Should you open a Solo 401(k)?

Updated 2026-09-02

Once freelance profit grows, the question shifts from "should I save?" to "where should I save?" For solos, the Solo 401(k) is often the answer — but it is not automatic. The decision turns on how much you can contribute and whether the extra paperwork is worth it.

The defining advantage: two contributions

A Solo 401(k) lets you contribute as both the employee and the business. That is the whole point, and it is why the account usually beats a SEP IRA at the same profit. A SEP IRA is employer-only — up to 20% of net earnings. A Solo 401(k) layers the employee deferral (up to $23,500 in 2025, plus a catch-up at 50) on top of that same employer share. Two streams into one account, one much bigger limit.

The Solo 401(k) calculator adds the two pieces and caps the total at the annual limit, so you can see your real max at your profit level.

What you can actually put in

The employee side is a flat deferral from your pay — up to $23,500 for 2025. Turn 50 and a $7,500 catch-up applies, lifting it to $31,000. The employer side is profit-sharing: up to 20% of your net earnings from self-employment, where "net earnings" is profit minus half your self-employment tax. The combined total cannot exceed $70,000 for 2025. At most profit levels you hit the natural limit (deferral plus 20%) well before the cap; at very high profits you max the cap instead.

Why this matters versus a SEP IRA

Run the numbers side by side and the Solo 401(k) wins for almost any solo with meaningful profit. The retirement savings calculator compares them directly. The gap is widest precisely because of the employee deferral — a SEP IRA has no equivalent. If you want to shelter six figures a year, the Solo 401(k) is the vehicle; a SEP IRA will leave room on the table.

The cost: setup and paperwork

A Solo 401(k) is not free to run. You adopt a plan document (often provided by the custodian), and once plan assets exceed $250,000 you must file Form 5500-EZ annually. That is the trade-off for the higher limit. For most solos the extra contribution room dwarfs the admin cost, but if you are only going to contribute a few thousand a year, a simple IRA may be easier and nearly as effective. The account earns its keep when the contribution is large.

Tax now, tax later

Contributions are deductible, lowering this year's taxable income, and growth is tax-deferred until withdrawal in retirement, when it is taxed as ordinary income. If you expect to be in a lower bracket later, the deduction is especially valuable. The contribution also reduces adjusted gross income, which can help with other income-based phase-outs. It is the standard pre-tax retirement deal, just with a bigger bucket.

Mind the deadlines

You can open the plan and make the employer contribution as late as your business's tax-filing deadline (including extensions), but the employee deferral must be made by December 31. Set the plan up before year-end if you want this year's employee deduction — waiting until you file in April is too late for that portion. The most common mistake is assuming the whole contribution can wait until filing season.

A simple decision rule

Open a Solo 401(k) if you have real profit, want to save aggressively, and will contribute enough that the higher limit matters more than the paperwork. Stick with a SEP IRA or IRA if your contributions are modest and simplicity wins. Either way, the contribution reduces this year's tax and builds retirement on autopilot — the account type just sets the ceiling.