Solo 401(k)

A Solo 401(k) — also called an individual 401(k), one-participant 401(k), or solo-k — is a retirement savings plan built specifically for self-employed business owners with no full-time employees (a spouse who works in the business can participate). It works like a regular employer-sponsored 401(k), but since you're both the boss and the employee, you get to contribute on both sides.

As the employee, you can defer up to $23,000 of your earned income in 2024 ($30,500 if you're 50 or older). As the employer, you can contribute an additional 25% of your net self-employment income (after deducting half of your self-employment tax). The combined employee + employer contribution can't exceed $69,000 in 2024 ($76,500 if 50+).

You can choose between traditional (pre-tax) contributions and Roth (after-tax) contributions for the employee deferral portion. Employer contributions are always pre-tax. Many Solo 401(k) providers also allow loans (up to $50,000 or 50% of your account balance) and accept rollovers from previous employer plans and IRAs.

Setup is straightforward: choose a provider (Fidelity, Schwab, Vanguard, and several others offer them for free), complete the adoption agreement, get an EIN if you don't have one, and start contributing. The plan must be established by December 31 of the tax year, though contributions can be made until your tax filing deadline.

The Solo 401(k) offers the highest contribution limits of any retirement plan available to self-employed contractors. Compared to a SEP IRA (which only allows employer contributions of 25% of net earnings), the Solo 401(k) lets you contribute more at lower income levels because of the employee deferral component.

For a contractor earning $100,000 in net self-employment income, a Solo 401(k) allows roughly $42,000 in total contributions. A SEP IRA would cap at about $18,600. That difference compounds dramatically over a career — potentially hundreds of thousands of dollars in additional retirement savings and tax deferral.