Under-Appreciated Solo 401(k)s: A Game Changer for Self Employed
There's no question that the labor market has shifted in massive ways in the wake of the COVID-19 pandemic. By this point, many pre-pandemic common law employees have no plans to return to more traditional employment settings, as they've obtained success in careers that operate fully under their own control. Many self-employed and contract workers are at the point where they're beginning to amass significant wealth—and, more and more, are looking for ways to shelter larger portions of their income from taxation. Many of these so-called "gig" economy entrepreneurs have historically taken a DIY approach when it comes to their retirement income planning. In today's market—fueled in part by President Trump's executive orders designed to allow traditional retirement plans to invest in alternative assets—significant opportunity exists for advisors to introduce these entrepreneurs to the benefits of the solo 401(k).
Solo 401(k)s: The Basics
A solo 401(k) is a traditional 401(k) that's set up for the benefit of the business owners (and their spouses). Only business owners, partners and their spouses are permitted to participate in the plan. While the solo 401(k) is not an option for businesses with employees, some recent studies have found that roughly 82% of employers have no employees.
Because of the way the law is drafted, small business owners who establish solo 401(k)s can contribute to those accounts as both employer and employee—so the solo 401(k) offers an edge over a typical 401(k).
In 2026, the self-employed individual can contribute up to $72,000 when both the employer and employee-side contributions are considered—compared to a maximum $24,500 contribution for the typical common law employee. On the employee side, the owner can also make use of catch-up contributions if they are at least 50 years old (the limits for 2026 are $8,000, or $11,250 for taxpayers who are 60, 61, 62 or 63).
While self-employed taxpayers have long struggled to maximize these contributions, gig economy workers are beginning to experience significant success—and the income necessary to support more substantial retirement account contributions. Solo 401(k)s are funded with pre-tax dollars, meaning that the self-employed individual can shelter even more income from taxation.
Additional Considerations for Solo 401(k) Savers
While solo 401(k)s are nothing new, wealth management firms have begun developing programs to make it easier for self-employed individuals to establish and monitor their accounts. Many programs already give savers access to more alternative investments, including cryptocurrency investments.
While SEP IRAs have long been the default for self-employed individuals, solo 401(k)s allow for higher contributions. SEP IRAs can be established by any business, but only allow employer-side contributions.
The maximum contribution limit for 2026 is the greater of (1) $72,000 or (2) 25% of compensation (up to $360,000 in compensation may be considered for purposes of calculating the maximum). SEP IRAs also do not permit catch-up contributions.
Solo 401(k)s also can provide a Roth contribution option to allow the saver to create a stream of tax-free income in retirement—which can be the key to managing tax exposure during retirement. (Post SECURE Act 2.0, SEP IRAs can also contain a Roth feature).
Solo 401(k) funds can also be easier to access in a pinch when compared with SEP IRAs. Participant loans from SEP IRAs are impermissible, while a solo 401(k) plan document can be written to permit participant loans up to certain limits. 401(k)s can also be structured to permit hardship distributions.
However, with a solo 401(k), the compliance burden increases once an account value reaches $250,000. Annual Forms 5500 must be filed by a solo 401(k) with more than $250,000 in assets. That said, business owners should consider that plan providers offer Form 5500 preparation services and can assist with any compliance issues.
Conclusion
While solo 401(k)s are by no means new to the retirement planning arena, shifts that have occurred within the labor market in recent years have created a broadening market for these plans. For many, solo 401(k)s may now prove more valuable than the tried-and-true SEP IRA option for independent contractors and other self-employed individuals. Your questions and comments are always welcome. Please post them at our blog, AdvisorFYI, or call the Panel of Experts.