====== Solo 401(k) ======
A Solo 401(k) (also known as an Individual 401(k) or Self-Employed 401(k)) is a supercharged retirement savings plan designed for [[self-employed]] individuals and small business owners with no employees, other than a spouse. Think of it as a traditional [[401(k)]] on steroids for the army of one. It allows you to make contributions as both the "employee" and the "employer," leading to significantly higher [[contribution limits]] compared to other retirement plans like a [[SEP IRA]] or a [[SIMPLE IRA]]. This unique structure makes the Solo 401(k) one of the most powerful tools available for freelancers, consultants, and small business owners to turbocharge their retirement savings. It offers the same investment flexibility as other brokerage accounts, allowing you to invest in a wide range of assets like stocks, bonds, and funds, all while enjoying substantial tax advantages. For the disciplined value investor running their own show, it’s a game-changer for building long-term wealth.
===== Who Can Open a Solo 401(k)? =====
Eligibility for a Solo 401(k) is quite straightforward. You can open one if you have self-employment income and your business has no other full-time employees. Your spouse can participate if they earn income from the business, but if you have other W-2 employees (who are not your spouse and work more than 1,000 hours a year), you are generally not eligible.
This plan is a great fit for various business structures, including:
  * **Sole Proprietorships:** Freelancers, independent contractors, and gig economy workers.
  * **Partnerships:** Provided the only employees are the partners and their spouses.
  * **Limited Liability Companies (LLCs):** Both single-member and multi-member LLCs.
  * **Corporations:** Including an [[S-corporation]] or [[C-corporation]], where you are the owner-employee.
The key takeaway is this: if you're the captain of your own ship (and maybe your spouse is the first mate), the Solo 401(k) is designed for you.
===== The Superpower of a Solo 401(k): Contribution Limits =====
The magic of the Solo 401(k) lies in its dual-contribution structure. As the business owner, you get to wear two hats: the employee and the employer. This allows you to save for retirement from two different pools of money, dramatically increasing your total potential contribution.
==== The 'Employee' You ====
As the "employee," you can make [[employee contribution]]s (also called elective deferrals). You can contribute 100% of your compensation up to the annual maximum set by the IRS ($23,000 in 2024). If you are age 50 or over, you can also make an additional "catch-up" contribution. These contributions can be made on a pre-tax basis, lowering your current taxable income, or to a Roth account, if your plan allows.
==== The 'Employer' You ====
As the "employer," you can also make a separate [[employer contribution]], typically in the form of [[profit sharing]]. This contribution is based on a percentage of your business's earnings.
  * For S-corps and C-corps, you can contribute up to 25% of your W-2 compensation.
  * For a [[sole proprietorship]] or single-member LLC, you can contribute up to 20% of your net adjusted self-employment income. The calculation is slightly different to account for self-employment taxes.
The total of both contributions cannot exceed a combined annual limit set by the IRS ($69,000 in 2024, or $76,500 if age 50 or over).
==== A Quick Example ====
Imagine you are a 40-year-old freelance consultant (a sole proprietor) who earned $100,000 in net self-employment income.
  - **As an employee:** You could contribute the maximum of **$23,000**.
  - **As an employer:** You could contribute 20% of your net adjusted income. For simplicity, let's say this is 20% of $100,000, which is **$20,000**. (The actual calculation is a bit more complex, but this is a good estimate).
  - **Total Contribution:** $23,000 + $20,000 = **$43,000**.
Compare that to a traditional [[IRA]], where your contribution would be capped at a much lower annual limit. The difference is staggering and highlights why the Solo 401(k) is such a powerful wealth-building tool.
===== Solo 401(k) vs. Other Retirement Plans =====
How does the Solo 401(k) stack up against its main competitors for the self-employed?
  * **Solo 401(k):**
    * **Pros:** Highest contribution potential. Allows for Roth contributions (as an employee). Can offer a loan provision.
    * **Cons:** Slightly more complex to set up. Requires annual reporting (Form 5500-EZ) once the balance exceeds $250,000.
  * **SEP IRA:**
    * **Pros:** Very simple to set up and maintain. No annual filing requirements.
    * **Cons:** Contributions are employer-only (up to 25% of compensation, or 20% for sole proprietors). Lower maximum potential contribution than a Solo 401(k) at most income levels. No Roth or loan options.
  * **SIMPLE IRA:**
    * **Pros:** Allows for both employee and employer contributions.
    * **Cons:** Significantly lower contribution limits than both the Solo 401(k) and SEP IRA. Employer contributions are generally mandatory, offering less flexibility. Better suited for small businesses with a handful of employees.
For most high-earning self-employed individuals, the Solo 401(k) offers the best combination of high contribution limits and feature flexibility.
===== Key Features and Considerations =====
Beyond contributions, a few other features make the Solo 401(k) attractive.
=== The Roth Option ===
Many Solo 401(k) plan providers offer a [[Roth 401(k)]] option. This allows you to make your //employee// contributions with after-tax dollars. While you don't get a tax deduction today, your investments grow completely tax-free, and qualified withdrawals in retirement are also tax-free. This is a fantastic option for investors who believe their tax rate may be higher in the future. Employer contributions, however, must always be pre-tax.
=== Loan Provisions ===
Unlike any IRA, a Solo 401(k) can permit you to take a loan from your account. You can typically borrow up to 50% of your vested balance, capped at $50,000. While borrowing from your retirement is rarely the first choice, it provides a valuable liquidity option in an emergency without triggering taxes and penalties associated with an early withdrawal.
=== Administrative Duties ===
Setting up a Solo 401(k) must be done by the end of your business's tax year (December 31 for most). While it used to be a creature of Wall Street's more obscure corners, today, most major brokerage firms offer them. The primary administrative task is filing an annual report, [[Form 5500-EZ]], with the IRS once your plan's assets reach $250,000 at the end of a plan year. This is a simple, one-page information return. Finally, like traditional 401(k)s and IRAs, Solo 401(k)s are subject to [[Required Minimum Distributions (RMDs)]] once you reach the required age.