From enjoying total autonomy to doing what you love most to working with your favorite kind of people, being self-employed offers many liberating perks. However, it also means you don’t have the luxury of an employer-sponsored retirement plan unless you take action.
So, how can you plan for retirement as a self-employed individual?
Fortunately, there are several options for entrepreneurs, including the solo 401(k). Also known as an individual 401(k) or self-employed 401(k), this retirement plan allows small business owners to make both employer and employee contributions. As such, it can be a great option for maximizing your retirement savings, often with higher contribution limits.
Let’s take a closer look at how a solo 401(k) works and its benefits.
Who Is a Good Fit for a Solo 401(k)?
According to the IRS, only business owners without employees (besides a spouse or business partner) can establish a solo 401(k). You can use the plan to cover your spouse. As the name implies, this type of account is ideal for sole proprietors, partnerships, and owner-only corporations who want a retirement plan similar to one they’d have access to at a bigger employer.
Benefits of a Solo 401(k) Plan
The main benefit of a self-employed 401(k) is the ability to fund it with both employee and employer contributions.
Additionally, you can choose your tax benefit—meaning you can opt for a Traditional 401(k) with pre-tax contributions that lower your income in the current year or a Roth 401(k) with post-tax contributions that allow tax-free retirement withdrawals. Not to mention, you can make larger contributions to a solo 401(k) than a SEP IRA or profit-sharing plan might allow.
To top it all off, solo 401(k)s come with easy administration handled by your custodian, from setting up your plan to mandatory distribution reporting. That also means no hidden setup or maintenance fees.
Solo 401(k) Contribution Limits
Remember, you can contribute to a solo 401(k) as both the employer and employee. Here’s how it breaks down for the 2025 employer and employee contribution limits:
- Employee contribution: You may defer up to $23,500 or 100% of your compensation, whichever is less, by December 31, 2025. If you’re 50 or older, you can make a catch-up contribution of $7,500. If you’re between 60 and 63, you can make the “super catch-up” contribution of $11,250, thanks to the Secure 2.0 Act. (IRS)
- Employer contribution: You can make a profit-sharing contribution of up to 25% of your compensation or net self-employment income. For 2025, the compensation limit that determines your retirement contribution is $350,000. (IRS)
How Do Solo 401(k) Distributions Work?
As with any employer-sponsored 401(k), you are eligible to take distributions from your solo 401(k) when you turn 59.5 years old or another “triggering event” (e.g., disability, plan termination, or death) occurs. If you make withdrawals before age 59.5, they may be subject to a 10% penalty and income taxes. You must take required minimum distributions (RMDs) from your solo 401(k) when you turn 73.
As for rollovers, an individual 401(k) may be set up to accept rollovers from other retirement plans, such as an employer-sponsored 401(k) or a SEP IRA. You may also roll your solo 401(k) into another retirement account that accepts rollovers.
Are you trying to decide between a solo 401(k) and other self-employed retirement plans but wondering what’s best for you? Contact Carlson Investments today for personalized guidance based on your business and financial situation. We’re happy to discuss all your options to maximize your retirement savings.
Carlson Investments does not provide tax, legal, or accounting advice. This content has been written for informational purposes only. Always consult your individual tax, legal, or financial professionals for advice tailored to your situation.
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