If you're self-employed and your retirement account is a regular IRA, you're leaving serious money on the table.
A traditional or Roth IRA lets you contribute $7,000 per year in 2024 ($8,000 if you're 50+). That's fine. A Solo 401(k) lets you contribute up to $69,000 per year. That's not a typo.
Here's how it works and why most contractors never set one up.
What Is a Solo 401(k)?
A Solo 401(k) — also called an individual 401(k) or self-employed 401(k) — is a retirement plan designed for self-employed people with no full-time employees other than themselves (and optionally a spouse).
You play two roles: employee and employer. This is what makes the contribution limits so large.
The Contribution Limits
Employee contribution (you wearing the employee hat): Up to $23,000 in 2024 ($30,500 if you're 50+). This can go in as traditional (pre-tax) or Roth (post-tax). It's the same limit as a W-2 employee's 401(k) contribution.
Employer contribution (you wearing the employer hat): Up to 25% of your net self-employment income. This one is always traditional (pre-tax).
Combined limit: $69,000 in 2024 ($76,500 if 50+), or 100% of net self-employment income, whichever is lower.
Let's run actual numbers. Say you have $120,000 in net self-employment income:
- Employee contribution: $23,000
- Employer contribution: 25% × $120,000 = $30,000
- Total: $53,000
That's $53,000 sheltered from income and self-employment tax — roughly $19,000 in tax savings at a combined 35% marginal rate.
Compare that to the $7,000 an IRA would let you contribute.
Roth vs. Traditional
The employee portion of your Solo 401(k) can be Roth or traditional. The employer portion is always traditional.
Traditional: Contributions reduce your taxable income now. You pay taxes when you withdraw in retirement.
Roth: You pay taxes now on the contributions. Withdrawals in retirement are tax-free.
For most contractors, the answer depends on your tax bracket. If you're in a high bracket now and expect lower income in retirement, traditional wins. If you're early in your career or had a low-income year, Roth is often better. The Roth Solo 401(k) also has no income limits — unlike the Roth IRA, which phases out above $161k (single) or $240k (married) in 2024.
One advanced move: if you have a traditional Solo 401(k), some plans allow a mega backdoor Roth — after-tax contributions of up to the remaining space below the $69k limit, then converted to Roth. This can shelter additional money at Roth tax treatment. It requires a plan that explicitly allows it, but providers like Fidelity and Vanguard do.
Who Qualifies
You need two things:
- Self-employment income — from freelancing, consulting, 1099 work, or a sole proprietorship/LLC/S-corp
- No full-time employees — only you (and a spouse, who can also contribute to the same plan)
Part-time employees under 1,000 hours/year generally don't disqualify you, but this varies by plan. If you hire full-time help, you'd need to switch to a SEP-IRA or SIMPLE IRA.
You don't need an LLC. You can open a Solo 401(k) as a sole proprietor with just your Social Security Number (though an EIN is required for most plan providers — free to get from the IRS in minutes).
The One Critical Deadline
You must open the account by December 31 of the tax year you want to contribute for. This is not like an IRA where you have until April 15 to contribute for the prior year.
If you want to make 2024 contributions, you need the plan established before December 31, 2024. Once it's open, you can make the actual contributions up to your tax filing deadline (including extensions).
This surprises many contractors who hear about Solo 401(k)s in January while doing their taxes. They can't go back.
Where to Open One
The most popular options for contractors:
- Fidelity — No fees, supports mega backdoor Roth, solid interface
- Vanguard — Low cost, no frills, requires a minimum for some funds
- Schwab — Good option, no setup fees
- ShareBuilder/Capital One — Works for basics
- Self-directed custodians — If you want to invest in real estate or alternative assets inside the account
For most contractors, Fidelity is the default. The setup takes about 20 minutes online.
The Bottom Line
The Solo 401(k) is the most powerful tax-advantaged account available to self-employed people, and it's widely underused simply because it's slightly less automatic than a workplace 401(k). You have to choose to open it. That's the entire barrier.
If you have meaningful self-employment income and you're not contributing to one, you're paying taxes you don't have to pay.
Deciding between Roth and traditional contributions? The Roth vs. Traditional Calculator shows your break-even point based on current vs. expected future tax rates — with the math visible.