What Is a Solo 401(k)? A Simple Guide for Self-Employed Folks

 If you’re self-employed, run a side hustle, or own a small business with no employees, you’ve probably wondered whether you’re missing out on the retirement benefits available to people with traditional jobs. Enter the Solo 401(k)—also sometimes called an Individual 401(k) or Self-Directed 401(k).

This retirement account is designed specifically for people who work for themselves and want a powerful, flexible way to save for the future.

Let’s break it down in plain language.

What Is a Solo 401(k)?

A Solo 401(k) is a retirement account available to self-employed individuals or business owners with no full-time employees (other than a spouse).

What makes it unique is that you get to play two roles:

• Employee – making salary deferrals

• Employer – making profit-sharing contributions

That dual role allows for much higher contribution limits than many other retirement options.

Who Is Eligible?

You may be eligible for a Solo 401(k) if:

• You earn self-employment income (freelancer, consultant, contractor, sole proprietor)

• You own a business (LLC, S-Corp, or C-Corp)

• You do not have full-time employees

• Your only eligible employee is your spouse (which can actually be a bonus)

Even side-hustle income can qualify—as long as it’s legitimate earned income.

How Much Can You Contribute?

This is where Solo 401(k)s really shine.

Because you contribute as both employee and employer, you can potentially save tens of thousands of dollars per year—depending on your income.

1. Employee Contributions

You can contribute up to the standard 401(k) employee limit each year (with an additional catch-up contribution if you’re 50 or older). Please consult the IRS website for the most up-to-date contribution limits.

2. Employer Contributions

As the “employer,” you can also contribute a percentage of your business profits.

Combined, these contributions allow for very high annual maximums, making Solo 401(k)s especially appealing for high-earning self-employed folks.

Important note: Contribution calculations can get tricky depending on your business structure. A tax professional can help ensure you’re doing this correctly.

Traditional vs. Roth Solo 401(k)

Many Solo 401(k)s allow you to choose between:

• Traditional contributions – tax-deductible now, taxed later

• Roth contributions – taxed now, withdrawn tax-free in retirement

Some plans allow both, letting you diversify how your future income is taxed.

What Does “Self-Directed” Mean?

A self-directed Solo 401(k) gives you more control over how your money is invested.

Depending on the plan provider, this can include:

• Stocks, ETFs, and mutual funds

• Real estate

• Private lending or private equity

• Other alternative investments

More freedom can be empowering—but it also comes with more responsibility and risk. Self-directed accounts often require careful record-keeping and a strong understanding of prohibited transactions.

Benefits of a Solo 401(k)

Here’s why many self-employed people love them:

• High contribution limits

• Tax flexibility (Traditional and/or Roth)

• No income limits like Roth IRAs have

• Spouse participation can double household savings

• Optional loan feature (borrow from your account, with rules)

Potential Drawbacks to Consider

A Solo 401(k) isn’t for everyone. A few things to keep in mind:

• More administrative responsibility than an IRA

• Annual filings required once your balance exceeds a certain threshold

• Not ideal if you plan to hire employees soon

• Self-directed options can increase complexity and risk

Solo 401(k) vs. SEP IRA: What’s the Difference?

Both are popular self-employed retirement options, but they function differently.

• SEP IRA – simpler, employer-only contributions

• Solo 401(k) – allows employee + employer contributions and Roth options

For many people with higher income or a desire for flexibility, a Solo 401(k) can offer more strategic value.

Is a Solo 401(k) Right for You?

A Solo 401(k) can be a powerful tool if you:

• Want to save aggressively for retirement

• Have consistent self-employment income

• Value flexibility and control

• Are comfortable managing (or outsourcing) a bit more complexity

Like most financial tools, it’s not about being “better” or “worse”—it’s about whether it fits your financial reality and your long-term goals.

Final Thought

Being self-employed already means you’re charting your own path. A Solo 401(k) can be one way to bring that same intentionality to your retirement planning—helping you design a future that aligns with your work, your values, and your version of financial security.

This article is for educational purposes only and is not tax or investment advice. Always consult a qualified professional regarding your specific situation.