Solo 401(k) Plans - Save Up to $61,000 Tax-Deferred Each Year

Solo 401(k) plans allow self-employed business owners to increase their retirement savings contributions versus an IRA. Additionally, Solo 401(k) plans offer tax advantages that may result in a lower tax bracket.

What is a Solo 401(k)?


A solo 401(k) (also known as an individual 401k) is a retirement plan for self-employed business owners and their spouses. This type of retirement plan allows you to contribute to the plan as both the employer and employee, providing you with the ability to maximize contributions and business deductions, while lowering your personal taxes.

You can also choose to contribute as an employee to the Roth 401(k) feature no matter how much you earn and also have access to your money via loan without penalty in case of an emergency.

As you can see, Solo 401(k)s offer some significant advantages over Traditional IRAs:

Solo 401(k) Traditional IRA
Annual Limit per Individual
Solo 401(k)
$61,000
Traditional IRA
$6,000
Age 50+ Catch-up amount
Solo 401(k)
$6,500
Traditional IRA
$1,000
Roth Income Limit
Solo 401(k)
None
Traditional IRA
$129K*
Penalty-free Access
Solo 401(k)
Yes, loan to self
Traditional IRA
No

*In 2022, the contribution amount allowed begins to decrease at $129K for single individuals, hitting $0 at $144K. For those filing jointly, the contribution limit begins to decrease at $204K, hitting $0 at $214K.

How the Self-Employed Can Save $10,000+ in Taxes This Year with a Solo 401(k)

The amount you can tax-defer will vary by your earnings and your tax rate. In general, for those earning $155,000 or more, protecting $10K or more in taxes is often doable. For those earning less, the tax savings can still be quite substantial. Here’s a hypothetical example of how an owner under 50 years of age can make contributions to a Solo 401(k) and lower taxable income:

Sole Proprietor Under 50 Years of Age 401(k)
Earnings
401(k)
$155,000
Contributions made as an employee
401(k)
$19,000
20% of net self-employment contribution
401(k)
$31,000
Total Tax-Deferred Savings
401(k)
$50,000
Taxable Income
401(k)
$105,000

While the owner earned $155,000, only $105,000 is taxable by the federal government. Assuming an effective tax rate of 20 percent, that’s $10,000, she can now keep for herself versus paying the taxman this year (155,000 x 0.2 = $31,000; 105,000 x 0.2 = $21,000; $31,000 - $21,000 = $10,000 in tax savings). In actuality, the tax savings could be even greater as she may also drop a tax bracket/AGI by contributing. This is not meant as tax advice. Please consult a tax advisor to discuss your specific situation.

Note, owners that are 50 years of age or more could tax-defer up to $67,500 in earnings this calendar year depending on your earnings. If your company is established as a corporation, you may be able to deduct 25% of W-2 earnings.

Learn More About the Benefits of a Solo 401(k) Plan for Your Business Here:

Solo 401(k) Features and Insights

ShareBuilder 401k’s are fully administered plans. For Solo 401(k) plans this means you automatically receive:

  • The ability to support multi-owners and spouses with your plan

  • Government tax reporting including 1099R and signature-ready Form 5500 if needed

  • A Roth 401(k) feature, ability to borrow from your account and to consolidate or rollover other accounts

  • The capability for one-time, web-based contribution(s) and/or regular automated ACH deposits

  • Toll-free access to your ShareBuilder 401k advisor and customer care team

  • Automatic pricing discounts as your assets grow

  • Set roster of retirement appropriate, index-based investments (ETFs) and a money market

There is an ongoing price per month to support your plan for those with <$250,000. The amount is reduced as your assets hit specific milestones and can be more than offset by the tax benefits for those regularly contributing to their account.

Solo 401(k) Fun Facts

  • Self-employed, multiple-owner firms without employees, and/or spouses that will contribute more than $6,000 per year.

  • Any business with employees that have either:

    • Reached the age 21 and/or

    • Worked 1,000 or more hours in the year.


    Solo 401(k) plans can be amended and upgraded to an employee-based plan in the event you add employees.

    Tip: If you, other owner, or a spouse in this plan owns another business(es), you may have to cover all these employees in a plan and would need to open a different plan type.

  • A new Solo 401(k) plan must be established by the end of your business tax year (generally December 31st) to qualify for the current year saving and tax benefits.

    • Contributions as an employee (Roth, catch-up, regular), must be made within the business tax year.

    • Employer contributions (profit share) you make, can be made by your tax deadline for the previous year (April 15th for most)

    • ShareBuilder 401k is a complete solution that allows you to access and manage your company's 401(k) plan online 24/7. The process to set up a plan is quick and easy, and it takes just a few minutes a month to manage.

    • You receive the potential for tax-deferred growth on employer and employee contributions. Note that employee elective deferrals can also be made as Roth contributions, with any earnings tax-free in retirement.

  • Because a Solo 401(k) is a type of 401(k) plan, it follows traditional 401(k) rollover and transfer rules. When consolidating your old 401(k) or qualified IRA account to your ShareBuilder 401k, the assets need to be moved via transfer and not as a distribution/rollover. This can take several weeks or more.

    • If you withdraw money from your 401(k) account other than via a 401(k) loan, your withdrawal will typically be subject to a 10% tax penalty if you are under 59 ½ years of age.

    • If you take a loan and you then terminate your plan before you pay it back, the outstanding balance will be treated as an early withdrawal and subject to a 10% tax penalty if you are under 59 ½ years of age. Know that 401(k) loan limits in a 401(k) are 50% of your vested balance up to $50,000.