Individual(k) ~ Solo(k) ~ 401(k)
for an Individual
Who Can Open an Individual 401(k)?
The Solo 401(k) continues to be one of the most powerful retirement tools for self-employed individuals and small business owners. Originally created by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and effective as of January 1, 2002, the Solo 401(k) offers significant tax advantages and high contribution limits for business owners with no W-2 employees, except possibly their spouse.
With a Solo 401(k) plan, self-employed business owners can take advantage of both higher contribution limits and the flexibility to contribute based on their business’s profitability. This makes it a great choice for those looking to build wealth, lower taxable income, or access funds through a loan provision.
Practical Notes for Solo 401(k) Owners
Employer Contribution Rules Stay the Same
- Up to 25% of W-2 wages if incorporated.
- Approximately 20% of net self-employment income for sole proprietors.
Age-Based Planning
- Ages 60–63 still have the highest possible employee contribution because of the additional catch-up.
- The standard catch-up rising to $8,000 in 2026 provides slightly more room for participants 50–59 and 64+.
Roth Requirement Change in 2026
Under SECURE 2.0, beginning in 2026, certain higher-income taxpayers must make catch-up contributions on a Roth (after-tax) basis, not pre-tax. This may impact tax planning for owners who prefer pre-tax contributions.
Key Differences Between 2025 and 2026
Employee Elective Deferral (Under Age 50)
- 2025: $23,500
- 2026: $24,500
Increase: +$1,000
- Standard Catch-Up (Age 50–59 and Age 64+)
- 2025: $7,500
- 2026: $8,000
Increase: +$500
- Additional Catch-Up (Age 60–63, “Super” Catch-Up)
- 2025: $11,250
- 2026: $11,250
Change: No increase
- Combined Contribution Limit (Employee + Employer)
- Under Age 50:
- 2025: $70,000
- 2026: $72,000
- Increase: +$2,000
- Age 50–59 or 64+:
- 2025: $77,500
- 2026: $80,000
- Increase: +$2,500
- Age 60–63:
- 2025: $81,250
- 2026: $83,250
- Increase: +$2,000
The total contribution amount includes both salary deferrals and profit-sharing contributions. The plan allows contributions to be adjusted at any time to align with your business’s performance, giving you significant flexibility.
Double Contributions for Spouse-Run Businesses
If your spouse works for your business and receives compensation, they can also contribute to the Solo 401(k). Each of you can make individual contributions, effectively doubling the family’s retirement savings potential. This means you could contribute a combined $138,000 in 2024 (or up to $153,000 if both are over 50). Both participants will be under one plan, but each will have their own account.
Partnerships and the Solo 401(k)
Solo 401(k) plans can accommodate businesses structured as partnerships. As long as only the partners participate, it remains a “single-participant” plan with fewer administrative requirements. However, if you hire common-law employees (i.e., employees other than partners or spouses) who become eligible for the plan, it will automatically convert into a standard 401(k). This triggers additional compliance requirements under ERISA, including bonding, nondiscrimination testing, and filing of Form 5500.
For now, you can avoid the extra burden by continuing as a single-participant plan. (For more details on determining whether your plan qualifies, refer to the Instructions for Form 5500-EZ on the IRS website.)
Borrowing with a Solo 401(k) Loan
A unique benefit of the Solo 401(k) is the ability to take out a loan. You can borrow up to 50% of your account balance or $50,000, whichever is less. These loans are tax-free, with the balance used as collateral, providing a valuable liquidity option without early withdrawal penalties.
Who Should Consider a Solo 401(k)?
A Solo 401(k) is ideal for self-employed business owners and small businesses with no W-2 employees who:
- Want to maximize their retirement savings while enjoying valuable tax deductions.
- Prefer flexibility in contributions, which can vary based on business profitability.
- May want access to funds through a tax-free loan option.
Get Started with a Self-Directed Solo 401(k) Today
At uDirect IRA Services, we help self-employed individuals unlock the full potential of Solo 401(k) plans, including self-directed investment options across asset classes such as real estate, private lending, and more. If you’re ready to prepare for your future, contact us at info@uDirectIRA.com to explore how a Solo 401(k) can fit into your retirement strategy.
A Solo 401(k) offers self-employed business owners control, flexibility, and tax-advantaged savings opportunities, helping them build wealth and secure their financial future. Take advantage of the contribution limits and plan today!
Please contact us at (866) 745-0228 for more information