pension plan
- Traditional IRA
Note: The IRS does not allow you to rollover a Roth IRA into a solo 401k, but you’re allowed to rollover a Roth 401k.
Solo 401k loans
With a solo 401k, you’re allowed to take out a loan from your own account. You’re allowed to borrow up to 50% of the plan value up to a maximum of $50,000. Usually, the interest rate is prime rate, plus one or two percent, depending on your provider. You’ll have to pay back the loan in five years or less. However, if you use the money to purchase a primary residence, you’ll be given 15 years to pay it back.
Not all solo 401k plan providers offer a loan option. It should be only be used as a last resort.
Not only do you have to pay interest while borrowing your own money, you’re depleting your retirement account of funds that would normally be invested and earning YOU interest.
You can learn more about how a solo 401k loan work here.
How do I sign up for a solo 401k?
The deadline to set up a solo 401k for you and your business is December 31 of the year you want to contribute. Note that the December 31 deadline is only to set up your account and make an election. An election is basically an official commitment that states how much you’ll contribute for the year, and which account you’ll contribute to (pre-tax or Roth). You don’t need to actually send the money until you file your taxes. You can learn more about solo 401k contribution deadlines here.
To set up a solo 401k, you’ll need to:
- Choose your solo 401k provider.
- Get an Employer Identification Number from the IRS.
- Fill out an application and required paperwork for the IRS. Your broker should help you with these.
- Open bank and brokerage accounts for your solo 401k trust.
- Once you’re account is open, rollover funds from an existing retirement account or transfer money from your bank.
- Choose your investments.
The sign up process can differ quite a bit depending on the plan provider you choose. Some plans will require that you complete a lot of these steps on your own, and others, like the Carry Solo 401k Plan, will handle it all for you during your onboarding. Carry also has integrated bank and brokerage accounts directly built into the platform, so you don’t even need to take your papers to a bank to open an account yourself.
Download the Solo 401k Handbook for offline reading.
More Solo 401k FAQs
How do I qualify for a solo 401k? As long as you have any self-employment activity, and you don’t have any employees, including part-time employees who are at least 21 years of age and have worked over 500 hours per year in your business for 3 consecutive 12 month periods, you’re qualified to set up a solo 401k.
How much can I contribute? The contribution limit changes each year, accounting for inflation. In 2020, the contribution limit was $57,000. In 2021, the contribution limit was $58,000. In 2022, the contribution limit was $61,000. In 2023, the contribution limit is $66,000.
How much can I contribute if I’m over 50 years old? If you’ll be at least 50 years old by the end of the year you want to contribute, you’re allowed additional catch-up contributions in the amount of $7,500 (applied to employee contributions). This brings your total solo 401k contribution limit up to $73,500.
Is there a minimum amount of revenue required to participate in a solo 401k plan? No. There are no age or income restrictions with a solo 401k plan.
Is the solo 401k the same as a one-participant 401k plan? Yes. The solo 401k has a few different names, and is sometimes referred to as a one-participant 401k, solo-k, or uni-k.
What can I invest in through my solo 401k account? Pretty much anything you want. You can invest in real estate, traditional assets like stocks and ETFs, precious metals, private equity, and even crypto.
Should I invest in a Roth solo 401k or a pre-tax solo 401k? Many plans will give you access to both. On the employer side, you can only invest in a pre-tax solo 401k plan. On the employee side, it’s up to you. Which one you contribute to depends on whether you prefer to deduct your taxable income for the year or pay taxes now, and nothing later.
What’s the difference between a Roth solo 401k and a pre-tax solo 401k? With a pre-tax solo 401k plan, you contribute with pre-tax dollars, which reduces your taxable income for the year. The downside is that you have to pay taxes when you withdraw from your account in retirement. With a Roth solo 401k plan, you contribute with post-tax dollars. This option is usually the preferred choice, since you don’t pay any taxes when you make withdrawals in retirement.
What is the minimum age I can withdraw from my plan? You can withdraw from your solo 401k when you reach the age of 59½. Early withdrawals will be hit with a 10% fee and income tax on the amount drawn.
What if my business has partners? If your business has partners, you can still qualify for a solo 401k. Your provider would need to customize your solo 401k plan to exclude your business partners.
What if I have multiple businesses? If you have multiple business interests, your companies could be subject to controlled group rules or affiliated service group rules. This is a complex topic: read more about it here.
Can I rollover another retirement account into a solo 401k? Yes, you can rollover almost any kind of retirement plan into a solo 401k. In fact, rollovers are one of the easiest, fastest ways to fund your solo 401k account. You can rollover another 401k plan, 403b, TSP, pension plan, or traditional IRA. The only retirement plan you cannot rollover is a Roth IRA.
Learn more about the solo 401k
Here are some of our other resources around the solo 401k plan.
- Deadline dates & contribution limits
- Contribution Calculator
- Withdrawal rules & penalties
- How to open a solo 401k
- The best solo 401k plans compared
- How to close a solo 401k
- Investment options
- Benefits & tax advantages
- Contribution types
- Tax deductions
- Catch-up contributions
- Roth option
- Eligible business entities
- Adding your spouse
- Prohibited transactions
- Mega Backdoor Roth strategy
- Controlled group and affiliated service group rules