Yes, but the type you can start depends on whether you're self-employed or work for a company

If you work for an employer, you cannot start your own 401(k) — your employer does. If you're self-employed or own a business, you can set up a Solo 401(k) (also called an individual 401(k)) through a bank, brokerage, or investment firm. If you have employees, you can set up a standard 401(k) plan, but that requires more paperwork and ongoing administration.

The key difference is who controls the plan. A Solo 401(k) is designed for self-employed people with no employees (except a spouse). A standard 401(k) is designed for businesses with staff. Both let you contribute money and defer taxes, but they have different rules, costs, and complexity.

Key Takeaways

  • Solo 401(k) plans are available to self-employed people and business owners with no employees, and you can open one through most major brokerages or banks.
  • You can contribute as both an employee and an employer, which means you can save more per year than you could in a traditional or Roth IRA.
  • Solo 401(k) plans require you to file Form 5500-N (a short form) with the IRS only if your plan balance reaches $16,000 or more at the end of the year.
  • If you have even one employee (other than a spouse), you must set up a standard 401(k) plan, which involves more paperwork and ongoing compliance.
  • You can start a Solo 401(k) at any time during the year, but contributions for that tax year must be made by the tax filing important date (usually April 15 of the following year).

Solo 401(k) vs. standard 401(k): which one applies to you

A Solo 401(k) is meant for self-employed people and business owners with no employees. This includes freelancers, consultants, gig workers, and owners of small businesses where you are the only worker. You can also have a spouse working in the business and still use a Solo 401(k).

A standard 401(k) is for businesses with employees. If you have even one employee (other than a spouse), you cannot use a Solo 401(k) — you must set up a standard plan. Standard plans require you to file more paperwork each year, offer the plan to all may be able to access employees, and follow more complex rules about contributions and vesting.

The reason for this distinction is that the IRS treats employee plans differently from owner-only plans. Standard 401(k)s have rules designed to prevent owners from giving themselves unfair advantages over employees. Solo 401(k)s skip those rules because there are no employees to protect.

How much you can contribute to a Solo 401(k)

A Solo 401(k) lets you contribute in two ways: as an employee and as an employer. This is what makes it more powerful than an IRA. For 2024, you can contribute up to $23,500 as an employee (called an "elective deferral"). You can also contribute up to 25% of your net self-employment income as an employer contribution. The total cannot exceed $69,000 per year.

The employee contribution is straightforward — it comes out of your income before taxes. The employer contribution is trickier because it depends on your net profit. If you're self-employed, you calculate this as roughly 20% of your net self-employment income after accounting for the self-employment tax deduction. A tax professional or the plan provider's calculator can help you figure the exact amount.

If you're over age 50, you can make an additional "catch-up" contribution of $7,500 as an employee, bringing your total employee contribution to $31,000. The employer contribution limit stays the same.

How to open a Solo 401(k)

You can open a Solo 401(k) through most major brokerages and banks, including Fidelity, Schwab, E-Trade, and Vanguard. Many also offer them through smaller financial institutions. The process usually takes 15 to 30 minutes online.

You will need your Social Security number, business information (or confirmation that you're self-employed), and the name and address of your business. Some providers ask for your estimated annual income to help you understand contribution limits. You do not need a separate business license or tax ID to open one, though you will need an EIN if you plan to hire employees later.

After you open the account, you can fund it by transferring money from your bank account or rolling over funds from another retirement account. You can make contributions at any time during the year, but contributions for a given tax year must be deposited by the tax filing important date (usually April 15 of the following year). If you file an extension, you have until October 15.

Reporting requirements and annual paperwork

The paperwork burden for a Solo 401(k) is light compared to a standard 401(k). You do not file anything with the IRS unless your plan balance reaches $16,000 or more at the end of the calendar year. Once it does, you must file Form 5500-N (the short form for small plans) by the tax filing important date of the following year.

Form 5500-N is a one-page form that reports basic information about your plan: the plan name, your name, the plan balance, and whether you made any loans or distributions. It is simpler than the full Form 5500 that standard 401(k) plans must file. Many Solo 401(k) providers offer to file it for you, sometimes for a small fee.

You also need to keep records of your contributions and any loans or distributions you take. Your plan provider usually maintains these records, but you should keep copies for your own records and for tax purposes.

Solo 401(k) loans and early withdrawals

One advantage of a Solo 401(k) is that you can borrow from it. You can take a loan of up to 50% of your vested balance, with a maximum of $50,000. The loan must be repaid within five years (with some exceptions for home purchases), and you pay interest to yourself. The interest rate is typically the prime rate plus 1% to 2%, set by your plan provider.

If you withdraw money before age 59½ without a loan, you owe income tax on the withdrawal plus a 10% early withdrawal penalty. There are some exceptions — for example, if you have a financial hardship or may have access to under the CARES Act — but these are narrow. Loans are a way to access your money without triggering the penalty.

Once you reach age 59½, you can withdraw money without the early withdrawal penalty, though you still owe income tax. You must begin taking required minimum distributions (RMDs) at age 73, based on your life expectancy and plan balance.

When a standard 401(k) is required instead

If you hire an employee, you must switch from a Solo 401(k) to a standard 401(k) plan. This is a legal requirement — you cannot keep a Solo 401(k) once you have employees. The transition usually happens at the end of the plan year, and you will need to set up the new plan before the important date.

A standard 401(k) requires more administration. You must file the full Form 5500 each year (not the short form), offer the plan to all may be able to access employees, and follow rules about vesting, non-discrimination testing, and matching contributions. Many business owners hire a payroll or benefits administrator to handle this work, which adds cost.

If you later let go of all employees and return to being self-employed, you can switch back to a Solo 401(k) in future years. However, you cannot retroactively convert a standard plan to a Solo plan for the year you had employees.

Frequently Asked Questions

Can I have both a Solo 401(k) and an IRA?

Yes. You can contribute to both in the same year, but your total employee deferrals across all plans cannot exceed $23,500 (or $31,000 if you're over 50). Employer contributions to a Solo 401(k) do not count toward this limit. A tax professional can help you coordinate contributions to maximize your savings.

What if my business income varies year to year?

You can contribute different amounts each year based on your income. In a good year, you might contribute the maximum; in a slow year, you might contribute less or nothing. There is no minimum contribution requirement, so you have flexibility.

Do I need a separate bank account for my Solo 401(k)?

No. Your Solo 401(k) is held at the brokerage or bank where you open it. You do not need a separate business bank account, though many self-employed people keep one anyway for accounting purposes.

Can I roll money from an old 401(k) into a Solo 401(k)?

Yes. If you left a job and have an old 401(k) or 403(b) from a previous employer, you can roll it into your Solo 401(k). This is called a rollover and does not trigger taxes or penalties. Your new plan provider can walk you through the process.

What happens to my Solo 401(k) if I die?

Your beneficiaries inherit the account. They can take the money as a lump sum, roll it into an inherited IRA, or take distributions over time, depending on the plan rules and their relationship to you. Your plan documents should specify who your beneficiaries are.