Solo 401(k)

A Solo 401(k) (also called Individual 401(k)) is a 401(k) for sole proprietors and their spouses. It lets you contribute as both employee and employer, dramatically increasing the contribution ceiling for high-earning self-employed individuals.

How contributions stack

• Employee contribution (2024): Up to $23,000 ($30,500 if 50+) — same as any 401(k).
• Employer contribution: Up to 25% of net self-employment income.
• Total cap: $69,000 ($76,500 with catch-up).
• Roth option: Many providers now offer Roth Solo 401(k) for the employee portion.

Solo 401(k) advantages over SEP

1. Higher contributions at moderate income levels (because the employee deferral is flat, not percentage-based).
2. Roth option available.
3. Loan provisions (up to 50% of balance, max $50k).
4. Doesn't count for Backdoor Roth pro-rata calculations.

The catch

Why Solo 401(k) is the single best retirement plan for high-earning self-employed

The Solo 401(k) combines the employee deferral limit of a traditional 401(k) with the employer profit-sharing capacity of a SEP IRA — and lets you fund both at the same time. For sole proprietors and S-corp owners with no employees other than a spouse, no other retirement structure allows higher annual contributions at typical income levels.

A worked example: $200,000 net self-employment income

Sarah operates as a sole proprietor with $200,000 in net self-employment earnings. Her 2024 Solo 401(k) contribution capacity:

• Employee deferral: $23,000 (the full 401(k) employee limit).
• Employer profit-sharing: 20% of net SE earnings (after the self-employment tax deduction) — roughly $37,200.
• Total: approximately $60,200 in tax-deferred (or Roth) contributions.

Compare to a SEP IRA at the same income: about $37,200 max (only the employer side). The Solo 401(k) adds the full $23,000 employee deferral on top — over $20,000 more in annual tax-advantaged space.

Solo 401(k) vs. SEP IRA — the head-to-head

The hard rules to know

• "Solo" is literal. Hire any non-spouse employee, and the plan disqualifies. Common business owners trip on this when scaling — start a separate plan structure (SIMPLE or proper 401(k)) when adding staff.
• Set up by December 31. Unlike SEP IRAs, which can be opened by the tax filing deadline, Solo 401(k) plans must exist by year-end of the contribution year (employer profit-sharing portion can still be funded by the tax deadline).
• $250,000 reporting threshold. Annual Form 5500-EZ filing required once plan assets exceed $250k. Mild paperwork — but missing it triggers significant IRS penalties.
• Spouse can also participate. A working spouse on the business can have their own Solo 401(k) contributions, effectively doubling household capacity.

Common Solo 401(k) mistakes

• Picking the wrong provider. Many "free" Solo 401(k) plans from large brokers (Fidelity, Schwab, Vanguard) don't allow Mega Backdoor Roth or rollovers from external IRAs. Choose a plan provider matching your strategy.
• Mixing personal and business funds. Solo 401(k) contributions must come from business earnings. Personal funds funneled in trigger excess contribution issues.
• Missing the deadline by days. December 31 deadline is firm. Plan must be established before year-end even if funded later.
• Forgetting to file 5500-EZ above $250k. Annual reminder once you cross the threshold — many self-employed assume "Solo" means "no paperwork."

Mega Backdoor Roth via Solo 401(k)

Many third-party administrators (like MySolo401k or Ocho) offer Solo 401(k) plans that support after-tax contributions and in-plan Roth conversions. This unlocks the "Mega Backdoor Roth" strategy:

• Standard employee deferral: $23,000 (Traditional or Roth).
• Employer profit-sharing: ~$37,000.
• After-tax contribution: filling the gap up to the $69,000 total cap.
• Immediate in-plan Roth conversion: moves the after-tax contribution to Roth space.

For a self-employed person earning $300,000+, this can move $25,000+ per year into Roth on top of standard contributions — one of the highest-leverage moves available.

Frequently asked questions

Can I have both a Solo 401(k) and a W-2 401(k)?

Yes, but your employee deferral limit ($23,000) is shared across both. Employer-side contributions get separate limits at each employer.

What if I hire a part-time employee?

Part-timers working under 500 hours/year for 3 consecutive years are excludable (with caveats under SECURE 2.0). Beyond that, you'd need to switch to a regular 401(k).

Roth Solo 401(k) — same as Roth IRA?

Tax treatment is similar — pay tax now, withdraw tax-free in retirement. Differences: Roth 401(k) has had RMDs (until SECURE 2.0 changed this for 2024+), and you can roll a Roth Solo 401(k) into a Roth IRA after leaving the business.

Putting this into practice this week

Concepts only matter if they change behavior. Pick the single most relevant action from the above and put it on your calendar — even 15 minutes of action beats hours of further reading without doing anything. The compound benefit of small consistent moves dwarfs the optimization gain from any single decision. Most people fail at finance not because they don't know what to do, but because they don't act on what they already know.

How this connects to the rest of your financial plan

Personal finance is a system, not a list of independent decisions. The choices you make in one area cascade into others: a tax-loss harvest affects your asset allocation, a 401(k) contribution affects your near-term cash flow, a Roth conversion in 2024 affects RMDs in 2050. Sophisticated financial planning is mostly about understanding these second- and third-order effects. The basics that everyone should master first: emergency fund in cash, capture the full 401(k) match, eliminate high-interest debt, max tax-advantaged accounts before taxable, write down a single-page financial plan and review it annually.

Key takeaways

• Understand the mechanics before you optimize the edges. A solid 70% strategy beats a fragile 95% optimization.
• Automate behavior so you don't depend on willpower. Set-it-and-forget-it is the highest-leverage financial habit.
• Match the strategy to your actual situation, not the situation you wish you had or that influencers describe.
• Review annually; ignore daily noise. The market's short-term moves rarely require a response.
• Consistency over decades beats brilliance over months. Time in the market does the work; trying to time it usually destroys it.

The bottom line

The biggest financial wins come from doing the simple things consistently for decades — not from finding the cleverest single trick. Build the foundation first; the optimizations layer on top once the foundation is solid. The investors who end up wealthy aren't the ones who picked the best stocks. They're the ones who saved consistently, kept costs low, took appropriate risk for their horizon, and didn't sell during crashes. Everything else is detail.

Continue your learning at Krovea

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A final note on financial decision-making

Every concept covered here exists because someone made a costly mistake first and the rule emerged from the consequences. The 401(k) match exists because Americans weren't saving enough. The Roth IRA exists because mid-century retirees got taxed twice on their nest eggs. The wash-sale rule exists because traders abused loss harvesting. Treat each piece of advice not as arbitrary rules to memorize but as the encoded lessons of prior generations of investors. The framework that survives recessions, regulatory changes, and market manias has been stress-tested in ways no individual could replicate. Following the boring conventional wisdom isn't unimaginative — it's the result of selecting for what actually works at scale.