Frequently Asked Questions
Who qualifies for a Solo 401k?
You qualify if: You're self-employed or a business owner, you have no full-time employees (working 1,000+ hours/year) other than yourself and your spouse, you have self-employment income. Independent contractors, sole proprietors, LLC owners, and corporation owners with no employees all qualify. Once you hire full-time non-owner employees, you must switch to a different plan (like regular 401k or Simple IRA).
What are the Solo 401k contribution limits?
2024 limits: Employee elective deferrals up to $23,000 ($30,500 if age 50+ including catch-up). Employer non-elective contributions up to 25% of compensation (20% for self-employed after SE tax adjustment). Total combined cannot exceed $69,000 ($76,500 if 50+). For example, with $150,000 income: $23,000 employee + ~$25,000 employer = ~$48,000 total. With $300,000 income, you could reach the full $69,000.
How are contributions calculated?
Employee deferrals: Up to $23,000 of earned income (wages or net self-employment income). Employer contributions: For corporations, up to 25% of W-2 wages. For self-employed, it's a circular calculation: Net earnings minus 1/2 SE tax minus employer contribution equals compensation. Effective rate is approximately 20% of net self-employment income after the 1/2 SE tax deduction. Use this calculator to determine your exact maximum.
What's the deadline for Solo 401k contributions?
Employee deferrals: Must be made by December 31 of the tax year. Employer contributions: Can be made until the business tax filing deadline including extensions (typically April 15 or October 15 for sole proprietors). Important: You must formally establish the Solo 401k plan by December 31 to make contributions for that year, even if you fund it later.
Can I take a loan from my Solo 401k?
Yes, one major advantage over SEP IRA. You can borrow up to 50% of your vested account balance or $50,000, whichever is less. Loan must be repaid within 5 years (or longer if used to purchase primary residence) with payments at least quarterly. Interest rate must be reasonable (typically prime rate + 1-2%). Not all providers offer loan features—check before opening if this matters to you.
Should I choose Solo 401k or SEP IRA?
Choose Solo 401k for: Higher contribution potential at lower income levels, Roth option, loan feature, catch-up contributions at 50+, spouse contributions. Choose SEP IRA for: Ultimate simplicity, no annual Form 5500 filing when assets exceed $250,000, easier setup with many providers. General rule: If you can max out the Solo 401k, it's usually the better choice. Many self-employed individuals graduate from SEP to Solo 401k as income grows.
Do I have to file annual reports?
Unlike SEP IRAs, Solo 401ks require annual IRS Form 5500-EZ filing once plan assets exceed $250,000. Below that threshold, no filing required. Form 5500-EZ is relatively simple compared to corporate 401k filings, but it's an additional requirement. Due annually by last day of 7th month after plan year ends (July 31 for calendar year plans). Most Solo 401k providers help with this or offer filing services.
Can I have both Solo 401k and a regular job 401k?
Yes. Employee deferral limits ($23,000) apply per-person across all plans, so your total employee contributions to both plans can't exceed $23,000. However, employer contributions are separate per employer. If you have a W-2 job with 401k and side business with Solo 401k, you could contribute $23,000 total as employee across both, plus employer contributions from each business separately.
What happens if I hire employees?
Solo 401k is only for owner-only businesses. Once you hire full-time employees (other than spouse), you generally must terminate the Solo 401k by the end of that year and transition to a traditional 401k or other eligible plan. Some part-time workers under 1,000 hours/year don't disqualify you. Plan ahead if business growth may lead to hiring employees.
How do I set up a Solo 401k?
Steps: 1) Choose a provider (brokerages like Fidelity, Schwab, Vanguard; or specialized Solo 401k providers for checkbook control), 2) Complete plan documents (adoption agreement, basic plan document), 3) Open accounts, 4) Make contributions by deadlines, 5) File Form 5500-EZ annually when assets exceed $250,000. Many providers offer pre-approved prototype plans that simplify setup. Process typically takes 1-2 weeks.
What investment options are available?
Depends on your provider. Brokerage-based Solo 401ks offer stocks, bonds, mutual funds, ETFs. Specialized providers allow "checkbook control" for real estate, private investments, precious metals, notes, and more. You serve as trustee and have full control. Unlike regular 401ks with employer-selected menus, Solo 401k typically offers unlimited investment flexibility. Choose based on your investment knowledge and goals.
Are Roth Solo 401k contributions allowed?
Yes, many Solo 401k providers offer Roth options for employee deferrals (not employer contributions, which are always pre-tax). Roth contributions are after-tax but grow tax-free. 2024 Roth contribution limit is $23,000 (same as traditional deferral). Combined Roth + Traditional deferrals can't exceed $23,000. Consider splitting contributions for tax diversification, especially if you expect higher taxes in retirement.