Solo 401(k)
Solo 401(k) is a 401(k) plan for self-employed individuals with no employees other than a spouse. It combines an employee deferral (up to $23,000 in 2024, plus $7,500 catch-up if age 50+) and an employer profit-sharing contribution (up to 25% of compensation), providing higher total contribution capacity than a SEP-IRA at the same income level.
Solo 401(k)s are popular among freelancers, consultants, and small business owners who want to maximize tax-advantaged retirement savings. The combined limit is the lesser of $69,000 (2024) or compensation. A self-employed person earning $200K can contribute the maximum $69,000 — substantially more than the $40K-$50K possible under a SEP-IRA.
Many Solo 401(k) providers offer both Traditional and Roth options for the employee deferral, allowing the participant to split contributions or to choose Roth in years where they expect higher future tax rates. The employer profit-sharing contribution is always pre-tax. The 'Mega Backdoor Roth' strategy uses after-tax contributions plus in-plan Roth conversion to add even more Roth contribution capacity, though only specific Solo 401(k) providers support the necessary plan provisions.
The limitation is the 'no-employees' requirement — the plan can only cover the business owner and their spouse. If the business hires a non-spouse W-2 employee who works more than 1,000 hours per year, the Solo 401(k) must convert to a regular 401(k) with all the associated administration. For businesses on a growth trajectory, planning the eventual transition is part of the Solo 401(k) decision.
max_total = min($69,000, employee_deferral + employer_contribution)
employee_deferral ≤ $23,000
employer_contribution ≤ 25% × (net_se_income − ½_se_tax)- net_se_income
- = Schedule C net profit
- ½_se_tax
- = Half of self-employment tax (deduction)
Net SE income $100K, SE tax ~$14,130, ½-SE deduction ~$7,065. Net earnings basis: $92,935. Employer max: 25% × $92,935 = $23,234 (sole-proprietor effective rate ~20% on gross). Employee deferral: $23,000. Total: $46,234. Well under the $69,000 cap; the deferral plus 25% employer is binding here.Solo 401(k) test corpora need three pieces most omit: the employee/employer split tracked separately (each has its own annual limit interactions), Roth vs. Traditional designation on the employee deferral, and after-tax contributions tracked separately from Roth (the Mega Backdoor Roth move converts after-tax basis, not Traditional pre-tax). The 'no non-spouse employee' constraint should be modeled as a state — businesses near the 1,000-hour threshold on any contractor convertible to W-2 are at risk of plan disqualification. Spousal-participant scenarios need separate participant records with their own deferral limits.
Common pitfalls
- Mixing employee deferral with employer contribution in a single contribution-amount field. The two have separate limits ($23,000 vs. 25% of comp) and separate tax treatment.
- Treating after-tax non-Roth contributions as Roth. After-tax basis is non-deductible going in and tax-free coming out only on the basis; gains are taxable unless converted to Roth (the Mega Backdoor move).
- Adding a non-spouse W-2 employee without flagging the disqualification risk. The plan must convert to a regular 401(k) (with Form 5500 obligations, nondiscrimination testing, etc.) within the same plan year.
- Applying age-50 catch-up to total combined limit. The $7,500 catch-up applies only to the employee deferral; the $69,000 overall limit becomes $76,500 with catch-up for an age-50+ participant.
Examples
Self-employed consultant, age 45, $250K net earnings. Contributions: employee deferral $23,000 (Roth). Employer profit-sharing 25% × ~$232K (after ½-SE-tax adjustment) ≈ $58,000 — capped at $46,000 to hit the $69,000 total. Plan permits after-tax non-Roth contributions: $0 of remaining room (already at $69,000 from employee + employer). Alternative scenario where employer-share is reduced to $25,000: after-tax non-Roth $21,000 available, immediately converted to Roth via in-plan Roth rollover. Result: $44,000 Roth contribution in a year where IRA Roth contributions are otherwise capped at $7,000.