Solo 401(k) Maximization Strategy

Solo 401(k) plans offer the highest contribution limits for self-employed individuals and offer both employee and employer deferrals. This guide covers strategy to maximize these benefits.

Higher contributions at lower income. A solo 401(k) allows both an employee elective deferral ($23,500 for 2025) and an employer profit-sharing contribution (up to 25% of net self-employment income). At income levels below roughly $350,000, the total contribution in a solo 401(k) exceeds what a SEP-IRA allows because of the employee deferral component.

Roth option available. Unlike a SEP-IRA, a solo 401(k) can accept Roth contributions on the employee deferral side. For high earners who expect to be in a comparable or higher bracket in retirement, the Roth option provides tax-free growth and withdrawals.

Loan provisions. Most solo 401(k) plans allow you to borrow up to $50,000 or 50% of the vested balance, whichever is less. This provides emergency liquidity without triggering a taxable distribution.

The tradeoff: Solo 401(k) plans require more administration than a SEP-IRA. Once plan assets exceed $250,000, you must file Form 5500-EZ annually. More importantly, if you hire any non-spouse employees, the solo 401(k) no longer qualifies and must be converted to a standard 401(k) or terminated.