Today’s article is by Paul Kim of Carry Money, explaining the advantages of a solo 401(k), annual contribution limits, and how the plan works. Because many readers are self-employed, this topic is especially relevant—saving for retirement matters. Enjoy Paul’s insights below.
A solo 401(k) is one of the most effective retirement and wealth-building vehicles for self-employed individuals. It offers the highest contribution limits of any retirement plan, tax-advantaged compounding, broad investment options across asset classes, and other powerful features.
I’ve worked for myself for most of my professional life—about nine years. In my early 20s I learned how to make money online, built blogs, studied SEO, and have since made a strong living growing content businesses.
Recently I accepted a full-time position at Carry Money. Many people asked why I would leave solopreneurship to join a company.
Two reasons:
First, Carry Money’s founder, Ankur Nagpal, previously built Teachable into a $250 million business in a short time. Working with him and the talented founding team is an incredible opportunity. After nearly a decade of working alone, I wanted to be part of a team working toward a bigger goal.
Second, Carry Money is building something I’ve wanted for a long time: a streamlined, intuitive solo 401(k) solution for self-employed people. I knew solo 401(k)s existed, but I had dismissed them before because setting up and maintaining a self-directed plan felt complex and costly. Major banks offered basic, limited plans, and other third-party providers weren’t compelling or trustworthy with retirement savings.
At Carry Money we launched a self-directed solo 401(k) with checkbook control and redesigned the signup flow and user experience to make it intuitive and accessible.
If you run a business, freelance, blog, or create content, here are several reasons to consider a solo 401(k). Even if retirement isn’t your immediate priority, the tax advantages alone can save you significant money each year.
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What is a solo 401(k)?
A solo 401(k) is a 401(k)-style retirement plan specifically for business owners and self-employed individuals. It offers higher contribution limits than other plans, access to Roth options, and the ability to invest across many asset classes with tax-advantaged compounding.
Unlike a traditional 401(k), you do not need an employer to sponsor the plan. Business owners and self-employed people can establish the account and make contributions on their own.
How do you qualify for a solo 401(k)?
Eligibility requires just two things:
- Some form of business activity or self-employment.
- No full-time W-2 employees who work over 1,000 hours per year in your business, other than your spouse.
There are no income limits—any income level can qualify. Any business entity type is eligible. However, if you employ full-time W-2 staff (over 1,000 hours/year) who are not your spouse, you do not qualify for a solo 401(k). You may still work with contractors and freelancers without affecting eligibility.
What makes a solo 401(k) special?
A solo 401(k) provides control and flexibility beyond most other retirement plans. Below are the key benefits and features to consider. Note that not all plan providers offer every feature; research providers to find the features you need.
1. Highest contribution limits
Solo 401(k)s have the highest contribution limits available. For 2022 the total contribution limit was $61,000 (or $67,500 for those 50+). For 2023 the limit increased to $66,000 (or $73,500 for those 50+).
By contrast, traditional employer-sponsored 401(k) employee deferral limits were $20,500 for 2022 and $22,500 for 2023, and IRA contribution limits were $6,000 for 2022 and $6,500 for 2023.
2. Invest in any asset class
Employer-sponsored 401(k)s usually limit you to a handful of pre-selected mutual funds. IRAs broaden the selection but typically remain limited to stocks, bonds, ETFs, and mutual funds.
A self-directed solo 401(k) can hold a wide range of assets: traditional securities plus alternative investments like real estate, private equity, cryptocurrencies, NFTs, and precious metals—if your provider supports those capabilities.
3. Tax-advantaged compounding
Like other qualified retirement plans, a solo 401(k) provides tax-advantaged compounding. Profits from sales or income generated inside the account are not subject to capital gains tax, allowing earnings to be reinvested fully inside the plan.
For example, rental income from a property owned inside a solo 401(k) is tax-advantaged, and any gain on the sale of that property remains in the account without immediate tax.
4. Roth option
Many solo 401(k) plans offer both a traditional (pre-tax) and a Roth (after-tax) account. Traditional contributions reduce taxable income today and are taxed upon withdrawal in retirement. Roth contributions are made with after-tax dollars and grow tax-free, so qualified withdrawals in retirement are tax-free.
Example: If you earn $80,000 and contribute $20,000 to a traditional solo 401(k), your taxable income is $60,000 that year. If you contribute $20,000 to a Roth solo 401(k), your taxable income remains $80,000, but future qualified withdrawals are tax-free.
5. Mega backdoor Roth
Some solo 401(k) plans support the “mega backdoor Roth,” enabling you to convert much larger sums into Roth status than the standard employee Roth deferral limit. In 2023, while the direct Roth employee deferral limit was $22,500 ($30,000 for those 50+), the mega backdoor Roth can allow you to convert up to the overall plan contribution limit—$66,000 ($73,500 for 50+)—into Roth dollars when implemented correctly.
6. Largest possible tax deduction
Because you contribute as both employee and employer, you can mix pre-tax and Roth contributions or maximize pre-tax contributions to reduce taxable income. If you allocate everything to a traditional solo 401(k) in 2023, you could potentially deduct up to $66,000 ($73,500 if age 50+), subject to the plan’s contribution rules and how your business is structured.
7. Rollovers
You may roll over assets from other retirement accounts (except Roth IRAs in some cases) into a solo 401(k) tax-free. Rollovers do not count against annual contribution limits. For example, rolling $50,000 from a traditional IRA into a solo 401(k) does not reduce your annual contribution allowance.
Solo 401(k) contributions explained
As the business owner you can contribute both as the employee and the employer. Each side has specific rules.
