Solo 401(k)

Also called individual 401(k), one-participant 401(k)

A 401(k) for self-employed people with no employees other than a spouse, allowing contributions both as employee and as employer.

What it means

A solo 401(k), also called an individual or one-participant 401(k), is available to business owners whose only plan participants are themselves and possibly a spouse. Because the owner is both employee and employer, they can make two kinds of contributions: salary deferrals as the employee, and a profit-sharing contribution based on compensation as the employer. Both are subject to limits the IRS sets each year.

Many solo 401(k) plans offer a Roth option for employee deferrals, and some allow loans. Once the plan’s assets pass a threshold, the owner must file an annual information return with the IRS. If the business hires eligible employees, the plan generally must be converted or replaced.

Example

Suppose a freelance designer and a SEP IRA user each net the same moderate self-employment income. The SEP user can make only an employer contribution, a percentage of earnings. The solo 401(k) owner can make that same employer contribution plus an employee deferral on top, so at many income levels their total allowed savings is higher.

How it’s used

Freelancers and consultants without staff
Married couples who run a business together
Self-employed people wanting a Roth option

Strengths and weaknesses

Strengths

Two contribution types can allow high savings even at moderate income
Roth deferrals and loans may be available
Flexible contributions from year to year

Weaknesses

More setup and paperwork than a SEP IRA
Annual filing required once assets pass an IRS threshold
Not available once the business has eligible non-spouse employees

Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.