For individuals navigating the realms of freelancing, consulting, or small business ownership, planning for retirement can often seem overwhelming. Many self-employed individuals frequently inquire, how do I prepare for retirement? Fortunately, a tailored solution exists: the solo 401(k).
A solo 401(k) is designed specifically for self-employed individuals or business owners without full-time employees, apart from possibly a spouse. This retirement account merges the advantages of both employer and employee contributions, offering exceptional flexibility and higher contribution limits compared to other retirement accounts, such as SEP IRAs or SIMPLE IRAs.
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Understanding the solo 401(k)
One of the most significant misconceptions surrounding the solo 401(k) is its perceived complexity. In reality, these accounts are straightforward and accessible for self-employed individuals across various income levels. By utilizing a solo 401(k), freelancers can effectively boost their retirement savings while reducing tax liabilities.
Maximizing contributions and tax efficiency
For self-employed professionals, managing inconsistent income can present challenges in achieving long-term financial goals. The solo 401(k) enables users to optimize contributions based on their earnings each year. During profitable periods, individuals can increase their contributions significantly, while scaling back during leaner times. Furthermore, as both an employee and employer, freelancers can contribute up to $70,000 annually to their solo 401(k) accounts, excluding any catch-up contributions.
Another attractive feature of this retirement account is the option to include a spouse as a participant. If a spouse contributes to the business, they can also make contributions to the solo 401(k) based on their earnings, effectively doubling the potential for retirement savings. Additionally, pre-tax contributions can lower the household’s overall taxable income, offering further financial advantages.
Unique features of the solo 401(k)
The solo 401(k) is distinguished by its unique combination of employee and employer contributions. This dual structure allows for greater tax-deferred growth, providing significant benefits to self-employed individuals. In 2025, for instance, eligible individuals can contribute a total of $70,000 to their solo 401(k) accounts, positioning themselves for a more secure retirement.
Catch-up contributions and the SECURE Act 2.0
Recent legislative changes, such as the SECURE Act 2.0, allow self-employed workers to establish a solo 401(k) after the new calendar year begins and still make retroactive contributions for the previous year until the tax filing deadline. This flexibility presents an excellent opportunity to enhance retirement savings that may have been previously overlooked.
Moreover, individuals aged 50 or older can take advantage of additional catch-up contributions, enabling them to save even more for retirement. However, starting in 2026, these catch-up contributions must be directed into a Roth solo 401(k) if income exceeded $145,000 in the prior year.
Choosing the right provider for your solo 401(k)
When establishing a solo 401(k), selecting the appropriate provider is crucial. It is essential to prioritize those with transparent fee structures and user-friendly digital tools that simplify account management. A provider with a strong compliance record and comprehensive recordkeeping services can help ensure that retirement savings are effectively managed.
Consider providers that offer a range of financial services, such as cash management and investment options, facilitating a seamless financial experience. For example, Betterment provides a competitively priced solo 401(k) designed specifically for self-employed individuals, making it easier to save for retirement and manage investments.
A solo 401(k) is designed specifically for self-employed individuals or business owners without full-time employees, apart from possibly a spouse. This retirement account merges the advantages of both employer and employee contributions, offering exceptional flexibility and higher contribution limits compared to other retirement accounts, such as SEP IRAs or SIMPLE IRAs.0
