Solo 401(k) is a powerful retirement plan is designed specifically for individuals who are self-employed with no employees (other than a spouse). Here's why setting up a Solo 401(k) can be one of the best financial moves you make.
What is a Solo 401(k)?
A Solo 401(k), also called an Individual 401(k), is a retirement savings plan tailored for business owners who work for themselves. It offers the same tax advantages as a traditional employer-sponsored 401(k) but with higher contribution limits and more flexibility.
Key Benefits of a Solo 401(k)
1. High Contribution Limits
Unlike IRAs, which cap annual contributions at relatively low amounts, a Solo 401(k) allows you to contribute in two ways:
- Employee Contribution: Up to $23,500 in 2025 ($31,000 if age 50+).
- Employer Contribution: Up to 20% of net self-employment income if taxed as a sole proprietor
- Total Limit: As much as $70,000 in 2025 (or $77,500 if age 50+).
This allows high-income solopreneurs to shelter far more income from taxes each year compared to other retirement accounts.
2. Tax Deduction Opportunities
Contributions to a Solo 401(k) are generally tax-deductible, reducing your taxable income. For example, a solopreneur earning $150,000 could potentially contribute over $50,000 to a Solo 401(k), lowering both federal and California state taxable income.
3. Roth Solo 401(k) Option
Many providers allow Roth contributions, meaning you can contribute after-tax dollars now and withdraw tax-free in retirement. Having both pre-tax and Roth options provides valuable flexibility for long-term tax planning.
4. No Income Phase-Outs
Unlike a Roth IRA, there are no income limits that prevent high earners from contributing to a Solo 401(k). This makes it one of the best retirement savings vehicles for Californians with higher incomes.
5. Catch-Up Contributions
If you are age 50 or older, you can contribute an additional $7,500 per year, accelerating your retirement savings in the crucial years leading up to retirement.
Solo 401(k) vs. SEP IRA vs. Traditional IRA
Solo 401(k) vs. SEP IRA
- Higher Contribution Potential: With a SEP IRA, you can only contribute up to 25% of your net self-employment income. In contrast, the Solo 401(k) allows both employee and employer contributions, meaning you can often save significantly more.
- Roth Option: SEP IRAs don't allow Roth contributions, while many Solo 401(k) plans do.
- Catch-Up Contributions: Solo 401(k)s allow age 50+ catch-up contributions, SEP IRAs do not.
- Loan Feature: SEP IRAs don't allow loans, but some Solo 401(k)s do.
Solo 401(k) vs. Traditional IRA
- Contribution Limits: Traditional IRAs are capped at $7,000 in 2025 ($8,000 if age 50+), far below the Solo 401(k)'s $70,000 maximum.
- Income Limits for Deductions: Traditional IRA deductions phase out at higher income levels, especially if you or your spouse are covered by a workplace plan. Solo 401(k)s have no such limits.
- Roth Access: Traditional IRAs face Roth conversion restrictions at certain income levels, while Solo 401(k) plans with Roth options bypass this issue.
Bottom Line: The Solo 401(k) offers far more flexibility and higher tax-advantaged contributions than either a SEP IRA or a Traditional IRA, making it the superior choice for high-income solopreneurs in California.
Steps to Create a Solo 401(k)
- Confirm Eligibility – You must be self-employed with no employees other than a spouse
- Choose a Provider – Brokerages like Charles Schwab, Fidelity offer Solo 401(k) plans
- Select Plan Features – Decide if you want a Roth option or loan provisions
- Apply for an EIN – An Employer Identification Number is required to establish the plan
- Open and Fund the Account – Set up the plan with your provider and begin making contributions
- Maintain the Plan – File Form 5500-EZ annually once your plan exceeds $250,000 in assets.
Final Thoughts
For solo business owners in California, a Solo 401(k) is one of the most tax-efficient ways to build wealth and secure retirement. With high contribution limits, flexible tax options, and advantages over both SEP IRAs and Traditional IRAs, it stands out as a premier retirement vehicle.
Setting one up early ensures you maximize your tax savings while growing your future nest egg.