Solo 401k: The Best Retirement Account for Self-Employed People
If you're self-employed — freelancer, consultant, sole proprietor, single-member LLC — the solo 401k (also called an individual 401k or self-employed 401k) is almost certainly the most powerful retirement account available to you.
The contribution limits are dramatically higher than most alternatives, it offers Roth options, and the tax savings can be substantial. Here's how it works and whether it makes sense for your situation.
What Is a Solo 401k?
A solo 401k is a traditional 401k plan designed specifically for self-employed individuals with no full-time employees (other than your spouse). It works exactly like an employer 401k — with the same tax advantages — except you're both the employee and the employer.
That dual role is the key to the account's power: you can contribute as both the employee and the employer, stacking contributions up to the IRS annual limit.
How Much Can You Contribute? (2026 Numbers)
Employee contribution: Up to $23,500/year (or 100% of self-employment income, whichever is less). If you're 50 or older, add a $7,500 catch-up contribution for a total of $31,000.
Employer contribution: Up to 25% of your "net self-employment income" (which is your net profit after the deductible portion of self-employment tax — approximately 20% in practice).
Total limit: The combined employee + employer contribution can't exceed $70,000 in 2026 ($77,500 if you're 50+).
Example: If you have $100,000 in net self-employment income:
- Employee contribution: $23,500
- Employer contribution: $100,000 × 20% = $20,000
- Total: $43,500
At $200,000 in net income:
- Employee contribution: $23,500
- Employer contribution: $200,000 × 20% = $40,000
- Total: $63,500
This is far more than a SEP-IRA (employer-side only, capped at 25% of net SE income) or SIMPLE IRA (typically $16,500/year employee limit).
Solo 401k vs. SEP-IRA vs. SIMPLE IRA
| Account | 2026 Employee Limit | Employer Limit | Roth Option | Best For |
|---|---|---|---|---|
| Solo 401k | $23,500 (+$7,500 catch-up) | 25% of net SE income | Yes | Maximizing contributions |
| SEP-IRA | None (employer only) | 25% of net SE income | No | Simplicity |
| SIMPLE IRA | $16,500 (+$3,500 catch-up) | 3% match | No | Small teams |
When is SEP-IRA better? If your income is lower and the math works out the same, or if you value simplicity — SEP-IRA has almost zero paperwork.
Solo 401k advantage at lower incomes: At $50,000 net SE income, a SEP-IRA caps you at $10,000 (20% after the SE tax deduction). A solo 401k lets you contribute $23,500 (your full employee contribution) plus $10,000 employer = $33,500. At lower income levels, the solo 401k wins decisively.
Traditional vs. Roth Solo 401k
Like standard 401ks, many solo 401k providers offer both traditional (pre-tax) and Roth options.
Traditional solo 401k: Contributions are tax-deductible. You reduce your taxable income now and pay tax on withdrawals in retirement.
Roth solo 401k: No deduction now, but all qualified withdrawals in retirement are tax-free — including decades of investment growth.
Which to choose? The usual calculus applies: if you expect to be in a higher tax bracket in retirement than you are today, Roth is often better. For most self-employed people with variable income, a mix is reasonable — traditional contributions in high-income years, Roth in lower-income years.
Note: The employee contribution can go into Roth; employer contributions must be traditional (pre-tax).
How to Open a Solo 401k
You need to open the account through a financial institution that offers self-employed 401k plans. Top options:
Fidelity: No account fees, excellent investment options, supports Roth contributions. The most popular choice for solo 401ks.
Charles Schwab: No fees, broad investment options, supports Roth.
Vanguard: Good investment options, but the solo 401k platform is limited — they've been phasing it out for new accounts. Not recommended for new solo 401k setups.
TD Ameritrade (now Schwab): Merged into Schwab.
Self-directed solo 401k providers (Rocket Dollar, Equity Trust): More expensive, but allow investing in real estate, private equity, and other alternative assets. For most people, unnecessary complexity.
The process:
- Open the account online (takes 15–30 minutes)
- Request an Employer Identification Number (EIN) from the IRS if you don't have one (free, instant at irs.gov)
- Fund with your first contribution
Important deadline: You must establish the plan by December 31 of the tax year you want to take the deduction. Contributions for the prior tax year can be made until your tax filing deadline (including extensions), but the plan must exist by year-end.
Tax Savings: What the Numbers Actually Look Like
If you're in the 24% federal tax bracket and contribute $43,500 to a traditional solo 401k, you save:
- Federal taxes: $43,500 × 24% = $10,440
- State taxes (varies): often $2,000–$4,000 additional savings
So roughly $12,000–$14,000 in tax savings on a $43,500 contribution. Those savings compound over time in the tax-advantaged account.
For someone in the 32% bracket contributing $63,500:
- Federal savings: $63,500 × 32% = $20,320
The solo 401k is one of the most powerful legal tax-reduction tools available to self-employed individuals.
Does a Solo 401k Affect Self-Employment Tax?
No. Solo 401k contributions do not reduce your self-employment tax (Social Security and Medicare taxes, which are 15.3% of net self-employment income). They only reduce your income tax.
The employer contribution is deducted as a business expense, slightly reducing your net self-employment income. But the primary benefit is income tax reduction, not SE tax reduction.
Loan and Hardship Withdrawal Provisions
Unlike an IRA, a solo 401k can allow loans — up to 50% of the account balance or $50,000, whichever is less. Most major providers (Fidelity, Schwab) enable this feature.
This is one of the underappreciated advantages of the solo 401k: the ability to access funds in a genuine emergency without a 10% penalty (as long as you repay the loan with interest within 5 years).
Early withdrawals (before 59½) are still subject to the 10% penalty plus income tax, same as any retirement account.
Annual Reporting Requirements
Solo 401ks have minimal paperwork — but there's one requirement to know:
Form 5500-EZ: Once your solo 401k balance exceeds $250,000, you must file Form 5500-EZ with the IRS annually. The form is not complicated, but missing it triggers significant penalties ($250/day, max $150,000). Set a calendar reminder.
Below $250,000, no annual filing is required.
Who Should NOT Use a Solo 401k
The solo 401k is only for businesses with no full-time employees other than your spouse. If you hire even one employee (other than your spouse) who works 1,000+ hours per year, you can no longer maintain a solo 401k — you'd need a regular 401k plan, which is significantly more complex and expensive to administer.
If you're planning to hire employees within the next 1–2 years, consider a SEP-IRA instead. It's simpler to transition away from.
Getting Started
If you're self-employed with solid income and no full-time employees, the solo 401k should be on your radar for this tax year. The steps are:
- Get an EIN if you don't have one (irs.gov, free, instant)
- Open a solo 401k at Fidelity or Schwab
- Determine your contribution limit based on your expected net SE income
- Make contributions before December 31 (employee) or your tax filing deadline (employer)
The paperwork is minimal, the tax savings are real, and this account can dramatically accelerate your retirement savings compared to a simple IRA or SEP-IRA.
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