If you’re a small business owner, independent contractor, or freelancer without any full-time employees, a One-Participant 401(k)—also known as a Solo 401(k)—could be one of the most powerful tools to build your retirement savings. Unlike traditional 401(k) plans offered by large companies, the Solo 401(k) offers flexibility, allows for high contribution limits, and gives you control over your investments. Whether you’re just starting out or already running a profitable solo business, this plan can offer major tax advantages and financial freedom in retirement.
The IRS has designed this plan specifically for business owners with no employees other than themselves (and possibly their spouse), allowing them to contribute as both employer and employee. That means you can potentially set aside more than double what you’d be able to save through an IRA, all while reducing your taxable income. But before jumping in, it’s critical to know the rules, benefits, and requirements that apply in 2024.
One-Participant 401(k) Plan Overview
| Feature | Details |
|---|---|
| Eligibility | Self-employed individuals or business owners with no full-time employees (except a spouse) |
| Annual Contribution Limit (2024) | Up to $69,000 ($76,500 if age 50 or older) |
| Contribution Types | Employee deferrals + Employer profit-sharing |
| Tax Treatment | Traditional (pre-tax) or Roth (after-tax) options |
| Filing Requirement | Form 5500-EZ once plan assets reach $250,000 |
| Loans | Allowed, up to 50% of account balance or $50,000 (whichever is lower) |
| Required Minimum Distributions | Begin at age 73 (or 75 depending on birth year) |
Who qualifies and why it matters
To open a Solo 401(k), you must be engaged in self-employment activity and have no full-time employees, other than your spouse. This may include sole proprietors, independent contractors, freelancers, and owners of corporations and LLCs. Even if you work part-time or run a side business in addition to your regular job, you may still qualify—as long as the self-employment income is legitimate and there’s no staff on payroll.
Your spouse may also be included in the plan if they earn compensation from your business. This can significantly increase overall household retirement contributions—doubling the tax advantages and savings potential in many cases.
How a One-Participant 401(k) works
One of the most attractive aspects of the Solo 401(k) is that you wear two hats: both employee and employer. As an “employee,” you can defer up to 100% of your compensation, up to $23,000 in 2024 (or $30,500 if you are age 50 or older). As the “employer,” you can contribute an additional 25% of your net earnings from self-employment, up to the combined total plan limit.
That means for 2024, your total contribution could reach an impressive $69,000—or $76,500 with catch-up contributions if you’re age 50 or older. These high limits greatly exceed traditional IRA contribution caps and make Solo 401(k)s an excellent tool for maximizing retirement savings quickly.
Traditional vs. Roth Solo 401(k)
Solo 401(k) plans offer the choice between **Traditional** (pre-tax) and **Roth** (after-tax) contributions. Traditional contributions reduce your taxable income now, deferring taxes on contributions and investment growth until withdrawal in retirement. Roth contributions are made with after-tax income, but grow tax-free and are not taxed upon qualified withdrawal.
For some high-earning self-employed individuals looking to minimize current taxes, the Traditional route offers compelling immediate benefits. On the other hand, younger business owners who expect to be in a higher tax bracket in retirement may benefit more from Roth contributions. Many Solo 401(k) plans allow both options, further increasing flexibility.
Required IRS filings and plan administration
If your Solo 401(k) reaches assets of $250,000 or more at the end of the year, the IRS requires you to file Form 5500-EZ annually. This filing reports your plan’s financial status and helps the IRS ensure compliance. Fortunately, the form is relatively straightforward for Solo 401(k) users and can often be completed without hiring an accountant. That said, a financial advisor familiar with retirement plans can ensure you’re maximizing efficiency and avoiding mistakes.
As with all retirement plans, it’s essential to keep detailed records, track contributions accurately, and perform regular reviews of investment performance and fees. Unlike workplace 401(k)s managed by HR departments, the responsibility here falls entirely on you—the plan sponsor and participant.
Loan provisions and access to funds
Solo 401(k) plans permit participant loans, which can be a lifeline in periods of financial need. You can borrow up to 50% of your account balance or $50,000 (whichever is less), and the loan must be repaid within five years. Loan proceeds are not taxed as long as repayment rules are followed, though regulators advise borrowing from retirement plans only when absolutely necessary.
Withdrawals before age 59½ are subject to a 10% early withdrawal penalty and regular income tax, unless an exception applies. At age 73 (or 75 depending on birth year), required minimum distributions (RMDs) begin unless the funds are in a Roth Solo 401(k), in which case distributions are tax-free.
Benefits for spouses in business
If your spouse earns compensation from your business, they qualify to open a separate participant account under the same Solo 401(k) plan. This means they can make the full employee contribution and receive an employer contribution too—potentially doubling the retirement plan’s overall savings power. This strategy is particularly powerful for family-run businesses, increasing tax-deferred or tax-free wealth accumulation as a household.
Important deadlines to remember
To make employee salary deferrals for the 2024 tax year, your Solo 401(k) must be established by December 31, 2024. Employer contributions can be made up until the tax-filing deadline (typically April 15, or October 15 if you file an extension). However, it’s important to make contributions early in the year to access the benefits of compound growth and properly document them.
If you’re forming a plan mid-year, it’s still possible to maximize both your deferrals and your employer contributions depending on your earnings and business income.
Winners and losers with a Solo 401(k)
| Winners | Losers |
|---|---|
| Self-employed individuals without employees | Business owners with full-time employees (other than spouse) |
| High earners who want tax-deferred savings | People with sporadic income and low earnings |
| Couples who work together in the same business | Those unwilling to manage or oversee plan admin |
FAQs about the One-Participant 401(k)
How soon can I access funds from a Solo 401(k) plan?
You may take a loan from your Solo 401(k) at any time, up to allowable limits. Early withdrawals before age 59½ generally incur a 10% penalty and income taxes unless an exception applies.
Can I contribute to a Solo 401(k) and an IRA?
Yes, you can contribute to both. However, deductibility of a Traditional IRA may be limited based on your income and whether you’re participating in a qualified plan like a Solo 401(k).
What happens if I hire an employee?
If you hire a full-time employee who is not your spouse, your eligibility to maintain a Solo 401(k) ends. However, you could transition to a regular 401(k) or another type of plan.
Do I need an EIN to open a Solo 401(k)?
Yes, a Solo 401(k) must be linked to an EIN (Employer Identification Number) even if you’re a sole proprietor without employees.
Are Roth contributions subject to RMDs?
Yes. Roth Solo 401(k)s are subject to required minimum distributions during your lifetime. However, rolling funds into a Roth IRA can eliminate this requirement.
Can I have a Solo 401(k) even if I have a full-time job?
Yes, if you earn income from a side business and meet the other eligibility criteria, you can have a Solo 401(k) even if you’re employed elsewhere.
A Solo 401(k) is one of the most underutilized yet incredibly powerful tools for self-employed professionals looking to take control of their financial future.
— John Michaels, Certified Financial Planner
