If you are self-employed and have some self-employment income, you can contribute to a solo 401(k) account. A solo 401(k) offers many of the same benefits as a traditional 401(k) but there are some important differences. Solo 401(k) is sometimes called a one-participant 401(k), individual 401(k), or self-employed 401(k).
A regular 401(k) is offered by an employer to allow an employee to save for his or her retirement. In many cases, the employer may also match a portion of the employee’s contribution. With a solo 401(k), you are both the employer and the employee.
Criterial for solo 401(k)s
To participate in the solo 401(k), you must be self-employed and have no direct employees other than your spouse. There are no age or income limitations.
The IRS defines self-employed as:
Someone who carries on a trade or business as a sole proprietor or independent contractor,
A member of a partnership that carries on a trade or business, or
Someone who is otherwise in business for themselves, including part-time business.
For 2022, the annual combined contribution limit for both employer and employee to a solo 401(k) is $61,000. If you are older than 50, you can contribute an additional $6,500 in catch-up contributions.
- Employee contribution limit is $20,500 (+$6,500 if you are older than 50). Note that the total contribution limit for all your 401(k)s is $20,500. Let’s say you contribute $7,000 to a traditional 401(k) at your full time job, then you can only contribute $13,500 to a solo 401(k).
- Employer contribution limit is $40,500 (for all employers)
- Contributions cannot exceed $100% of your compensation
Solo 401(k) contribution deadlines
- Employee contributions – Last day of the calendar year (December 31)
- Employer contributions – tax deadline for the previous year (Apr 15th or later, if extensions are filed)
Solo Roth 401(k)
Just like a solo 401(k), you can set up a solo Roth 401(k)if you prefer to make after-tax contributions.
Be prepared for additional paperwork
Solo 401(k)s have more paperwork compared to an IRA. If your solo 401(k) balance exceeds $250,000 at the end of the year, you need to file IRS Form 5500-EZ.
Higher costs than IRAs
The cost to maintain a solo 401(k) is higher than that of IRAs due to higher compliance requirements.
Where can you open a solo 401(k)?
Discount brokerages usually don’t offer solo 401(k)s but the big players such as Fidelity, Vanguard, and Schwab do. Read the fine print – understand the fees, minimum balances, and inactivity fees before you sign up.
Rolling over solo 401(k)s
You can rollover your solo 401(k) into IRA, just like you would roller over your traditional 401(k) into an IRA.