Solo 401(k)s: The Best Retirement Plan for Self-Employed Individuals

Business owners are always looking for ways to lower their tax bill. When the end of the year gets close, the go-to move is often a new truck or a piece of equipment. There's nothing wrong with that when the business needs it. But there are only so many vehicles one business can buy.

What if there were a write-off that also helped you build wealth? One that lowers your taxes today and keeps growing for you, instead of losing value the day it leaves the lot.

For many self-employed people, that write-off is a retirement account. The real question is whether you're using the one that lets you save the most.

Who a Solo 401(k) Is For

A solo 401(k) is built for self-employed people whose business has no employees other than themselves and their spouse. Think consultants, contractors, real estate agents, freelancers, and other one-person businesses.

There are a few exceptions, like certain part-time workers, that a plan can leave out. But if you have regular full-time staff, a different type of plan will likely be a better fit.

Comparing Your Options: SEP IRA vs. Solo 401(k)

Take Tom and Rachel. Both are under 50, both run their own consulting businesses, and both had $80,000 in business income this year after the self-employment tax deduction.

Tom has a SEP IRA. With a SEP, only the business can contribute, and the amount is capped at a percentage of what you earn. On $80,000, Tom can put away $16,000.

Rachel has a solo 401(k). She can make that same $16,000 contribution as the business. But because she's also an employee of her own business, she can add up to $24,500 more on top of it. That brings her total to $40,500.

Same income. Same type of business. Very different results.

That's because a solo 401(k) lets you wear two hats. As the employer, your business contributes a share of your earnings, just like a SEP. As the employee, you can also contribute a set dollar amount, up to your income for the year. That second piece is where the gap comes from, and it's why the solo 401(k) tends to help most at moderate incomes. For higher earners, the two accounts start to land closer together.

If you've been using a traditional IRA instead, the difference is even wider. An IRA caps out at $7,500 for 2026, no matter how much your business earns.

The Same Flexibility, With More Room to Save

Higher limits don't mean giving up options.

• Traditional or Roth: You can choose pre-tax contributions, which give you the write-off now, or Roth contributions, which skip the deduction today but grow tax-free for later. That lets you decide, year by year, when it makes more sense to take the tax break.

  
  

• Your choice of investments: Most solo 401(k) providers offer a wide range of investment options, so you can build a portfolio that fits your goals.

  
  

• Room for your spouse: If your spouse works in the business, they can contribute as an employee too, which can roughly double what your household sets aside.

  
  

A Clear Path to the Backdoor Roth IRA

If your income is too high to contribute to a Roth IRA directly, a backdoor Roth IRA can be a great way to keep building tax-free savings. But there's a catch. If you have pre-tax money sitting in an IRA, including a SEP IRA, a rule called the pro rata rule can turn your backdoor contribution into a tax bill you didn't expect.

Solo 401(k) balances don't count toward that rule. So moving your savings from a SEP IRA to a solo 401(k), or rolling existing IRA money into one when the plan allows it, can clear the way for clean backdoor Roth contributions each year.

We walk through how the backdoor Roth works in our post on the Backdoor Roth IRA.

What It Takes to Get There

The tradeoff is that a solo 401(k) comes with a few more moving parts than a simple IRA. You'll need to set up a plan document, keep track of your contributions in both roles, and once the account grows past $250,000, file an annual report with the IRS. It's not complicated, but it's also not a set-it-and-forget-it account the way an IRA can be.

For most self-employed people who want to save more, that extra setup is well worth it.

How We Approach It

At Launch Wealth, we start with the numbers. We look at your business income, your household's goals, and the accounts you already have, then calculate what you could be contributing under each option. From there, we help you decide how much to put in as the employee and as the employer, whether pre-tax or Roth makes more sense this year, and how it all fits with the rest of your tax picture. Then we revisit it every year as your income changes.

A backdoor Roth IRA is one of many strategies we use to help people keep more of what they’ve worked hard to build. If you’d like to see the kinds of people we work with and how we help them, take a look at Who We Serve. Wondering whether a backdoor Roth IRA makes sense with the accounts you already have? Schedule a call with us and we’ll walk through it together.

Disclaimer

This article is for educational purposes only and is not personalized investment, tax, or legal advice. Examples are hypothetical, and figures are based on current law, which may change. Investing involves risk, including possible loss of principal. Launch Wealth LLC is a registered investment adviser. Registration does not imply a certain level of skill or training. View our full disclaimers here.