Self-Employed? Don’t Worry, You Can Still Have a 401(k)

This is for all freelancers, creators, and consultants out there doing their thing. You prioritize and enjoy being your own boss, but that doesn’t mean you have to miss out on an employer-sponsored benefit like a 401(k) retirement plan. 

So, the good news is that you can still have a 401(k), even if your office is your dining room table. Or the couch.

When you’re self-employed, a Solo 401(k) will be one of your best ways to save for retirement, reduce tax bills, and invest for your future.

What’s a Solo 401(k)?

A Solo 401(k), which is also known as an individual 401(k) or self-employed 401(k), is a retirement plan specifically designed for people who work for themselves or run a small business with no full-time employees. The only exception is your spouse if they earn income from your company!

It works pretty similarly to a traditional workplace 401(k), except in this case, you’re BOTH the employee and the employer. This is good because you can contribute more than you think!

How Much Can You Contribute?

Get excited because you can actually contribute up to $70,000 as the maximum total. If you’re 50 or older, you can contribute up to $76,500 due to catch-up contributions. This number can include TWO types of contributions:

1. As an employee, the maximum contributions vary depending on your age.

• Ages 49 and under can contribute up to $23,500 pre-tax dollars
• Ages 50-59 can add a catch-up contribution of $7,500 for a total of $31,000
• Ages 60-63 can add a catch-up contribution of $11,250 for a total of $34,750
• 64+’s catch-up contribution drops down to $7,500 again, for a total of $31,000
  

2. As the employer, you can contribute up to 25% of your compensation, but for sole proprietors, this is about 20% of your net self-employment income (after subtracting half of your self-employment tax).

• For 2025, the compensation cap is $350,000 to calculate contributions

For example, if you earn $200,000 in net self-employment income, your maximum employer contribution would be $40,000 due to the self-employment tax adjustment.

If you earn $400K, you can only count up to $350K, so your maximum employer contribution is 25% of $350K, which is $87,500, but you’re still capped by the $70,000 total limit (if under 50). 
Basically, you can never exceed the combined total of $70,000 between employer and employee contributions (or $76,500 with catch-up contributions).

Tip: We recommend asking your CPA or accountant to help you calculate contributions to make things easier the first time around!

Roth vs Traditional Solo 401(k)

Similar to a work-employed 401(k), most Solo 401(k) providers let you choose between traditional (pre-tax) and Roth (after-tax) contributions OR a mix of both.

Traditional: Reduces your taxable income NOW, and you’ll pay taxes LATER when you withdraw.

Roth: No tax break immediately, but your money grows tax-free! And your withdrawals in retirement are tax-free, too.

Choose what makes sense for your tax situation and long-term goals. If you feel like you’ll be in a lower tax bracket during retirement, then Traditional might make more sense. But you can also have a mix of both to balance out some tax breaks for now and some for later.

Benefits of a Solo 401(k)

If you couldn’t tell already, we’re big fans. But here are some more facts:

• High contribution limits compared to IRAs
• The traditional option has tax-deductible contributions
• Roth option has tax-free growth
• Loan option (some plans let you borrow from your balance)
• Flexible investing in stocks, ETFs, mutual funds, etc.

How to Set Up a Solo 401(k)

Just follow these steps to get your Solo 401(k) going.

1. Choose a provider: The popular big 3 are Fidelity, Vanguard, and Charles Schwab. 
2. Apply for an EIN if you don’t have one already: You’ll need an Employer Identification Number from the IRS, which is free.
3. Open your account: Complete the paperwork through the provider you choose. Some require setting it up by December 31 to make contributions for the year.
4. Start contributing: Decide how much you’ll contribute and set it up to fund manually or set a schedule so you don’t have to think about it

Other Important Facts

• If your business grows and you start hiring full-time employees who aren’t your spouse, you’ll need a different retirement plan, like a SEP IRA, available to businesses of any size, or a SIMPLE IRA, which is designed for small businesses with less than 100 employees.
• Annual reporting (Form 5500-EZ) is required once your Solo 401(k) hits $250,000 in assets
• Double check with your provider if you must open the plan by December 31 for it to count toward the current tax year, even if you don’t contribute until the tax deadline.

What If You Have a W2 Job As Well?

If you have a W2 job that doesn’t offer a 401(k), then you can still qualify for a Solo 401(k) with your side hustle income. Just keep in mind that the IRS limits how much you can contribute as an employee across all jobs. So if you DON’T contribute to a 401(k) at your W2 job, then you can make the full employee contribution to your Solo 401(k). (Refer to the Contribution section above for limit details) And even better, on top of that, you can contribute more as the employer from your side hustle money so that you can save even more for retirement!

The Money Move

Just because you’re self-employed and your own boss doesn’t mean you have to skip out on saving for retirement. In fact, you’re in a great position to contribute even more than a normal 401(k)! The Solo 401(k) is a powerful way to invest, reduce your tax bill, and build long-term wealth without relying on a traditional employer-sponsored retirement plan.

So start setting up your own retirement plan and make that smart money move!