April 25, 2024

A solo 401(ok) is a retirement account designed for self-employed people with no workers (other than a partner). They’re fascinating as a result of they’ve increased contribution limits than different forms of retirement accounts, which may give them nice tax benefits. 

Different names for a solo 401(ok) are: 

In the event you’re a self-employed particular person, you most likely wish to know if a solo 401(ok) will make sense for you and your enterprise. Let’s break down its advantages, options, and disadvantages.



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How does a solo 401(ok) work?

A solo 401(ok) works greatest for a person who has no full-time workers (aside from a partner) and doesn’t anticipate so as to add workers sooner or later. It is because the Inside Income Service (IRS) permits for self-employed people to contribute as if they’re each the employer and the worker in a solo 401(ok). This raises the quantity you’ll be able to contribute to a retirement plan to a most of $66,000 (not together with $7,500 in catch-up contributions you may make after age 50). 

That is useful in years while you make more cash since you’re capable of cut back your taxable earnings by taking a deduction from your enterprise bills while you make retirement account contributions. 

Self-employed people may also like selecting their very own retirement plan supplier and the funding choices with a solo 401(ok). 

Solo 401(ok) contribution limits

One of many defining options of a solo 401(ok) is how a lot you’re capable of contribute to the account. Right here’s the way it breaks down.

  • Worker most contributions are $22,500 in 2023, $30,000 if age 50 or over.
  • Worker and employer most contributions mixed are $66,000 for 2023, $73,500 if 50 or over. As a enterprise proprietor who’s each the employer and worker, you’ll be able to contribute this increased quantity to your plan.

Solo 401(ok) professionals and cons

Increased contribution limits at $66,000 (or $73,500 at age 50 and over).

Enterprise house owners can contribute double the quantity into the account—each from the possession facet and the worker facet.

In the event you’re below 59½, triggering occasions that permit for early distributions could also be topic to a ten% penalty along with any tax you’ll owe.

Helps reduce self-employment tax invoice by decreasing taxable earnings.

Tax is paid when funds from a non-Roth 401(ok) are distributed and taxed as extraordinary earnings.

Flexibility in selecting a supplier, plan, and investments.

Loans and hardship distributions could also be potential.

Accepts rollovers from different 401(ok) accounts.


A solo 401(ok) has some benefits that may enable you to contribute extra to your retirement whereas decreasing the quantity of taxes you owe. 

Increased contribution limits

As a result of a solo 401(ok) means that you can contribute as each the employer and the worker, you’ll be able to max out your retirement contributions at $66,000 ($73,500 in case you’re age 50 or over). 

Scale back taxable earnings

Contributing to a retirement account can maintain more cash in your pocket and cut back your tax invoice. The employer portion of retirement account contributions might be claimed as a deduction in opposition to your enterprise bills, which reduces your earnings and, in flip, reduces the quantity of tax you’ll owe. The worker a part of your contributions can cut back your taxable earnings— until the account is ready up as a Roth 401(ok), during which case your worker contribution will likely be from after-tax earnings. Seek the advice of a tax advisor earlier than establishing your plan to discover your choices.

Plan might permit for loans or hardship distributions 

A solo 401(ok), relying on the way you set it up and what the plan permits, can begin distributions for qualifying occasions. Some may permit for loans. Simply remember there could also be a penalty for some early distributions.

Flexibility in selecting a supplier, plan, and investments

While you’re self-employed, you’ve gotten the choice of selecting your individual retirement plan supplier, sort of retirement plan, and what investments you make inside that plan. It’s possible you’ll wish to seek the advice of with a monetary advisor, equivalent to these from Empower. 

Can roll over retirement cash from one other account

While you open a solo 401(ok), you’ll be able to roll over cash from a earlier tax-advantaged retirement account, equivalent to a 401(ok) from a earlier employer, into your new account.. There are companies, equivalent to Beagle, that may enable you to discover these outdated 401(ok)s to perform this purpose.

Particular concerns

Earlier than you resolve on a solo 401(ok), there are some things of which you’ll wish to remember.

Early withdrawal penalties

If you’re self-employed and presumably seeking to retire early, you need to know that the penalty for withdrawing cash earlier than age 59½ from a solo 401(ok) is 10%. In the event you’re going to wish your cash earlier, you’ll wish to take a look at different retirement automobiles. 

If your enterprise grows

In the event you add workers at a later date, you’ll have to convert your solo plan to a standard 401(ok) or terminate it. That is regulated by the IRS. 

Authorized entities

It’s potential for sure authorized entities to spend money on a solo 401(ok). The primary restriction is full-time workers—you’ll be able to’t have any besides your partner. Nonetheless, the next are allowed to open solo 401(ok)s so long as the enterprise solely contains you and a partner.

Giant retirement account stability

As soon as your account reaches $250,000, or while you shut the account, you’ll have to file IRS type 5500. 

The way to open a solo 401(ok)

Solo 401(ok)s are marketed by most retirement plan suppliers. It’s just like opening a standard 401(ok), however you  want an employer identification quantity (EIN) to open one. In the event you don’t have one, you’ll be able to simply get one on-line. 

From there, you’ll be able to:

  • Select a supplier.
  • Open the account.
  • Arrange contributions.
  • Select investments.
  • Alter as crucial with time.

The fundamentals are simple.  What you’ll wish to spend time on is researching which supplier is greatest for you, then which investments you wish to make. If that seems like greater than you wish to do your self, you’ll be able to seek the advice of with a monetary advisor, equivalent to these from Empower. 

Is a solo 401(ok) value it?

There are a couple of conditions during which a solo 401(ok) makes numerous sense. 

When you should offset a considerable amount of earnings. A solo 401(ok) might will let you deduct retirement contributions. With the bigger contribution restrict of $66,000, you could possibly cut back your tax legal responsibility with retirement contributions.

When you should construct a retirement account shortly. In the event you’re older and wish to maximise your retirement contributions, a solo 401(ok) may help. You can also make a considerable amount of contributions to the account to construct a retirement fund shortly.

Alternate options to a Solo 401(ok)

In the event you’re searching for extra retirement choices, check out these options:

A solo 401(ok) may help self-employed people ramp up retirement contributions

A solo 401(ok) has an a variety of benefits. It means that you can construct up your retirement account shortly whereas providing tax benefits like a typical 401(ok): tax-free progress on the account and decreased tax legal responsibility in your earnings. 

There are a variety of suppliers who can administer your solo 401(ok). In the event you’re new to self-employment, you’ll be able to roll over an outdated 401(ok) right into a solo 401(ok). Simply, you should definitely assessment the options listed above earlier than you make your last determination. 

Steadily requested questions (FAQs)

Are you able to cowl your partner below your solo 401(ok)?

Sure, a partner can take part in a solo 401(ok) plan. 

What’s the distinction between a person 401(ok) and a solo 401(ok)?

They’re usually thought of to be the identical factor. 

What occurs to solo 401(ok) when you find yourself now not self-employed?

You could possibly roll over the solo 401(ok) to a different retirement plan while you’re now not self-employed. Simply understand that the rollover might have tax penalties in case you swap from a pretax account to a Roth or vice versa.

** Empower Private Wealth, LLC (“EPW”) compensates Time Stamped for brand new leads. Time Stamped is just not an funding shopper of Empower Advisory Group, LLC.