Solo 401(k): The Most Powerful Retirement Plan for Self-Employed
A Solo 401(k) allows contributions up to $69,000 in 2025 — far more than a SEP-IRA for most self-employed earners. It also provides Roth options and loan provisions a SEP-IRA does not.
Why the Solo 401(k) Beats the SEP-IRA for Most Self-Employed Earners
Both plans reduce taxable income, but a Solo 401(k) allows significantly higher contributions at lower income levels. A self-employed person earning $80,000 net can contribute roughly twice as much to a Solo 401(k) as to a SEP-IRA.
- Solo 401(k) — employee deferral: $23,500 (or $31,000 if age 50+)
- Solo 401(k) — employer contribution: up to 25% of W-2 wages (S-Corp) or ~20% of net SE income (sole prop)
- Solo 401(k) — total limit: $70,000 (or $77,500 age 50+) in 2025
- SEP-IRA: 25% of W-2 wages or ~20% of net SE income — no employee deferral component
How It Works: Two Contribution Buckets
The Solo 401(k) has two separate contribution components, which is why it outperforms the SEP-IRA:
- Employee elective deferral: Up to $23,500 (2025) or 100% of W-2/SE income if lower. This component is unique to 401(k) plans — the SEP-IRA has no equivalent. Can be traditional (pre-tax) or Roth (after-tax, no RMDs).
- Employer profit-sharing contribution: Up to 25% of W-2 wages (if you have an S-Corp) or approximately 20% of net self-employment income (sole prop/LLC). Always pre-tax, deducted on the business return.
The combined limit is $70,000 (2025), subject to the individual component limits above.
Who Qualifies
A Solo 401(k) is available to self-employed individuals with no full-time employees other than a spouse. This is the critical eligibility requirement under IRC §401(a). Once you hire a full-time W-2 employee (other than a spouse), the plan must cover them and is no longer a "Solo" plan.
Eligible: sole proprietors, single-member LLCs, S-Corp owners who take W-2 salary, partnerships where all partners are eligible.
Setup Deadline and Annual Requirements
A Solo 401(k) must be established by December 31 of the tax year for which you want to make contributions (unlike the SEP-IRA, which can be established up to the tax filing deadline). Employee deferrals must be elected before year-end. Employer contributions can be made up to the tax filing deadline (including extensions).
Plans with assets over $250,000 must file IRS Form 5500-EZ annually. Under $250,000: no annual filing required.
Solo 401(k) vs. SEP-IRA: Quick Decision Guide
- Choose Solo 401(k) if: net income under ~$140,000 (employee deferral component adds more), want Roth option, want loan provision, have no employees
- Choose SEP-IRA if: net income over ~$280,000 (limits converge), want simplest possible administration, may add employees soon
- Both beat a SIMPLE IRA for self-employed with no employees — higher limits, more flexibility
IRC §401(a) (qualified plans), IRC §402(g) (elective deferral limits), IRC §415 (annual additions limit), IRC §404 (deduction for employer contributions). IRS Publication 560 (Retirement Plans for Small Business), IRS Form 5500-EZ.
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