If you're one of millions of Americans without access to a 401(k) or other retirement plan through a job, you may still have options to save for retirement when you hang your own shingle. Meet the solo 401(k)—also known as the self-employed 401(k), individual 401(k), personal 401(k), or, to use the IRS's preferred term, the one-participant 401(k).
Whatever you call it, the solo 401(k) is known for its high contribution limits that let people with no employees except a spouse who earns income from a business save a lot for retirement. That includes freelancers and gig workers to sole proprietors, LLCs (limited liability corporations), S corporations, C corporations, business owners, and partnerships with no employees.
Solo 401(k) contribution limits for 2023
In 2023, aggregate contributions can reach up to $66,000 if you are under 50 and $73,500 if you are 50 or older.
While those are the absolute maximums that can be contributed to a solo 401(k), the amount you can contribute may be different. That's because solo 401(k)s come with a little nuance. With a solo 401(k), you can make contributions in 2 ways: as the employee and as the employer. Each portion of that equation has a different limit that adds up to that hypothetical max of $66,000 or $73,500 for those 50 or older.
In 2023, you can contribute up to $22,500 pre-tax dollars to your solo 401(k) as an employee, the same amount that a regular employee can contribute to a traditional 401(k). If you're at least 50 years old, you can add a catch-up contribution of $7,500, for a total employee contribution of $30,000.1 You can choose to contribute up to 100% of your compensation, provided you don't exceed these limits.
You are also allowed to contribute up to 25% of earned income (meaning after Social Security and Medicare taxes) for the employer portion, or profit-sharing contribution.2 The IRS limits the amount of compensation that determines retirement contributions; for 2023, the limit is $330,000. As an example, a consultant under 50 with earned income of $100,000 can put in $22,500 as an employee and up to $25,000 (25% of $100,000)3 as the employer for a total of $47,500.
Keep in mind that if you have access to a 401(k) plan, your employee contribution limit applies across all plans, not per plan. So if you max out your contributions to a different employer-sponsored 401(k), you may only be able to make employer contributions to your solo 401(k).
Employee contributions are tax-deferred and should be made no later than December 31 (sole proprietors and single member LLCs have until the tax-filing deadline for the year, generally April 15); employer contributions can't be made any later than the tax-filing deadline. If your business is not incorporated, you can generally deduct employer contributions (which include employee contributions) for yourself from your personal income. If your business is incorporated, you can count these contributions as a business expense. Consult with a tax professional for your situation.
Solo Roth 401(k) contribution limits
If your solo 401(k) plan allows Roth contributions, the Roth solo 401(k) contribution limit is the same as the pre-tax contribution limit. Employee contributions are not tax-deductible to the employee but may be treated as a business expense. When the time comes to withdraw, withdrawals are tax-free as long as you're at least 59½ and have had the account for 5 years. SECURE 2.0 now allows employers to make matching contributions to Roth accounts.
After-tax solo 401(k) contributions
If you've maxed out your employee, catch-up (if eligible), and employer contributions, and you still want to save more for retirement, check whether your plan allows after-tax contributions.
After-tax contributions may sound a lot like Roth contributions. But unlike Roth contributions that you've already paid taxes on, after-tax contributions are held in a traditional solo 401(k) account, meaning you may eventually have to pay income taxes on a withdrawal of their earnings in retirement.
To minimize the future tax burden of after-tax contributions held in a pre-tax traditional solo 401(k), you can either do an in-plan Roth conversion if your plan allows or roll over into a Roth IRA. Rollovers can be complicated, so consult a tax professional.
What if I contributed too much to a solo 401(k)?
If you contributed too much to a solo 401(k), remove what the IRS calls "excess deferral." If you do so by Tax Day of the following year, usually April 15, you'll likely just have to pay any applicable taxes on what you overcontributed.
If you do so after that deadline, the amount of the withdrawal could be double taxed: once in the year you put in the money and then again the year the money is taken out to correct the error. You may also have to pay a 10% early withdrawal tax.
How to open a solo 401(k)
You can open a solo 401(k) at a number of providers, including Fidelity. Factors you might consider are plan offerings such as traditional, Roth, and after-tax contributions; investment options; fees; administrative support; the ability to take out loans; the plan's ability to accept rollovers; and electronic deposit capabilities. Once you open a solo 401(k) you are responsible for making contributions and complying with the terms of the plan.
Anything else I should know about a solo 401(k)?
If your solo 401(k) balance is above $250,000, you may have to file tax form 5500-EZ for one-participant plans. Also, solo 401(k)s typically do not provide unlimited creditor protection under ERISA (Employee Retirement Income Security Act of 1974).