Solo 401(k)

The Solo 401(k) was authorized under the Economic Growth and Tax Relief Reconciliation Act of 2001 and became available January 1, 2002. It follows the same Internal Revenue Code rules as conventional 401(k) plans but is streamlined for single-participant operations. Eligible adopters include sole proprietors, single-member LLCs, S-corporation owner-employees, C-corporation owner-employees, and partnerships where all partners are also employees — as long as no non-owner, non-spouse full-time employee (generally defined as working 1,000+ hours per year) exists in the business. A spouse who earns compensation from the business may also participate, effectively doubling the household's contribution capacity.

The Solo 401(k) is particularly powerful because the owner can contribute in two separate capacities: as an employee making elective deferrals and as an employer making profit-sharing contributions. The combination allows much higher total contributions than a SEP IRA at the same income level — especially for lower-earning self-employed workers. Because the plan is established by the business, the owner must adopt a plan document (available from most major custodians at no cost), designate a plan year, and maintain the plan in compliance with IRS rules, though solo plans are exempt from ERISA's more burdensome annual reporting requirements (Form 5500-EZ is required once plan assets exceed $250,000).

The Solo 401(k) also uniquely offers Roth elective deferral options — unlike the SEP IRA, which has no Roth variant — and can support after-tax contributions and in-plan Roth conversions (the mega backdoor Roth) if the plan document is drafted to include those features. Loan provisions are also available, allowing the owner-employee to borrow up to the lesser of $50,000 or 50% of the vested account balance. These features make the Solo 401(k) the most flexible tax-advantaged savings vehicle available to self-employed individuals.

Employee + Employer Contributions: The two-bucket contribution structure is the defining advantage of the Solo 401(k). As an employee of their own business, the owner can make elective deferrals of up to $23,500 in 2025 ($31,000 if age 50 or older, or $34,750 if ages 60-63 under the SECURE Act 2.0 super catch-up). These deferrals can be designated as pre-tax (Traditional) or Roth. Separately, as the employer, the business can make a profit-sharing contribution of up to 25% of compensation (with 'compensation' defined as W-2 wages for S-corp owners or net self-employment income after the deductible half of self-employment tax for sole proprietors). The combined employee plus employer contributions cannot exceed the Section 415 limit — $70,000 in 2025 ($77,500 if age 50+ using standard catch-up, $81,250 for ages 60-63). A sole proprietor with $120,000 of net self-employment income could contribute $23,500 as employee deferrals plus roughly $22,000 as the 25% employer profit-sharing contribution, totaling approximately $45,500 — compared to a maximum SEP IRA contribution of $22,000 at the same income level. At higher income levels, the SEP IRA and Solo 401(k) converge, but for those under the break-even income point (approximately $140,000 for sole proprietors), the Solo 401(k) consistently allows larger contributions.

Mega Backdoor Roth via Solo 401(k): The Solo 401(k) is the primary vehicle through which a self-employed individual can execute the mega backdoor Roth strategy, and it is often more accessible for sole proprietors than for employees at large companies whose plans may not permit the necessary features. The Solo 401(k) plan document must specifically allow after-tax (non-Roth) contributions and either in-service withdrawals or in-plan Roth conversions. When these features are included, the owner can contribute after-tax dollars up to the Section 415 limit after accounting for pre-tax, Roth, and employer contributions. Those after-tax contributions can then be immediately converted to Roth status within the plan or rolled to a Roth IRA, with only the earnings (typically minimal if converted promptly) subject to tax. For a high-earning self-employed consultant in 2025, this might look like $23,500 in Roth elective deferrals plus $30,000 in employer profit-sharing plus $16,500 in after-tax contributions totaling $70,000, with the $16,500 after-tax portion converted to Roth — creating $40,000 of Roth assets in a single year. Not all custodians support this feature in their prototype plan documents; the owner may need to adopt a custom plan document from a third-party administrator to unlock after-tax contribution and conversion capabilities.