Tax-advantaged plans such as a 401(k) are great for retirement savings, but the limit on annual contributions is $23,000. For those age 50 and older, an additional $7,500 “catch-up” amount is allowed, bringing the total to $30,500. That’s a good amount, but what if you need more? A little-known section of the IRS code allows some people to boost that figure much higher.

A solo 401(k) is an IRS-sanctioned retirement savings plan with substantially higher contribution limits than a traditional 401(k). If you are 50 or older, you can save up to $76,500 annually; otherwise, the limit is $69,000.

So what’s the catch? First of all, you have to be making some serious money to live without $76,500. Secondly, in order to qualify for a solo 401(k), you must be self-employed or own a small business. 

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The business cannot have any full-time employees nor can any other business that you own. You can be a full- or part-time employee of your business, and optionally you can include your spouse as either a full- or part-time employee. You and your spouse can be employed elsewhere (i.e., your business can be on the side), and you can participate in your employer’s 401(k) plan.

Solo 401(k)

The beauty of a solo 401(k) is that it allows you to contribute both as an employee and “employer”. The contribution limit on the employee side is the same as a traditional 401(k): $23,000, or $30,500 for those age 50 and over. On the “employer” side (which is still you), the 2024 annual limit is $69,000.

The “employer” contribution cannot be more than 25 percent of your net business income. Net business income is defined as earnings from your small business less personal contributions to the solo 401(k) and one-half of your federal self-employment tax. 

Any type of business is compatible with a solo 401(k), including a sole proprietorship, partnership, LLC, or corporation. The limit on “employer” contributions for sole proprietorships and partnerships drops to 20 percent.

Sound good? Wait, it gets better. 

Roth Solo 401(k)

You can configure your solo plan to be a Roth 401(k). That means you will enjoy tax-free income in retirement. Unlike a Roth IRA which is limited to $7,000 in annual contributions (plus $1,000 catch-up), a Roth 401(k) has the same contribution limits as a traditional 401(k): $23,000 (plus $7,500 catch-up). The “employer” contributions to a Roth solo 401(k) remain after-tax (i.e., not Roth).

Multiple Plans

As mentioned, if you are otherwise employed you can contribute to both your employer’s 401(k) plan and your solo 401(k) plan. The contribution limits are per person, not per plan. In other words, you can’t contribute $23,000 to the 401(k) at work and another $23,000 to your solo 401(k). It would have to be a combination that does not exceed the $23,000 limit.

Bottom Line

A solo 401(k) is like greased lightening for retirement savings. You will get to where you want to be so fast you won’t know what happened. Consider a couple in their fifties who each employ the strategy. In just 10 years they can amass $1.6 million.*

There are no age or income restrictions. You can create a solo 401(k) plan at most online brokers.

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