You’re probably familiar with workplace retirement plans. Most companies offer retirement options for their employees, such as a 401(k) or a pension. But what about business owners — solopreneurs, specifically?
Luckily, there is a retirement option built specifically for them. Meet the Solo 401(k).
What is a Solo 401(k)?
A one-participant 401(k) plan, more commonly referred to as a Solo 401(k), is an individual retirement plan designed for business owners with no employees. It essentially works like any other 401(k) plan, just designed for business owners and their spouses.
Who qualifies for a Solo 401(k)?
Before we get into the details, it is worth clarifying who this is actually for. You do not need to have an LLC or be designated as an S-Corp to take advantage of a Solo 401(k). Sole proprietors, freelancers, consultants, and anyone who is considered self-employed would qualify. If you are generating self-employment income and have no full-time employees, you are likely eligible.
How contributions work
One of the unique features of the Solo 401(k) is the ability to contribute as both the employer and the employee. Think of a traditional workplace retirement plan. Most employers contribute a certain percentage to the employee’s retirement account, and the employee also contributes a portion of their paycheck. The same principle applies here.
As the employee, you can make salary deferral contributions — money set aside from your compensation into the retirement account. As the employer, you can make additional profit-sharing contributions on top of that. This dual contribution structure is what makes the Solo 401(k) one of the most effective retirement savings vehicles available to self-employed individuals.
Contributions grow tax-deferred, meaning the money you put in and the earnings from your investments are not taxed until you withdraw them in retirement. Unlike a taxable brokerage account, which taxes earnings and gains every year, a tax-deferred account lets your money compound over time. However, you will be taxed when you withdraw in retirement, based on your marginal tax bracket at the time of withdrawal.
The contribution limits
For 2025, as the employee, you can contribute up to $23,500, or 100% of your compensation, whichever is less. Those aged 50 to 59 or 64 and older can add a catch-up contribution of $7,500, for a total employee contribution of $31,000. Those aged 60 to 63 can contribute an additional $11,250 instead of the standard catch-up, for a total of $34,750.
For 2026, the employee contribution limit increases to $24,500. Those aged 50 to 59 or 64 and older can contribute an additional $8,000, for a total of $32,500. Those aged 60 to 63 can contribute $11,250 instead of the standard catch-up, for a total of $35,750.
As the employer, you can contribute up to 25% of your W-2 compensation if your business is incorporated — such as an S-Corp or C-Corp. For sole proprietors and single-member LLCs, the employer contribution is up to 20% of net self-employment earnings. Keep in mind that in this scenario, you are both the owner and the employee, so a special calculation is required to determine your exact employer contribution limit.
The total combined contribution limit — employee plus employer — is $72,000 for 2026 for those under age 50. For those 50 and older, the limit rises to $80,000, and for those ages 60 to 63, it can reach $83,250.
It should be noted that you can have a traditional 401(k) plan with another employer alongside your Solo 401(k). This is not always the case with other retirement plans for business owners. The employee contributions are still limited to $23,500 (2025) for all 401(k) plans. For example, if you contributed $10,000 to your workplace 401(k), you would be permitted to contribute up to $13,500 to your Solo 401(k). However, the employer contributions do not share a combined limit.
A simple example
Let’s say Peter received $100,000 in W-2 compensation from his S-Corp in 2026. He is 45 years old.
As the employee, Peter can contribute up to $24,500 in salary deferrals.
As the employer, his S-Corp can contribute up to 25% of his W-2 compensation — 25% of $100,000 = $25,000.
Peter’s total contribution for 2026 would be $49,500 — all of which reduces his taxable income and grows tax-deferred until retirement.
If Peter had a full-time job in addition to his business, the employee contributions across both retirement plans could not exceed $24,500 for the year. So, adjustments would need to be made to his Solo 401(k) contributions.
The investment flexibility advantage
One of the key advantages of the Solo 401(k) is the investment flexibility it offers compared to a typical workplace plan. Most employer-sponsored plans limit you to a specific menu of mutual funds or target-date funds. Those options are not always the best. To be fair, there are legitimate regulations and other factors that restrict can investment options. We won’t get into the minutia in this edition. Just know that the options are typically very narrow.
Solo 401(k)’s are not beholden to these restrictions. You can choose from a laundry list of mutual funds, ETFs, stocks, bonds, etc. Having the ability to choose your own funds and investments gives you a significantly better chance of achieving the outcomes you want.
Think of a workplace plan as a five-course meal — you get what’s on the menu. A Solo 401(k) is more like a buffet.
What happens if you hire an employee?
If you hire an employee, someone who works more than 1,000 hours per year, your business will no longer qualify for the Solo 401(k). Remember, the Solo 401(k) was specifically offered for sole proprietors or single-member LLCs.
Hiring an employee would essentially force you to switch to a more traditional workplace retirement plan, such as a 401(k). Doing so would require the plan to adhere to the Employee Retirement Income Security Act (ERISA) regulations. Most notably, the plan must meet the nondiscrimination testing requirement, unless it is structured as a safe harbor plan or another plan exempt from testing.
Should every founder who qualifies have a Solo 401(k)?
Solo 401(k)’s are a fantastic option for sole proprietors and single-member LLCs. If your business can feasibly support a Solo 401(k), you’ll have a hard time finding a better retirement option.
When working a traditional W-2 job, the retirement plan is already set up, and there is little work on your end to implement. For founders, the onus is solely on your shoulders. What’s new, right?
But the reality is that you need sufficient revenue and net earnings to make contributions. Your daily personal expenses and business needs should come first.
One concept that some entrepreneurs seem to have is that their business is their retirement plan. A SCORE survey revealed that 34% of business owners did not have a retirement plan for themselves. Not only is this risky, but it also assumes that their business is sellable. Depending on what outlet you read, about 70-85% of businesses listed for sale don’t end up sold.
When it comes to building personal wealth, oftentimes having multiple avenues for wealth building will yield the greatest results. Within those different avenues, risk mitigation and diversification are major factors. Furthermore, having a well-thought-out plan will often produce even better results.
If this aspect of your wealth-building journey has been overlooked, you’re not alone. For sole proprietors and single-member LLCs, a Solo 401(k) is an excellent place to start. It’s pretty simple to set up, and many custodians in the market offer these plans.
*This is not meant to be investment or tax advice and is for general information purposes only.
Want to learn how a Solo 401(k) fits into your broader financial plan as a founder? Schedule a free consultation with Texel Compass to get personalized, fee-only guidance.