Solo 401k for Self-Employed Professionals and Small Businesses: What to Know

Planning for retirement is a common concern among self-employed professionals, even as they enjoy the flexibility, control, and creativity of an independent career. While traditional jobs offer built-in retirement plans, navigating these options on your own can be more challenging.

Fortunately, there are a number of solutions available. The right one for you will depend on factors such as your personal goals and income level. Discussing these factors with a financial advisor before making any decisions is recommended. Below, we provide general information on a potential option your financial advisor might suggest—the solo 401(k), a popular choice for self-employed professionals.

What Is a Solo 401k?

A one-participant 401(k) plan, or solo 401(k), is a traditional 401(k) that covers a business owner with no employees, or that person and their spouse. A solo 401(k) has the same rules and requirements as any other 401(k) plan you’d see through an employer.

You must establish the plan by December 31 or the fiscal year end in order to make a contribution for that year. Aside from contributions, a solo 401(k) requires minimal maintenance; however, once you have $250,000 in assets you will need to file annual paperwork. You can also opt for a Roth solo 401(k), which mimics a Roth IRA. Consider this option if your income and tax rate are lower now than you expect them to be in retirement.

Advantages of a Solo 401k

As a self-employed professional, you act both as an employee and an employer. This means your contribution limits for a solo 401(k) are higher because you can contribute as both parties. A solo 401(k) will allow you to save large sums that wouldn’t be possible with other retirement plans.

There is no minimum required annual contribution. Because contributions are optional, you can save a lot in years when your business is doing particularly well, and less when you may be going through leaner times.

Disadvantages of a Solo 401k

The main disadvantage of a solo 401(k) is that no additional employees can participate; you are only eligible as a self-employed business owner and a spouse. Minimal administration costs may apply as well, depending on which mutual fund company you work with.

Contribution Limits for a Solo 401k

As a business owner and employee, there are two contribution limits with a solo 401(k):

• Elective deferrals: As an employee, you can contribute up to 100% of self-employed earned income up to the annual contribution limit, which is $23,000 for 2024. This limit increases to $30,500 if you are 50 or older.
• Employer non-elective contributions: As an employer, you can contribute up to 25% of compensation. However, your total contributions (not including catch-up contributions for those 50 or older) cannot exceed $69,000 for 2024.

When calculating earned income, keep in mind that this number is your net earnings from self-employment after deducting one-half of your self-employment tax and contributions for yourself.

Solo 401k Examples

Example 1: 50 or younger

Anna, age 42, earns $60,000. She defers $19,500 in regular elective deferrals. Her business contributes 25% of her compensation to the plan, which is $15,000. Her total maximum contribution is $34,500.

Example 2: 50 or older

George, age 54, earns $120,000. He defers $19,500 in regular elective deferrals plus $6,500 in catch-up contributions for a total of $26,000. His business contributes 25% of his compensation to the plan, which is $30,000. His total maximum contribution is $56,000.

Independent consultants who run their business through MBO Partners are entitled to take part in our corporate 401(k) plan. Contact us today to learn more.

The information provided in the MBO Blog does not constitute legal, tax or financial advice. It does not take into account your particular circumstances, objectives, legal and financial situation or needs. Before acting on any information in the MBO Blog you should consider the appropriateness of the information for your situation in consultation with a professional advisor of your choosing.