A solo 401(k) is a retirement savings plan for a self-employed or sole proprietor business owner (and spouse, if applicable). This individual 401(k) plan goes by different names, including Single(k)®, self-employed 401(k), Individual 401(k), or one-participant 401(k).
A solo 401(k) plan provides all the same benefits as their larger, traditional 401(k) counterparts—acting as a savings vehicle for participants to invest contributions from their paychecks. By playing both roles as both employer and employee, solo 401(k) plans allow self-employed business owners to maximize their retirement contributions. Solo business owners can then gain additional savings by deducting these 401(k) contributions, along with any plan costs, as a business expense.
With the Single(k)® solution from Ubiquity Retirement + Savings™, a business owner can establish a plan online in minutes for one low fee and start saving today.
A self-employed business owner must have earned income from self-employment to contribute to a solo 401(k). Self-employment can take any form; however, it does not have to be a full-time business venture.
For example, an individual may work full time for an employer and have their own business on the side.
Any income earned from the side business would be eligible to contribute to a solo 401(k) plan.
The business establishing the solo 401(k) can be structured as a sole proprietorship, partnership, or corporation. One-participant plans are intended for businesses without any employees or businesses with employees who are not eligible to participate in an employer-sponsored plan—for example, those who work fewer than 1,000 hours per year or who are younger than age 21.
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A business owner has the best of both worlds with a solo 401(k). They have the flexibility to contribute as much as they want from year-to-year (up to the standard limits), plus, they do not have to worry about limiting their salary deferrals based on failed nondiscrimination tests caused by employees with low savings rates. They also get all the benefits of a big business 401(k), such as tax deductions and loans.
Solo 401(k) benefits
Because there are no employees, plan administration is extremely low maintenance. There are no nondiscrimination tests, and business owners are not required to file annual reports with the IRS until the plan reaches $250,000 in assets.
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One of the most important benefits of a self-employed 401(k) is the large amount that can be contributed each year, tax-free.
Lesser of 25% of eligible compensation or $40,500 ($61,000 if no deferrals)
Annual limit per
Lesser of 100% of income or $61,000
Catch-up contributions if age 50 or older
To establish a plan for a tax year, the business owner must sign a plan document by the last day of the business’s tax year to contribute for that year (e.g., December 31 for a calendar-year business). The document must be signed by December 31 to make contributions for that year. All contributions must be made by the business’s federal income tax return due date, including extensions.
A solo 401(k) plan follows most of the same rules as a regular 401(k) plan, with a few exceptions.Questions? Our experts are here to help
Pre-tax and Roth contributions
A business owner has the option to make either pre-tax or post-tax Roth salary contributions. Pre-tax contributions are not included in income when calculating taxable income for the year. Taxes are paid on these amounts, and any investment earnings when the person retires and starts taking an income from their 401(k) plan. Post-tax Roth contributions are included in taxable income. These amounts are tax-free when distributed from the plan. Any investment earnings on the Roth contributions will also be distributed tax-free if the distribution is qualified.
Although solo 401(k) plans are not intended for businesses with employees, the business owner may want to set eligibility requirements in the plan document in case they add employees at some future date. Care must be taken to not exclude the business owner from the plan if selecting eligibility provisions.
Reporting and disclosures
Solo 401(k) plans are not subject to most of the annual reporting and participant disclosure filing requirements that apply to 401(k) plans covering employees. Once solo 401(k) plan assets reach $250,000 or more, the owners must file a Form 5500-EZ, Annual Return of One-Participant (owners and their spouses) Retirement Plan with the IRS.
A Simplified Employee Pension (SEP) plan is an IRA-based savings vehicle also designed for small business owners.
A SEP IRA plan is easy to administer and allows a business owner to make tax-deductible contributions up to 25% of taxable compensation (maximum of $61,000 for 2022).
While the annual maximum is the same on paper, in practice, a business owner would need a higher level of taxable compensation to make the $61,000 maximum SEP contribution as compared to a solo 401(k) contribution.
In addition, many solo 401(k) plans, including Ubiquity’s Single(k)® plan, offer the ability to take a loan of up to half of the plan’s value (up to $50,000). IRS rules prohibit loans from SEP IRAs.
The SEP plan does not have an additional $6500 catch-up contribution provision like there is with a Solo 401(k) plan.
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If you are a small business owner and need a retirement plan for yourself and your company, only Ubiquity offers flat-fee plans plus free expert advice.
We will fully customize your plan to meet the specific needs of your small business.
Setting up a 401(k) can be complicated. Only Ubiquity gives small business owners access to retirement experts in addition to industry-leading, low, flat fees. Each sales expert has over a decade of experience assisting business owners in 401(k) plan design. Take advantage of this free benefit.