Tax-Savvy Tips (2) - Having Solo 401(k)

What Is a Self-Employed 401(k)?

A self-employed 401(k)—also known as a solo 401(k) or individual 401(k)—is a retirement savings plan designed for small-business owners who have no employees other than a spouse. It’s ideal for sole proprietors, independent contractors, partnerships, and owner-only corporations seeking a retirement plan similar to those offered by larger companies.

Functionally, a self-employed 401(k) works much like a traditional 401(k). You can contribute as both the employee (through pre-tax salary deferrals) and the employer (through profit-sharing contributions). These combined contributions can be invested in a variety of vehicles and grow tax-deferred until withdrawn in retirement.

2025 Self-Employed 401(k) Contribution Limits

A key advantage of the self-employed 401(k) is the ability to contribute in two ways:

• Employee contribution: Up to the lesser of $23,500 or 100% of compensation for 2025.If you’re age 50 or older, you may make an additional $7,500 catch-up contribution.

• Employer contribution: Up to 25% of your compensation each year.

For 2025, the combined employee and employer limit is $70,000 or 100% of compensation, whichever is lower. If you’re eligible for catch-up contributions:

• Ages 50–59 or 64+: up to $77,500

• Ages 60–63: up to $81,250 (including an enhanced $11,250 catch-up allowance if permitted by the plan)

  
  

Example: If you’re an independent consultant under 50 earning $100,000 in 2025, you could defer $23,500 as the employee and contribute another $25,000 as the employer. In total, you could invest $48,500 toward retirement in one year.

Self-employed 401(k) contributions may also provide tax advantages:

• For unincorporated businesses, contributions are typically deductible from personal income.

• For incorporated entities, contributions are treated as a business expense.

Setting Up a Self-Employed 401(k)

You can establish a self-employed 401(k) through a financial institution that offers 401(k) administration. Because these plans usually involve only one or two participants, they are simpler and less costly to manage than standard employer 401(k)s. Some providers even waive setup or maintenance fees. When comparing providers:

• Review all fees and administrative requirements upfront.

• Look for plans offering diverse investment choices—such as mutual funds, ETFs, stocks, bonds, and CDs.

• Consider institutions that provide online tools or advisory support to help you manage your investments.

Once your plan is active, you can adjust contributions annually based on your business performance—there’s no required minimum contribution. Keep detailed records for tax purposes.

If your year-end balance exceeds $250,000, you terminate the plan, or you hire an employee who becomes eligible, you may need to file Form 5500 (or a related IRS form).

Withdrawing Funds from a Self-Employed 401(k)

A solo 401(k) is meant for retirement savings, and the IRS enforces rules to encourage long-term investing:

• Withdrawals are generally allowed only after a triggering event such as death, disability, plan termination, or reaching age 59½.Early withdrawals may incur a 10% penalty plus applicable income taxes.

• Required minimum distributions (RMDs) must begin at age 73.

• Plans may be structured to allow loans or hardship withdrawals.

• You can roll over assets from other qualified plans (e.g., SEP IRA or 401(k)) into your self-employed 401(k).

• Upon a triggering event, funds can be rolled into another 401(k) (if permitted) or an IRA.

Is a Self-Employed 401(k) Right for You?

Thanks to its high contribution limits, flexible investment options, and low administrative costs, a self-employed 401(k) is an excellent choice for self-employed individuals or business owners looking to save aggressively for retirement.

However, if you expect to hire employees in the future, you’ll need to convert the plan into a traditional 401(k) or terminate it. If you’re confident you’ll remain a one-person business, this plan offers one of the most powerful and tax-efficient retirement savings opportunities available.方案。