Like an employer-provided 401(k), a Solo 401(k) plan allows you to save for your retirement, invest, and reduce your taxable income.

A Solo 401(k) is a retirement plan geared specifically toward the unique needs of self-employed individuals and micro-business owners. One of its most appealing features is that it permits an enrollee to wear two contributor’s hats: one as an employee and another as an employer. Under the right circumstances, even the spouse of a participant can contribute to a Solo 401(k) since the spouse of the owner is also considered an owner.

As of 2023, a Solo 401(k) plan allows you to contribute up to $66,000 and $73,500 if you're aged 50+. Assuming, of course, your income will support the contribution.

As an employee of your business:

You can contribute up to $22,500 ($30,000 if you are 50+ years old)

Your contributions can be pre-tax, Roth, or a mix of the two.

The employee contributions are also called “effective deferral” or “employee deferral”. These function similarly to how you would contribute to a 401(k) plan with your full-time job.

The limit however is based on all deferrals you make to all plans you participate in combined.

As an employer (of yourself):

You can contribute up to 25% of your compensation if your business is incorporated (around 20% if it’s not)

These contributions are made on a pre-tax basis and capped at $66,000 for 2023

The limit of $66,000 is the combined limit of the employee and employer contributions.

That is the beauty of a solo 401(k) - because you contribute to both the employee and employer side, you can contribute more than you would to a 401(k) plan of an employer you work for.

If an individual’s contributions (deferrals and profit sharing) total an amount below the $66,000 limit, an employee can make an additional non-deductible contribution or after-tax contribution to maximize the contribution up to $66,000.  This after-tax contribution however is not like a Roth contribution since the tax-deferred earnings will be taxable upon distribution.

As an example, Angela is an S-Corporation owner and makes $100,000 of W-2 income for the year.  She is under the age of 50. Her company does not have any employees.  After making the 25% ($25,000) profit-sharing contribution and the maximum deferrals ($22,500), she can make an additional after-tax contribution of $18,000 to get her to the maximum limit of $66,000.  The after-tax contribution cannot be used as a tax deduction.