Are you making the most of your self-employed retirement options? With higher contribution limits in 2025, you can save up to $70,000 in a Solo 401(k)—or even more with a SEP IRA. Whether you’re a freelancer, small business owner, or independent contractor, choosing the right retirement plan can lower your tax bill and secure your future. In this article, learn about IRA, SEP IRA, and Solo 401(k) rules, helping you maximize savings while staying compliant with IRS regulations.
How does a Solo 401(k) work for self-employed individuals?
A Solo 401(k) is a tax-advantaged retirement plan designed for self-employed individuals and small business owners with no employees. If you’re a sole proprietor, freelancer, or independent contractor, this is one of the best ways to maximize your retirement savings while getting major tax benefits.
Here’s how it works:
- You play both roles – You’re both the employee and employer, allowing you to make contributions on both sides, increasing your total contributions compared to other retirement accounts like an IRA or SEP IRA.
- Choose between Traditional or Roth – A Traditional Solo 401(k) lets you get an immediate tax break by deducting contributions from your income, while a Roth Solo 401(k) allows tax-free withdrawals in retirement.
- Higher contribution limits – Unlike a Traditional IRA or Simple IRA, Solo 401(k) plans let you make employer contributions in addition to your employee contributions, allowing for larger annual contributions.
- Flexible investments – You can invest in mutual funds, stocks, bonds, ETFs, or even real estate, depending on the provider.
If you have earned income from your own business, you can take advantage of a Solo 401(k) to build your self-employed retirement savings.
What businesses qualify for a Solo 401(k)?
To qualify for a Solo 401(k), your business must meet these IRS rules:
- You must be self-employed – This includes sole proprietors, independent contractors, gig workers, and LLC owners.
- You cannot have full-time employees – The only exception is your spouse. If you hire full-time W-2 employees working more than 1,000 hours per year, you must switch to a different retirement account, such as a SEP IRA or 401(k) plans for businesses.
- You need earned income – Your annual contribution limits are based on your net self-employment income.
If your business owner status meets these criteria, you can open a Solo 401(k) and start building your self-employed retirement savings today.
Further Reading: Plan your retirement wisely by seeking to maximize income
Solo 401(k) Contribution Limits for 2025
How much can you contribute to a Solo 401(k)?
For 2025, the Internal Revenue Service (IRS) has set the following maximum contribution limits:
- Employee contribution limit: You can contribute up to $23,500 or 100% of your net earnings (whichever is lower).
- Employer contributions: As your own employer, you can contribute up to 25% of your net self-employment income after deducting half of your self-employment taxes.
- Total contributions cannot exceed: $70,000 for 2025. If you're age 50 and older, you can add a $7,500 catch-up contribution, increasing the limit to $77,500.
- Higher catch-up contribution: Under the Secure 2.0 Act, if you're between ages 60-63, you qualify for a higher catch-up contribution of $11,250, bringing your total possible contribution to $81,250.
If you want to maximize your retirement savings, taking advantage of both employee and employer contributions is key.
How does the employer profit-sharing contribution work?
Since you’re the business owner, you can make employer contributions to your own Solo 401(k). This is called a profit-sharing contribution, and it allows you to save more than a traditional IRA or SEP IRA.
How it’s calculated:
- You can contribute up to 25% of your net self-employment income after subtracting half of your self-employment taxes and your own employee contributions.
Example:
Net self-employment income: $100,000
Employee contribution (salary deferral): $23,500
Employer profit-sharing contribution (25% of $100,000): $25,000
Total contributions for 2025: $48,500
If you’re age 50 and older, you can also make a catch-up contribution of $7,500, bringing your total savings to $56,000.
Further Reading: Learn how to maximize tax-free retirement savings with smart insurance strategies
Tax Benefits and IRS Rules for Solo 401(k) Plans
How do Solo 401(k) contributions lower your taxes?
A Solo 401(k) offers major tax benefits, whether you choose a Traditional or Roth Solo 401(k).
- Traditional Solo 401(k):
- Contributions reduce your taxable income, lowering your adjusted gross income (AGI).
- You’ll pay taxes when you withdraw funds in retirement.
- Roth Solo 401(k):
- Contributions are made after-tax, but withdrawals are 100% tax-free in retirement.
- Best for business owners who expect to be in a higher tax bracket later.
IRS Contribution Deadlines:
- Employee contributions must be made by December 31, 2025.
- Employer contributions can be made until April 15, 2026 (or October 15, 2026, with an extension).
This tax-advantaged retirement plan gives self-employed business owners more ways to reduce taxable income while growing their investment savings.
Are Solo 401(k) withdrawals taxable?
Your withdrawals will be taxed based on whether you choose a Traditional or Roth Solo 401(k):
- Traditional Solo 401(k): You’ll pay taxes at your ordinary income rate when you withdraw funds in retirement.
- Roth Solo 401(k): Withdrawals are tax-free as long as you are age 59½ or older and have held the account for at least five years.
- Early withdrawals (before 59½): Subject to a 10% penalty plus income tax, unless you qualify for a hardship exemption.
If you’re considering early withdrawals, it’s best to consult a tax professional regarding your specific situation.
Further Reading: Discover the new plans for 401k and IRA retirement savings plans
How to Open and Maintain a Solo 401(k)
Where can you open a Solo 401(k)?
You can open a Solo 401(k) with most major retirement plan providers. Some of the best options include:
- Fidelity – No setup fees, broad investment choices, and a solid reputation.
- Vanguard – Low-cost mutual funds and index funds with no maintenance fees.
- Charles Schwab – A variety of IRA and retirement account investment options.
These providers offer low-cost solutions to help you grow your self-employed retirement savings.
How much does it cost to open a Solo 401(k)?
Most Solo 401(k) providers offer free or low-cost plans, but some fees may apply:
- No setup fees at major brokers like Fidelity, Vanguard, and Schwab.
- Administrative fees may apply if your retirement account holds $250,000+ in assets (you’ll need to file an annual report on Form 5500-SF).
- Trading fees might apply, depending on your investment choices.
If you want to keep costs low, go with Fidelity, Vanguard, or Schwab for no-fee Solo 401(k) plans.
Key Takeaways
- A Solo 401(k) is a powerful retirement plan for self-employed individuals with no employees, offering high contribution limits and major tax benefits.
- In 2025, you can contribute up to $70,000 (or $81,250 for ages 60-63) through employee and employer contributions.
- Traditional Solo 401(k) contributions offer an immediate tax break, while Roth Solo 401(k) withdrawals are tax-free in retirement.
- You can open a Solo 401(k) with Fidelity, Vanguard, or Schwab, often with no setup fees and low costs.
- Employer contributions can be made until April 15, 2026 (or October 15 with an extension), giving you extra time for tax planning.
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