Solo 401(k)
Now that you understand how individuals save through IRAs, the next step is the Solo 401(k), a plan designed specifically for self-employed individuals who want to save more than IRA limits allow.
What Is a Solo 401(k)?
A Solo 401(k) (also called an individual 401(k) or one-participant 401(k)) is a retirement plan for self-employed individuals and business owners with no employees other than a spouse.
Why it exists: IRAs cap contributions at $7,000/$8,000 per year. Self-employed individuals often need to save much more. The Solo 401(k) solves this by allowing both employee deferrals and employer profit-sharing contributions.
Contribution Structure
The Solo 401(k) has two contribution buckets:
- Employee elective deferrals: Up to $23,500 in 2025 ($31,000 if age 50+, or $34,750 if age 60-63 under the SECURE 2.0 Act enhanced catch-up)
- Employer profit-sharing contributions: Up to 25% of net self-employment income
- Total combined limit: $70,000 in 2025 ($77,500 if age 50+)
This dual structure is the key advantage over IRAs and SEP IRAs for many self-employed individuals.
Exam Tip: Gotchas
- Ages 60-63 get a higher catch-up limit. The enhanced catch-up ($11,250 in 2025 vs. $7,500 standard) is a newer SECURE 2.0 Act provision that the exam may test.
Tax Treatment Options
| Option | Contributions | Growth | Qualified Distributions |
|---|---|---|---|
| Traditional Solo 401(k) | Pre-tax (deductible) | Tax-deferred | Taxed as ordinary income |
| Roth Solo 401(k) | After-tax (not deductible) | Tax-free | Tax-free |
The plan participant can split deferrals between traditional and Roth, or use one type exclusively.
Exam Tip: Gotchas
- Roth Solo 401(k) accounts no longer require RMDs. The SECURE 2.0 Act eliminated RMDs for Roth employer plan accounts starting in 2024, aligning them with Roth IRAs.
Other Key Features
- Loans: Participants can borrow from the plan (unlike IRAs, which do not permit loans)
- Required Minimum Distributions (RMDs): Traditional Solo 401(k) accounts are subject to RMDs beginning at age 73
- Roth Solo 401(k) RMDs: Starting in 2024, Roth accounts in employer plans (including Solo 401(k)) are no longer subject to RMDs during the participant's lifetime, thanks to the SECURE 2.0 Act. This aligns Roth employer accounts with Roth IRAs.
- Early withdrawal penalty: 10% on distributions before age 59 1/2 (same as Traditional IRAs and 401(k) plans)
Exam Tip: Gotchas
- Solo 401(k) allows plan loans, but IRAs do not. If a question asks about borrowing from a retirement account, the plan type matters.