Employee contributions: You can defer up to 100% of your compensation up to the employee deferral limit—$22,500 for 2023. Those 50 and older receive an additional catch-up contribution of $7,500, increasing the employee limit to $30,000.
Employer contributions: Employers may contribute up to 25% of compensation for incorporated businesses (and up to 20% for unincorporated businesses, based on how compensation is calculated).
The combined employer and employee contributions cannot exceed the annual cap—$66,000 for 2023 ($73,500 for those 50+). Employee deferrals may be designated as pre-tax or Roth; employer contributions must be pre-tax.
How do withdrawals work with a solo 401(k)?
Withdrawals generally follow standard retirement-plan rules. You can take distributions penalty-free after age 59½. Distributions taken earlier are usually subject to a 10% early-withdrawal penalty plus income tax on the withdrawn amount, unless an exception applies.
Example: An early $10,000 distribution could incur a $1,000 penalty plus income taxes on the $10,000.
Traditional vs Roth withdrawals
After age 59½, distributions from traditional solo 401(k) accounts are taxed as ordinary income. Qualified distributions from Roth solo 401(k) accounts are tax-free because taxes were paid on contributions earlier.
Solo 401(k) vs other retirement plans
Below are comparisons between a solo 401(k) and several common retirement plans to help you evaluate which suits your needs.
Solo 401(k) vs SEP IRA
The SEP IRA is the closest alternative. Both target business owners and share similar overall contribution capacities, but they differ in important ways:
- Roth option: Solo 401(k)s can include a Roth option; SEP IRAs are pre-tax only.
- Catch-up contributions: Solo 401(k)s offer catch-up contributions for those 50+, while SEP IRAs do not.
- Investment choices: Solo 401(k)s can support alternative assets when self-directed; SEP IRAs are normally limited to traditional investments.
- Employees: SEP IRAs allow full-time employees and require employer contributions to be made proportionally for all eligible employees, while solo 401(k)s are only for businesses without full-time W-2 employees aside from a spouse.
Solo 401(k) vs 401(k)
An employer-sponsored 401(k) requires an employer plan; participation depends on your employer offering it. Solo 401(k)s are for individual business owners and do not require an employer sponsor. Key differences:
- Investment options: Employer 401(k)s usually limit you to a set menu of funds; solo 401(k)s give wider investment choice, including alternatives if supported.
- Contribution limits: Employee deferrals to a regular 401(k) are limited to $22,500 for 2023 ($30,000 for 50+). Solo 401(k)s combine employee and employer contributions, increasing potential contributions to $66,000 ($73,500 for 50+).
- Rollovers: Employer plans may restrict rollovers while employed; solo 401(k)s often allow flexible rollovers and transfers.
- Roth option: Employer 401(k)s may or may not offer a Roth component depending on the employer. With a solo 401(k) you choose a provider that includes the Roth feature if desired.
Solo 401(k) vs IRA
The main difference is eligibility: solo 401(k)s are for business owners; IRAs are available to anyone with earned income. Other contrasts:
- Contribution limits: Solo 401(k) limits are far higher—$66,000 for 2023 ($73,500 for 50+)—while IRAs are limited to $6,500 for 2023 ($7,500 for 50+).
- Investment options: Standard IRAs are limited to traditional assets, though self-directed IRAs exist. Solo 401(k)s can offer alternative investments plus the potential for checkbook control, which simplifies direct investing in alternatives.
- Income limits: IRAs and Roth IRAs have income-based limitations for tax-deductible contributions or direct Roth eligibility, while solo 401(k)s generally do not impose such income caps.
How does checkbook control work?
Carry Money launched its solo 401(k) product with checkbook control—a feature many people haven’t encountered. Checkbook control gives you direct transactional control of the solo 401(k) trust’s bank and brokerage accounts, allowing you to write checks or wire funds straight from the account when making investments.
How it works
When you establish a solo 401(k) with checkbook control you receive a trust-owned bank and brokerage account. As trustee, you manage those accounts and can invest directly. For example, to buy cryptocurrency you open an exchange account with the trust as owner and fund it from the solo 401(k) bank account. To invest in a startup or real estate, you write a check from the trust’s bank account.
Other self-directed providers may create plan documents but require you to arrange third-party bank or brokerage accounts that accept the documents. Carry Money integrates brokerage accounts automatically during signup and allows you to fund and manage investments through the dashboard, wire funds, or write checks directly.
Checkbook control removes the need to route every transaction through a plan custodian and empowers faster, more flexible investing in alternative assets.
Conclusion
A solo 401(k) is a highly flexible and powerful retirement vehicle for business owners and self-employed individuals. It provides very high contribution limits, a path to a large Roth account via strategies like the mega backdoor Roth, tax-advantaged compounding, and the ability to invest across many asset classes.
To qualify you need any form of self-employment or business activity and no full-time W-2 employees working over 1,000 hours per year other than your spouse. All business entity types can establish a plan.
Despite its benefits, the solo 401(k) is less well-known than traditional 401(k)s and IRAs because historically the setup process was cumbersome and paperwork-heavy. Carry Money has redesigned that process to make signup fast and straightforward.
Thanks for reading. If you have questions about solo 401(k)s or want help with the application process, I’m happy to answer questions and provide guidance.
Author bio: Paul Kim is a finance enthusiast and blogger. Before joining Carry Money to focus on content and education, he grew two finance media brands to over a million annual readers. In his free time he listens to money podcasts while hiking with his dog, Elliot.
Are you saving for retirement? What questions do you have about solo 401(k)s?