Solo 401(k)
A solo 401(k), also called a one-participant 401(k) or individual 401(k), is a tax-advantaged retirement plan designed for self-employed individuals and small business owners with no employees other than the owner and their spouse.
The solo 401(k) was made widely available after the Economic Growth and Tax Relief Reconciliation Act of 2001 expanded 401(k) contribution rules to allow self-employed individuals to establish plans with the same contribution limits as large employer plans. Before this legislation, self-employed individuals typically used SEP IRAs or Keogh plans, which offered lower effective contribution limits relative to the solo 401(k)'s combined employee and employer structure.
The contribution structure of a solo 401(k) consists of two components. As an employee, the owner can make elective deferral contributions up to the standard 401(k) limit — $23,000 for 2024, plus a $7,500 catch-up if age 50 or older. As an employer, the same individual can also make profit-sharing contributions of up to 25% of net self-employment income (after deducting one-half of self-employment tax and the contribution itself from the income calculation). The combined employee and employer contributions cannot exceed the Section 415 limit of $69,000 for 2024 ($76,500 with catch-up).
Compared to a SEP IRA, the solo 401(k) allows much higher contributions at lower income levels. A SEP IRA permits only the employer-side contribution of up to 25% of net self-employment income, with no employee deferral component. At annual self-employment income below approximately $130,000, the solo 401(k)'s employee deferral component allows the owner to contribute a larger absolute dollar amount than a SEP IRA would permit.
Solo 401(k) plans can accept both traditional (pre-tax) and Roth (after-tax) contributions, depending on how the plan is drafted. Some plan documents also allow plan loans and in-service hardship withdrawals, features not available in IRAs. If the plan's total assets exceed $250,000 at the end of the plan year, the owner must file Form 5500-EZ with the IRS annually to disclose plan assets and other administrative information.
If the business hires any employees other than the owner's spouse, the solo 401(k) loses its one-participant status and must be converted to a full 401(k) plan subject to ERISA nondiscrimination testing and coverage requirements. The plan must cover eligible employees, and the plan's contributions for the owner cannot discriminate in favor of highly compensated employees relative to rank-and-file workers. This requirement to convert upon hiring employees is a key planning consideration for sole proprietors anticipating future growth.