The Best Retirement Plans for Small Businesses: Solo 401k, Part 4
In this fourth part of our series on top retirement plans for small businesses, we explore the Solo 401k plan—a flexible and potentially high-contribution option for solo entrepreneurs and small business owners.
Missed the earlier parts? Catch up here:
What Is a Solo 401k?
A Solo 401k, also known as an individual 401k, is designed for self-employed individuals or business owners with no full-time employees, except possibly a spouse. This plan allows for significant annual contributions, which can be especially beneficial in profitable years.
Key Features of Solo 401k Plans
- Flexible Contributions: You decide how much to contribute each year, ranging from nothing up to the maximum limit, depending on your financial situation.
- High Contribution Limits: For 2025, the IRS has set the employee contribution limit at $23,500, with an additional $7,500 catch-up contribution allowed for those aged 50 or older, bringing the total to $31,000. IRS
- Employer Contributions: As both employer and employee, you can contribute up to 25% of your compensation, with total contributions (employee plus employer) capped at $70,000 for 2025. IRS
- Loan Options: Some Solo 401k plans permit loans, allowing you to borrow from your retirement savings if needed.
Contribution Breakdown
- Employee (Elective Deferral) Contribution: Up to $23,500 for 2025; if you’re 50 or older, you can add a catch-up contribution of $7,500, totaling $31,000. IRS
- Employer Contribution: Up to 25% of your compensation, with total contributions not exceeding $70,000 for 2025. IRS
Example: Solo Business Owner Under 50
Consider Alex, a 45-year-old sole proprietor earning $100,000 in 2025. Alex can contribute:
- Employee Contribution: $23,500
- Employer Contribution: Up to 25% of compensation, allowing for a significant additional contribution
This setup enables Alex to maximize retirement savings while reducing taxable income.
Advantages of Solo 401k Plans
- Higher Contribution Limits: Compared to other retirement plans like SEP IRAs, Solo 401(k)s often allow for larger contributions, enhancing your retirement savings potential.
- Flexibility: You can adjust contributions annually based on your business’s performance, contributing more in profitable years and less when necessary.
- Loan Availability: With certain plans, you have the option to borrow from your Solo 401k, providing financial flexibility when needed.
Considerations
- Employee Restrictions: If you hire full-time employees, your Solo 401(k) may need to transition to a standard 401(k) plan, which involves additional administrative requirements.
- Contribution Limits: The IRS sets annual contribution limits, which are subject to change. It’s essential to stay informed about the latest limits to maximize your contributions effectively.
Is a Solo 401k Right for You?
If you’re a self-employed individual or small business owner without full-time employees (other than a spouse), and you aim to maximize your retirement contributions, a Solo 401(k) could be an excellent choice. Its high contribution limits and flexibility make it a compelling option for boosting your retirement savings.
Note: Always consult with a financial advisor or tax professional to determine the best retirement plan for your specific circumstances.
Still thinking about how to save on your tax before the year ends, here is our post on tax strategies you can employ.
To learn how to earn tax-free income with the Augusta Rule, we have this article with all the information you need.
What is an EIN and how can you apply for it for your business? Read about it here and follow the IRS guidelines and set your business up for success by applying for an EIN today!
