Solo 401(k) Plans – What You Need to Know Today

Patrick Cote |


A solo 401(k) plan is a great retirement savings vehicle for self-employed business owners with no employees, other than their spouse.  Unfortunately, most folks have never heard about this opportunity and instead are steered toward a SEP IRA.  To take full advantage of a solo 401(k) the deadline to establish a plan is December 31st.

How is a solo 401(k) different from a SEP IRA?

The IRS considers the business owner to be both an employee and an employer, increasing the maximum amount you can contribute compared to a SEP IRA.

  • As an employee, you can make contributions of up to $20,500 for 2022, or $27,000 if age 50 or older.
  • As an employer, you can make additional contributions of up to 20% of your net business earnings.
  • With a SEP, the 20% employer portion is the only contribution allowed.
  • There is an overall limit on the combined employee and employer contributions of $61,000, or $67,500 if age 50 or over.
  • Contributions are tax-deductible, add to your personal retirement savings, and grow tax-deferred until withdrawn years later in retirement.

For many business owners, a solo 401(k) allows for much higher contribution totals than a SEP because of the addition of the employee contribution as well.

For example, if you are self-employed, age 52, and have net business income of $200,000:

A solo 401(k) allows for an employee contribution of $27,000 and an employer contribution of $40,000 ($200,000 x 20%) for a total of $67,000.  With a SEP IRA, however, you are limited to only the $40,000 employer contribution. 

Solo 401(k) plans are flexible,  but they can be complex.  It is important to work with an experienced investment professional who understands how to maximize the benefits of your solo 401(k) and comply with IRS reporting requirements.  One that considers the specifics of your tax situation, the variability of your income, your goals for the future and only then aligns your investments to meet those goals. 

At AssetGrade, we draw on our years of experience to deliver customized solutions for our clients.  Call us today to understand your options.