A single-participant 401(k) or solo 401(k) is an attractive retirement savings option for self-employed workers or business owners. Although they are similar to the standard 401(k) plans often offered at larger workplaces, single-participant 401(k) allows solo business owners to exceed the contribution limits subject to other plans. Consider talking to a financial advisor if you need help saving and planning for retirement.
What is a one-participant 401(k)?
A single-participant 401(k) is a retirement plan designed specifically for sole proprietors, freelancers, and small business owners who have no employees other than their spouse.
Also known as individual 401(k), these plans combine the features of a traditional 401(k) with a profit-sharing plan, allowing you to contribute as both an employee and employer. As a result, a business owner with a one-participant 401(k) could potentially save more than the typical 401(k) contribution limit of $22,500 in 2023 and $23,000 in 2024.
Single-Participant 401(k) Contribution Limits
The IRS allows single-participant 401(k) owners to save up to $66,000 in 2023, or $73,500 if age 50 or older. These totals include contributions from both the employee and the employer, the latter of which may be as much as 25% of their compensation from the business.
For tax year 2023, the employee contribution limit for a one-participant 401(k) plan is the same as the standard 401(k) and similar plans: $22,500. If you’re age 50 or older, you can add a catch-up contribution of up to $7,500. Employee contributions can be made on a pre-tax or Roth basis.
For example, Mary works as a personal trainer through the S corporation she runs and earns approximately $115,000 per year. She has a single-participant 401(k) and made the maximum allowable contribution — $22,500 — as an employee in 2023.
But single-participant 401(k) owners can also contribute up to 25% of their compensation as an employer. For Mary, this means she can contribute an additional $28,750 to her 401(k) if she wants. As a result, Mary is eligible to make joint contributions of up to $51,250 to her single-participant 401(k).
Setting up a one-participant 401(k)
Setting up a single-participant 401(k) starts with eligibility. Again, you must be self-employed or a business owner and not have any full-time employees other than you and your spouse.
From there, you’ll need to select a financial institution that offers single-participant 401(k) plans. Banks, brokerage firms, and mutual fund companies are common providers. Compare fees, investment options and features before making a decision.
Your chosen provider will supply the necessary planning documents. These documents outline the terms and features of your solo 401(k) plan. Make sure you understand these terms thoroughly. When setting up your plan, you will need to provide an Employer Identification Number (EIN).
Once your account is opened, you can fund it through salary deferrals and employer contributions. Finally, don’t forget to allocate funds in your account to investments offered by your provider. You’ll want to choose investments that best match your goals.
Traditional vs. Roth 401(k)
When it comes to a single-participant 401(k), you can choose your preference between the traditional and Roth options. If immediate tax savings are a priority, a traditional 401(k) with pre-tax contributions may appeal to you. However, be prepared for withdrawals in retirement to be taxed as ordinary income.
Alternatively, the Roth 401(k) takes a different approach with after-tax contributions. There are no immediate tax savings here, but when retirement arrives and it’s time to make withdrawals, they can be taken completely tax-free.
Single-Participant 401(k) Alternatives
A single-participant 401(k) is far from being the only retirement savings option for self-employed individuals or small business owners. Simplified Employee Pension (SEP) and Savings Incentive Match Plan for Employees (SIMPLE) IRAs are other common options.
Like a single-participant 401(k), SEP IRAs are subject to higher contribution limits, but do not have the same loan provisions. SIMPLE IRAs, on the other hand, offer employer matching, with lower contribution limits.
A one-participant 401(k) or solo 401(k) is designated for self-employed workers and small business owners who have no other employees besides their spouse. In 2023, the IRS allows single-participant 401(k) owners to contribute as both employee and employer. As a result, you can save up to $66,000 in a single-participant 401(k), plus an additional $7,500 if you’re age 50 or older.
Retirement Planning Tips
- SmartAsset’s retirement calculator can help you estimate how much your savings will be worth by the time you retire, as well as how much you may need to support your lifestyle.
- A financial advisor can help you create a retirement plan that suits your lifestyle and expenses. Finding a financial advisor doesn’t have to be difficult. SmartAsset’s free tool matches you with three verified financial advisors serving your area, and you can have a free introductory call with one of their advisors to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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