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While tens of millions of people have access to a traditional 401(k) through their employer, as a business owner, you are almost certainly going to be 100% responsible for funding your own retirement.
Thankfully, because the team at ProsperPlan Wealth has a long history of working with small business owners throughout the Sacramento region – and specifically, business owners in Fair Oaks, Gold River, Folsom, and Roseville – we know that entrepreneurs have some terrific (and flexible) ways to set aside money for the future.
Enter the Solo 401(k): a powerful retirement savings tool designed for self-employed individuals and small business owners (who do not have full-time employees). This quick guide, conceived and written in-house, will cover the key aspects of the Solo 401(k), including contribution limits and how establishing a plan helps to minimize your current and future tax burden.
Quickly: What is a Solo 401(k)?
You may be wondering, when it comes to a Solo 401(k), “What questions should I ask a financial advisor?”
We’ve been guiding clients toward better retirements for over two decades, and as a fee-only financial advisor, one of our specialties is managing the assets and the retirement planning of self-employed individuals. With that in mind, there is a clear consensus here at ProsperPlan that Solo 401(k)s are among the most versatile retirement savings vehicles in existence.
That is partly because “Solo Ks” are actually easier to manage and understand (think less bureaucratic red tape), and have significantly higher personal contribution limits, than their corporate/traditional counterparts.
Why the higher contribution limits? First, as a business owner, you get to contribute as both an employee and an employer, which exponentially increases the amount you can put away while substantially expanding both your current and future tax benefits.
Are you eligible for a Solo 401(k) in 2025?
It is reasonably simple: To open a Solo 401(k), you must be a business owner with no full-time employees (other than possibly a spouse). (This makes it an ideal choice for freelancers, consultants, and solo entrepreneurs.)
How do you go about setting up a Solo 401(k)?
There are four basic steps to follow to set up your Solo 401(k). (If you have any questions or need clarity or guidance, contact us and we will walk you through the process.)
First, choose a plan provider:
While we can of course recommend a plan provider, if you set it up alone, remember that not all fees and plans are identical (and over time, those fees can add up). But first, you’ll need to identify a financial institution that offers Solo 401(k) plans. (Charles Schwab and Fidelity have varying investment options and fee structures, so research is important. Remember: always read the fine print!)
Second, carefully fill out the paperwork:
When it comes to Solo 401(k)s, the two essential pieces of paperwork are known as the “plan adoption agreement” and the “account application.” Also, make sure you have your Employer Identification Number (EIN: (it is on your tax forms) at the ready.
Decide and then set your contribution limit amounts:
More on this coming up in the next section, but you will need to calculate your contribution amounts before you can complete the set-up process. (This is primarily concerned with how much money you will contribute and how often.) Make sure your plan is compliant with all relevant laws and regulations:
For instance (this is where ProsperPlan and/or your accountant can lend a hand), aside other housekeeping items, once the assets in your Solo 401k exceed $250,000, each year you will need to file a Form 5500 with the IRS.
How much money can you contribute to a Solo 401(k) in 2025?
Solo 401(k) contribution limits for 2025 have been bumped up to $70,000 if you are under 50 years of age, with an additional “catch-up” contribution of $7,500 if you are between the ages of 50-59.
What are key tax advantages of Solo 401(k)s?
The big advantage of tax-deferred savings vehicles (such as a Solo 401(k)) is that they enable you to lower your taxable income today (everyone’s situation is unique), with the concept being that when you withdraw the money later, you should be in a lower tax bracket.
This, of course, takes planning. But when executed correctly, it can potentially save you tens of thousands of dollars.
A quick Solo 401(k) investment advantage.
Another nice advantage of Solo 401(k)s (when compared to other similarly structured, tax-deferred retirement accounts) is that they offer greater investment flexibility, including a wider range of professionally managed portfolios (rather than merely offering your employer’s typically limited menu of investment options). And this of course enables you and your advisor to tailor your portfolio to your precise risk tolerance, time horizon (when you will need the money), and investment goals.
Do Solo 401(k)s offer real estate investments?
Continuing with the theme of greater investment flexibility, some Solo 401(k) plans do allow you to invest directly in real estate. (And rental income can then be returned to your Solo 401(k), tax deferred.) However, and this is where it gets a bit tricky, as some strict rules (though not prohibitive) apply. For instance, personal use of the property you invest in is limited.
You will want to calculate the costs and assess the compliance requirements associated with owning real estate in any type of self-directed 401k.
Can you take a loan or an “early” withdrawal from your Solo 401(k)?
As with traditional 401(k)s, withdrawals from a Solo 401(k) before you reach age 59.5 incur a 10% penalty and are then taxed as ordinary income. However, there are circumstances where penalty free hardship withdrawals and loans from your Solo 401(k) may be available.
Lastly, here are two common Solo 401(k) mistakes to avoid.
1. Accidentally (or intentionally) contributing too much:
The IRS doesn’t miss a beat. So, while this seems straightforward enough, just make certain you stay within the contribution limits of your Solo 401(k) to avoid any penalties or unnecessary headaches.
2. You are a business owner, so do not overlook your compliance responsibility:
As the owner of the plan, you are probably going to serve as the official plan fiduciary, which means that you are responsible for making sure all the appropriate forms are completed correctly and on time. (Though you can legally hire a third-party administrator to serve as the fiduciary on your plan’s behalf.)
3. Comparison with other retirement plans.
While we at ProsperPlan believe that the Solo 401(k) is a terrific financial planning tool for Sacramento-area small business owners to utilize to better prepare for retirement, it is not the only viable vehicle available to you. (SEP IRAs and SIMPLE IRAs come to mind.)
Remember, everyone’s situation is unique. Let us know if you are considering setting up a Solo 401(k) and we will evaluate factors such as your income level, business structure, tax situation, and your retirement goals to determine the best option available for you.
