Solo 401(k) – What You Need to Know

If you’re self-employed and want to make tax-free retirement savings, a solo 401(k) may be the answer. Start by finding a broker that offers a solo 401(k) and exploring its fees, investment options, and customer service.

You’ll need an Employer Identification Number (EIN), and your broker should provide a plan adoption agreement and application to fill out.

Tax-Free Savings

A Solo 401(k) offers many benefits for self-employed workers and freelancers, including the ability to save money tax-free and the flexibility to invest in any asset. It also provides higher yearly contribution limits than an IRA and allows contributions on behalf of a spouse. A downside is that it may take more paperwork to set up a plan than a brokerage account, and the IRS requires annual reports for plans with $250,000 or more in assets. It’s important to talk to a financial advisor before you open this retirement savings account to ensure you understand how the plan works and avoid any penalties if you change your mind.

Another drawback is that withdrawing the funds before 59 1/2 will face income taxes and a 10% penalty. However, if you need to pay for medical bills or other expenses, you can borrow money against it.

As with other employer-sponsored retirement accounts, a solo 401k plan allows participants to invest in various assets, from mutual and exchange-traded funds to individual stocks. But be careful: Some financial institutions that house these accounts may only offer their products, and you may incur higher fees than you would with a traditional broker or IRA. 

Investment Options

A Solo 401(k) is a popular retirement plan for small business owners without full-time employees. It offers high contribution levels, flexible investment options, and relatively easy administration.

As a result, it’s one of the best retirement plans for self-employed individuals. However, there are a few things you should know before deciding to open an account.

First, you’ll need to choose a provider. Many options range from low-cost budget brokerage firms to more sophisticated providers offering various investment and retirement plans. You’ll also need to decide whether to use the account solely for investment purposes or if you’d like to add other types of retirement accounts, such as an IRA.

Some investment providers offer traditional options, including mutual funds, ETFs, stocks, bonds, and unconventional assets like real estate and cryptocurrencies. Others offer additional features, such as robo-advisers, online tools, and in-person consultations to help you maximize your retirement savings.

Another vital factor is whether you want to contribute to a Roth or traditional Solo 401(k). The difference is that with the Roth version of the plan, you can make your employee salary-deferral contributions tax-free up to the annual limit (plus the 50-and-older catch-up provision, if applicable). Conversely, all your employee and employer profit-sharing contributions are made with pretax dollars with the traditional plan.


Unlike an individual retirement account (IRA), a Solo 401(k) allows you to make employer and employee contributions. The plan’s contribution limit is based on the business owner’s compensation, minus self-employment tax, plus any profit-sharing contributions and a $7,500 catch-up contribution for those over 50.

If you have other retirement plans, such as an IRA or SEP IRA, you can roll them into your Solo 401(k). It can simplify your recordkeeping and save more by not having to split your income across multiple accounts.

The flexibility to participate in nontraditional assets like real estate, cryptocurrencies, and private investments is one benefit of a solo 401(k) plan. However, it’s important to remember that you must abide by prohibited transaction rules when investing in these assets, or you could face fines.

You also can take loans from a solo 401(k), which typically isn’t subject to credit checks and can be used for any purpose. However, you must repay the loan within five years or risk a 10% early withdrawal penalty. In addition, the money you withdraw from a 401(k) before age 59 1/2 will be subject to ordinary income taxes. Nonetheless, the flexibility of a solo 401(k) makes it worth considering for many self-employed individuals. However, weigh the pros and cons of a solo 401(k) against alternatives such as a Roth IRA or traditional IRA.


A Solo 401(k) plan, also known as an individual 401(k), is an effective retirement savings option for freelancers, consultants, and other self-employed individuals with no employees. It provides all the benefits of a traditional employer-sponsored 401(k) plan, including tax-deductible savings, tax-deferred or tax-free growth, and generous annual contribution limits.

It is generally intended for sole proprietors, independent contractors, small business owners without workers, and the spouse of a self-employed individual. However, no restrictions exist on who can open and invest in a solo 401(k). As an employer and employee, you are each eligible to contribute to your Solo 401(k) up to the plan limits of $20,500 in 2022 and $22,500 in 2023 (plus $7,500 for individuals 50 or older).

Many online brokerages offer a solo 401(k) plan through which you can save and invest with any eligible investment, including mutual funds, exchange-traded funds, individual stocks, and bonds. However, some providers charge service fees for their plans that could add up quickly if you save aggressively. Considering these fees when choosing a broker for your solo 401(k) plan is essential. Additionally, if you withdraw your money before you reach retirement age, currently set at 59 1/2, you must pay applicable income taxes and a 10% early withdrawal penalty. It could deplete your savings and delay your retirement.