When you’re building a business, there are two things you can never have enough of: time and money. But what if I told you there’s a tool designed to give you both?
It’s called the Solo 401(k). And no, it’s not just some fancy retirement account. For business owners like you, it’s a powerful tax strategy disguised as a savings plan. It’s a way to build wealth, reduce your tax burden, and take control of your financial future, without the headaches of managing employees or big corporate retirement plans.
In this article, we’re breaking down the Solo 401(k) in plain English. What it is, how it works, who it’s for, where it goes wrong, and why it just might be the most overlooked tax shelter in the game right now.
Let’s get into it.
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 designed specifically for self-employed individuals or business owners with no full-time employees other than a spouse.
It acts like a regular 401(k) in many ways… you contribute money, it grows tax-deferred, and you don’t pay taxes until you take distributions in retirement. But here’s the magic: with a Solo 401(k), you wear two hats, employer and employee, and you get to contribute in both roles. Guess why this makes sense for so many S-Corp owners?
This dual-role setup allows you to sock away a serious amount of money each year. It’s far more than a traditional IRA or SEP.
Imagine this: You own an S-Corp with no other full-time employees. Your business pays you a salary, and you want to reduce your tax bill while planning for retirement. With a Solo 401(k), you can contribute a portion of your salary as the “employee,” and then the business (you, again) can make a profit-sharing contribution as the “employer.”
That’s how the Solo 401(k) stands out. It lets you stack your contributions for maximum savings.
How Is a Solo 401(k) Different From a Traditional 401(k)?
A traditional 401(k) is built for companies with many employees. It requires compliance testing, administrative oversight, and complex reporting requirements to make sure everyone gets treated fairly under the tax code.
A Solo 401(k) is the opposite of that. It’s lean, nimble, and built for you.
Here’s how it’s different:
You’re in charge. There’s no third-party administrator breathing down your neck. You set it up, decide how much to contribute, and choose the investments. Whether that’s index funds, real estate, or even private loans… talk about flexibility.
There are no nondiscrimination tests, because there’s no one else to discriminate against. That means you can max out your own plan without worrying about whether other employees are keeping up.
You can borrow from it. Yes, up to $50,000 or 50% of your balance, whichever is less. While not ideal, it’s there if you need it.
And perhaps most important: Solo 401(k)s offer Roth and traditional options. giving you control over whether you want to pay taxes now or later.
Who Can Set Up a Solo 401(k)?
Not everyone can have one – and that’s what makes this such an exclusive club.
To qualify, your business must have no full-time employees other than you (and possibly your spouse). That means if you’ve got W-2 employees who work over 1,000 hours a year, you’re out. You’ll need to move to a traditional 401(k) plan or something more complex like a Safe Harbor plan.
But if you’re a solopreneur, freelancer, consultant, real estate agent, or even the owner of an S-Corp where you’re the only employee. Then… you’re golden.
Spouses can also participate and double the contribution limits, which is a game-changer for family-run businesses.
2025 Contribution Limits: How Much Can You Put In?
Let’s talk numbers. For 2025, here’s how the contribution limits shake out:
As the employee, you can contribute up to $23,500 of your W-2 income (or net self-employment income). If you’re 50 or older, you can add a catch-up contribution of $7,500, for a total of $31,000.
As the employer, your business can contribute up to 25% of your compensation. They are, however, capped by IRS limits.
Combined, the total contribution limit for 2025 is $70,000 (or $77,500 if you’re 50+).
Think about that. That’s $70K sheltered from taxes, growing for your future. And it gets even better if your spouse is involved, because they can do the same thing… doubling your family’s total contributions.
What Makes the Solo 401(k) So Powerful for Tax Planning?
Here’s the part that gets tax strategists like me excited.
You get to choose between pre-tax and Roth contributions.
Let’s say you’re in a high-income year and want to lower your tax liability. You can defer income now and get a deduction for contributions. That means less income on your return, less tax owed to the IRS.
