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What is a Solo 401(k)?

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S&A Financial Services, Inc. Blog

This information can also be found on Small Business Financial Podcast , episode #4.

What is a Solo 401(k)?  Who can contribute to a Solo 401(k)? 

You can actually set up your own 401(k) if your a sole proprietor.  This type of retirement account would be best used if you have no employees (hence the name....SOLO 401(k)) or if you happen to have spouse on the payroll.  

Great thing about this plan is that there's not many, if any, admin fees to set this up and maintain throughout the year.

Another perk from a Solo 401(k) is that you can actually contribute a little more than the IRS stated max by contributing from your share of profits.  

Regarding the profit sharing contribution.  As a small business owner, you're able to contribute 20% of your profits, UNLESS you're an S Corp. or C Corp., then it's 25% of your salary.  

 So, with some tax strategies involved (this is why I promote using CPA planner), you very well could max this thing out at $55k.  This, of course, is assuming your income justifies it.  You’ll need to be pulling down $275 to come to that $55k number.  

Furthermore, if you’re over 50yrs old, you can add another $6k as a catch-up contribution…. On top of that $55k.  So, you’re looking at $61k contribution to that Solo 401(k).  Again, this would be utilizing some tax strategies.  

Tax Strategies....?  Not sure what I'm referring to, huh?  

Folks, you can add a Roth feature to your Solo 401(k).  This is a HUGE advantage! 

So much so, that I'm working w/ my tax planner regarding reorganizing my entity and possibly setting up a Solo 401(k) instead of a SEP, which is what I currently have now.  

Take a few minutes to think about how powerful that Roth component can be….

First, a lot of you out there may make too much to contribute to a Roth IRA.  Well guess what, that doesn’t matter for your Roth 401(k).  Income limits go away.  You COULD, if you so desired, put 100% of your contributions into that Roth feature up to the IRS limits.  But hang tight here, I'll elaborate more on that…

Second, you’ll be accomplishing TAX DIVERSIFICATION for your retired self.  Of course, you’ve heard about portfolio diversification.  Well, why wouldn’t you implement that same principle towards your future tax liability…..?

Third, let’s take a real life look at this - what Imean by that, is don’t be crunching numbers on a calculator or trying to google 401(k) vs Roth 401(k) tax difference.  

Just think about this…. 

This is an actual case scenario from a client of mine….

She’s (client of mine) got $165k saved in her 401(k).  She's 45yrs old.  She’s currently putting away $18k per year towards her Solo 401(k).  She’s in the 22% tax bracket and lives in a state that has state income tax.  Assuming she’ll work for another 20 years, earning 7% on her money…she’ll have around $1.45mill at retirement.  

 Now, seriously ask yourself this question....

Do you really think you’re 65yr old self is going to remember, OR CARE, that you saved a few tax dollars when you were in your late 40’s or 50’s….when you were in your EARNING YEARS?  I’d like to think that you’d stare at your $1.45mill balance and think to yourself, holy _____.  Most of this is going to come to me TAX FREE….

I say most, because you’re probably not going to save 100% of your retirement in the Roth account.  

However, I think you’ll be the happiest retiree you know.

Personally, I have 2 buckets of money for when I retire.  As of now, my pre-tax bucket is about triple of what my Roth bucket is.  But, man, I’m working on it....

Folks you’ll hear ALL kinds of reasons as to why pre-tax is better than Roth, and a lot of it is true.  Especially if you can see into the future as to what tax rates will be.  Something to remember - I’ve been doing this for 20 years, rarely, if ever, do I see people’s spending habits change in retirement.  Exceptions to every rule, but you DON'T want to take a pay cut in retirement, which means that money has to come from somewhere, right?

Personally, I want that money sent to me TAX FREE!

Now, here’s something to take note of.  Remember, you can put a portion of your profit sharing towards your Solo 401(k).  That portion HAS to go in pre-tax though.

So....maybe you put as much as you can towards your Roth Solo 401(k) and dump the profit sharing portion into the traditional Solo 401(K)….sounds like a pretty good plan to me.  

*Not investment advice.  Consult with your CPA or competent fee-only financial advisor first. 

I mentioned this earlier, but this Roth feature should be VERY attractive to those living in high taxed states - for obvious reasons.  

Also, if you run your business as a partnership, you’re still eligible for a Solo 401(k), but ONLY if each partner owns at least 5% of the business.  

Quick snippet on tax filing - only need to file form 5500 annually if your balance reaches $250k or higher.

Now, you can easily google the rules / regulations around the Solo 401(k), but I'll go ahead and outline these here. 

2022 rules / regulations....

Who is eligible

Self-employed individuals and owner-only businesses. The owner's spouse may participate in the plan.

Tax benefits

Tax-deferred growth, tax-deductible contributions, and pre-tax deferral contributions.  

Who contributes

Funded by compensation deferrals and employer contributions.

Contribution amounts

Individuals may contribute up to $19,500 for 2021 and up to $20,500 for 2022. Employers may contribute up to 25% of compensation, up to a maximum of $58,000 in 2021 and $61,000 for 2022. Profit-sharing contributions allowed up to 25% of compensation,2 up to the annual maximum of $58,000 in 2021 and $61,000 for 2022. Total contributions cannot exceed $58,000 in 2021 and $61,000 for 2022. Additional salary catch-up of $6,500 for 2021 and $6,500 for 2022 (if age 50 or older).3


Cannot take withdrawals from the plan until a "trigger" event occurs, such as turning age 59½, disability, or death. 10% early withdrawal penalty applies if you are under age 59½ and taking a distribution. Required minimum distributions start at age 72.

Administrative responsibilities

Annual IRS Form 5500 filing after plan assets exceed $250,000.


The deadline to open a new plan is generally December 31 (or fiscal year-end) if compensation deferrals are intended. The SECURE Act change to tax filing deadline including extensions allows for profit-sharing only.

Solo 401(k) right for your small business?  Jump on MY CALENDAR for quick, 15min phone chat to find out. 


2. Maximum compensation on which contributions can be based is $290,000 for 2021 and $305,000 for 2022. If you are self-employed, compensation means earned income.
3. With catch-up provisions, individuals 50 and older may defer up to $26,000 for 2021 and up to $27,000 for 2022, subject to the combined deferral and employer contribution limit.

S&A Financial Services, Inc. is a registered investment adviser.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  Investments involve risk and, unless otherwise stated, are not guaranteed.  Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.

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