What Is a Self-Employed 401(k) Plan?

Self-Employed 401(k) Plan Explained in Less Than 4 Minutes

Small business owner on phone in bakery

dowell / Getty Images

A self-employed 401(k) plan is a retirement account for small business owners who are the only employee of their business, other than a spouse. These 401(k) plans are traditional 401(k)s that sole proprietors and their spouses can set up. Business owners work for themselves, so they don't have an employer with an established pension plan, retirement fund, or plan to contribute to and take with them into retirement. A self-employed 401(k) plan can be the answer.

Learn more about these 401(k)s and how you can use one to plan for your retirement.

Key Takeaways

  • A solo 401(k) is a retirement plan for small business owners and their spouses.
  • The business owner is both the employer and employee for the purpose of contributions.
  • Contribution limits essentially double for a business owner and their spouse.
  • Continuous investing allows the money to compound quickly in any 401(k).

How a Self-Employment 401(k) Plan Works

Self-employed 401(k)s allow small business owners with no other employees to contribute to a retirement plan as both an employee and employer. The same person makes both contributions.

There are two types of contributions that can be made: elective deferrals and employer non-elective deferrals. Employees make elective deferrals and can include up to 100% of their compensation to the limit of $20,500 in 2022, increasing to $22,500 in 2023. The limits are adjusted every year or two to account for inflation and cost-of-living increases.

Employees who are age 50 or older can make catchup contributions of an additional $7,500 per year in 2023, totaling $30,000, up from $6,500 in 2022 for a total of $27,000. The employer's contributions, called non-elective deferrals, can be a maximum of 25% of compensation after deductions that are calculated using tables and worksheets provided by the Internal Revenue Service (IRS).


The contribution limits are much higher for small business owners and their spouses, making the solo 401(k) an appealing retirement plan option compared to an IRA.

The result is that business owners can contribute a total of $61,000 to their 401(k) plan in 2022, increasing to $66,000 in 2023, not including catchup contributions.

Business owners can make contributions for both themselves and for their business when the plan is set up. They can make withdrawals and pay any necessary taxes when they retire.

A business owner and their spouse can contribute employer plus employee contributions for each of them, earning interest and keeping that money protected from income taxes for decades.

An Example of Self-Employed 401(k) Savings

A husband and wife set up a limited liability company and launch a small business when they're in their mid-20s. They earn enough revenue to pay themselves $175,000 per year before taxes by the time they're 35 years old.

The couple initially places $116,000 into their 401(k). They could continue putting that amount in their plan (adjusted for cost-of-living increases) but they decide to reinvest it into their business, taking $75,000 per year for living expenses.


All 401(k)s are tax deferred until distributions are taken, which allows for extra interest-earning power.

They earn 8% annually on their money over the next 25 years and continue to invest $24,000 per year, or $2,000 per month. Their combined 401(k) accounts would have more than $2.5 million waiting to fund their retirement.

All that money would stay within the protected confines of the 401(k) account if the couple continued to work as outlined in this example. It would earn dividends, interest, capital gains, and profits without them having to pay any income taxes until they began withdrawing from the plan.

Frequently Asked Questions (FAQs)

Do I need a 401Kk) solo plan?

A solo 401(k) is an excellent way to save for retirement if you're a small business owner. If you hire employees at some time during your business's lifetime, you'll have to adjust the plan to include them equally or create criteria to define benefit-eligible employees and create retirement plans for them.

What happens if I contributed more into my 401(k) plan than the limit?

You have until April 15 of the following year to take the excess money from your plan. This date is carved in stone. It's April 15 even if Tax Day for filing your return is a day or two later in a given year to accommodate a weekend or a federal holiday. The withdrawal is included in your gross income for the year for tax purposes, but it's not subject to a tax penalty as an early distribution.

Was this page helpful?
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. IRS. "Retirement Topics - 401(k) and Profit-Sharing Plan Contribution Limits."

  2. IRS. "Publication 560 (2021), Retirement Plans for Small Business."

  3. IRS. "One-Participant 401(k) Plans."

Related Articles