Self-employed individuals with no employees can open a solo 401k and contribute as both employee and employer: the full annual 401k limit on the employee side plus a percentage of business profits on the employer side. The combined ceiling far exceeds what an IRA allows and can significantly reduce your taxable self-employment income.
Most self-employed people never open one. They default to an IRA because it’s the account everyone knows, hit its low annual ceiling, and assume they’re done saving for retirement. The tax code allows far more room. An IRA just isn’t where it lives.
The solo 401k works by letting you wear both hats. As the employee, you defer up to the same annual IRS limit W-2 workers get. As the employer, your business adds a profit-sharing contribution on top: up to 25% of compensation if you’re incorporated, or about 20% of net self-employment earnings if you file a Schedule C. On $100,000 of net earnings, that employer side alone adds roughly $20,000 of contribution room.
Traditional pre-tax contributions also lower your adjusted gross income, so a strong year of profits turns into a smaller tax bill instead of a bigger one.
Eligibility is the main test. You need self-employment income and no employees, though a spouse who works in the business can join the plan. Most major brokerages offer solo 401ks, and opening one takes about as long as a standard brokerage account. Once it’s live, decide each year how much to put in on each side as profits allow. If you’re 50 or older, catch-up contributions raise the employee limit further. Many providers also offer a Roth option if you’d rather pay tax now and withdraw tax-free in retirement.
A solo 401k doesn’t replace your IRA either. You can fund both in the same year. If your business income has outgrown what an IRA can absorb, the solo 401k is where your next retirement dollar belongs.
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