Or let’s say you’re in a low-tax year and believe taxes will go up in the future (and let’s be honest, they probably will). You can opt for Roth contributions, pay taxes now, and enjoy tax-free withdrawals in retirement.
You can even mix and match. Do part pre-tax and part Roth, depending on your strategy.
The cherry on top? Unlike a SEP IRA, a Solo 401(k) lets you contribute both the employee and employer portion, regardless of your income level, giving you much more flexibility and control.
Can a Solo 401(k) Be Self-Directed?
Absolutely. In fact, that’s one of the most exciting aspects for investors.
A self-directed Solo 401(k) gives you the ability to invest in things beyond just mutual funds or ETFs – like real estate, private businesses, tax liens, and even crypto (depending on your custodian).
But, and this is a big one, you have to follow IRS rules on prohibited transactions. For example, you can’t buy a vacation home through your Solo 401(k) and then use it for personal enjoyment. You also can’t lend money to yourself or a family member through the plan. Those are all examples of prohibited transactions. Get the picture here – the IRS doesn’t want what they refer to as “self-dealing.” Makes sense, right?
Without getting into this area too much.. let’s just say this is one thing you want to avoid like the plague when it comes to any type of retirement account.
Still, with proper guidance, a self-directed Solo 401(k) opens up a world of investment options that traditional retirement plans can’t touch.
Common Mistakes and Traps to Avoid
Like any powerful tool, a Solo 401(k) can backfire if used incorrectly.
One common trap: failing to open the plan by December 31st. Even though you can fund contributions up until your tax filing deadline, the plan must be established by year-end to count for that tax year. Miss that window, and you lose out… period.
Another issue: not updating the plan once you hire employees. The moment you bring on a full-time employee (outside your spouse), your Solo 401(k) is no longer compliant. You’ll need to upgrade to a regular 401(k) or Safe Harbor plan to stay in good standing with the IRS.
A third trap: forgetting about required minimum distributions (RMDs) after age 73. Just like a traditional IRA, you’ll eventually have to start taking money out, and paying taxes on it, unless it’s in a Roth.
Finally, not keeping up with annual IRS filing requirements. Once your Solo 401(k) balance hits $250,000, you must file Form 5500-EZ each year. Failing to do so can trigger penalties.
Real-Life Example
Let me share a quick story.
A client of mine ran a consulting business with no employees. She consistently made about $200K per year and had minimal overhead. For five straight years, she maxed out her Solo 401(k), putting in just over $60K annually… split between salary deferrals and employer contributions.
She chose to do a mix of pre-tax and Roth, based on her income levels each year. And she invested the funds into a diversified portfolio that included real estate and private lending.
At 55, she sold her business and walked away with a retirement portfolio big enough to comfortably stop working. The tax savings she stacked along the way? Over six figures.
That’s the kind of impact a Solo 401(k) can have.
Final Thoughts: Should You Set One Up?
If you’re a business owner with no full-time employees, and you’re not taking advantage of a Solo 401(k), you’re leaving serious money on the table.
Whether you’re trying to catch up on retirement savings, reduce your taxable income, or explore more creative investment options, this plan is one of the most flexible and tax-efficient tools available.
Just remember: as with all tax strategies, the key is planning ahead. Don’t wait until tax season to bring this up with your accountant. By then, it’s usually too late.
If you’re not sure whether a Solo 401(k) is the right move for you, or how to set one up properly, I’m here to help. If you have any additional questions, or just want me to look things over – feel free to book a free consultation today.
Welcome to the New Age of Accounting. Let’s begin.
Chris is the Managing Partner at Weston Tax Associates, a best-selling author, and a renowned tax strategist. With over 20 years of expertise in tax and corporate finance, he simplifies complex tax concepts into actionable strategies that drive business growth. Originally from Sweden, he now lives in Florida with his wife and two sons.
