Historically, for small business owners and solo entrepreneurs, saving for retirement was challenging due to a number of factors: cost inefficiencies, lack of customized features, and more. But thanks to solo 401(k)s, they now have a powerful solution to build the future they want. Solo 401(k)s, also known as individual 401(k)s, are specialized retirement savings plans built for business owners with no employees, designed to offer the ability along with more tax advantages, contribution flexibility. Basically, the opportunities for an owner to maximize their savings as both an employer and employee are almost endless here!
For owners that are ready to set up a retirement plan, the next steps are to understand the benefits and everything a solo 401(k) entails before choosing a provider. Read on to learn these aspects so you can choose the right plan to optimize your savings.
Who Qualifies for a Solo 401k?
As stated, solo 401(k)s are made specifically for self-employed individuals and small business owners who want to build their retirement savings. Many of these plans, like the solo plans offered at Ubiquity, offer the same, extensive business as big-box businesses, but without the high costs. Here’s are the qualifications to consider as you start exploring options:
- Business Ownership
You must be self-employed or own a business to implement a solo 401(k). This includes anyone that would run their own business across all industries like freelancers, gig workers, and consultants.
- Owners vs. Independent Contractors
Simply working as a freelancer or independent contractor doesn’t qualify for a solo 401(k) unless the worker is the specified owner of a business. That being said, there are still options for these types of workers so explore all your options first if you are in this category.
- Spouse Participation
It’s important to know that no employees besides your spouse can participate in your plan. So, if your spouse is part of your business and earns an income, they can also contribute to your solo 401(k), doubling your saving potential.
- Sole Ownership vs. Multiple Owners
These plans aren’t designed to support multiple owners. So, even if your business is still small or in its beginning stages but has multiple owners, you may need a traditional 401(k) instead.
Step-by-Step Guide to Opening a Solo 401k
To ensure you pick the right plan for you, here are 10 steps that can help you. This list is designed to guide you through the setup process from start to finish, so be sure to keep it handy!
Step 1: Determine Your Eligibility
Before setting up a solo 401(k), you’ll need to confirm that you meet the basic qualifications (which you can find above). Use this time to reevaluate your business structure and any changes you may need to make to be able to qualify for a solo plan.
Step 2: Choose the Right Solo 401k Plan Type
There are two plan options you’ll need to explore: traditional and Roth solo 401(k). When you start your research, first create a brief outline on your current and future tax situation, and how either could align with your needs. Some key differences between the two are that traditional solo plans use pre-tax contributions and withdrawals in retirement are taxed as regular income. Roth solo 401(k)s use after-tax contributions, and withdrawals in retirement are tax-free (as long as certain stipulations are met).
Step 3: Select a Solo 401k Provider
Remember: Your solo 401(k) should align with your business needs and financial goals. So, taking your time to choose a reputable plan provider is crucial because they will handle everything from compliance and plan administration to distributions and investments – all of which can impact how you save! Be sure to research different providers and compare their fees, plan features, and their customer service options.
Step 4: Complete the Plan Documents
Once you select your provider and plan, you will have to fill out the necessary documents. Thankfully, it shouldn’t be too difficult as your provider will likely have multiple sources you can reference if you need help, like customer support or simplified instructions. Expect to sign documents like an application, adoption agreement, and legal forms, all of which are necessary to get your plan set up properly. You can also find plan specifics like structure, contribution limits, and account management in these forms.
Step 5: Obtain an Employer Identification Number (EIN)
Even if your business is under a sole proprietorship, you will need to get an EIN to be able to adopt a solo 401(k). You can easily do this for free through the IRS website.
Step 6: Fund Your Solo 401k Account
With your solo 401(k), you can contribute as both an employer and employee as long as you follow the IRS limits (which can be found below). Based on the IRS limits and other aspects like income and budget, you will need to decide how much you want to contribute. Once you get your number, you can start funding your account accordingly.
Step 7: Select Investments for Your Solo 401k
Depending on the solo 401(k) you go with, you’ll have a variety of investment options (bonds, stocks, ETFs, mutual funds, and more) to choose from. Carefully consider your goals, risk tolerance, and ideal retirement age before deciding on investments, and try to diversify your options to enhance your portfolio.
Step 8: Submit the Documents and Finalize the Account
Once you go sign your documents and make your initial contribution, it’s time to finalize your account! Your provider will work with you to ensure that they have all the necessary information to set you up for success without any delays or issues.
Step 9: Maintain Your Solo 401k
Once you’ve made it to this step, congratulations–you’ve officially set up your 401(k)! You will have ongoing responsibilities like keeping track of contributions and maintaining documents for compliance requirements to keep your plan in good standing. Be sure to regularly review your account, and keep up with these tasks.
Step 10: Take Advantage of Plan Features
Depending on your provider, you’ll have different benefits to utilize with your solo 401(k), like catch-up contributions, loan options, and useful tools like financial education resources and calculators that can help maximize your account and well-being. Use every feature you can as they will help provide clarity into how you’re meeting your retirement goals.
Solo 401k Contribution Limits and Tax Benefits
As a small business owner, it’s important to understand that while the plan you choose has significant flexibility with contribution limits, they still are dependent on different factors like age, income, and whether they’re made as an employer or employee. Here’s what you need to know:
- Dual Contribution Structure
Employer and employee contributions are set to different limits, allowing owners to save significantly more. In 2025, owners can now save up to $70,000 with both contributions if they’re 49 years old or younger. If they’re 50 or older, their limit is $79,000.
- Contribution Differences
The main difference between self-employed individuals (also known as sole proprietors) and S-corp owners is that the former makes contributions based on their net self-employment income and deducts the necessary taxes, usually maxing out at 20% of their earnings. On the flip side, the latter makes contributions based on their W-2 earnings, allowing them to use up to 25% of their salary.
- Tax Advantages
Employee contributions for traditional solo 401(k)s are made on a pre-tax basis, meaning that owners can reduce their overall taxable income for the specific year. Employer contributions are also tax deductible, allowing for even more savings. Additionally, owners in a higher tax bracket may be able to benefit from tax-free withdrawals in retirement.
Depending on the plan provider used, owners may also have access to Roth contributions, which are made with after-tax dollars.
- Options for Multiple Businesses
There are also options for owners with multiple businesses to open a solo 401(k) for each business. The only thing to remember here is that they won’t be able to exceed the contribution limits across all accounts. So, it’s crucial for owners to keep careful records of their contributions to ensure they’re not overexceeding at any time.
Final Thoughts
Robust solo 401(k)s are a necessity for self-employed individuals, especially as they scale and grow. Not only do small business owners get to utilize several money-saving features like broader investment and contribution options, but they also gain more security and peace of mind because they’re allowed more control over their financial future. The best part is that setting up a plan and taking advantage of the benefits is simple, and can be done almost immediately. Whether you use a solo 401(k) provider like Ubiquity or another servicer, you’ll be able to get your plan implemented and working hard for you in no time.
