Solo 401(k): The Small-Biz Retirement Lever You Need
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If you run your business solo, the Solo 401(k) is the blunt tool you want in your financial kit. It lets owner-operators shelter more income, use employee deferrals plus employer profit-sharing, and—if your plan allows—make Roth contributions and take loans. But it’s not free money. Miss the setup window or pick the wrong custodian and you pay in lost deferrals, paperwork headaches, or fees.
Why it beats the SEP for many owners
The headline: Solo 401(k) combines two levers. You get an employee deferral (what you’d call a salary deferral) and an employer contribution. That double-axis gives higher total contribution room than a SEP in most cases. SEP IRAs are simpler to open late in the year and let you shelter employer contributions, but they don’t let you make the employee-deferral piece or offer Roth options. If you want to shove maximum taxable income into retirement while keeping options, Solo 401(k) wins.
Beyond contribution math, Solo plans often let you borrow against the account — commonly up to $50,000 or 50% of the balance, whichever is less — which a SEP won’t do. Many broker custodians also let you split the employee piece into Roth and pre-tax buckets. That flexibility matters when you’re optimizing taxes across growth assets and cash needs.
The real costs and constraints
No plan is perfect. Solo 401(k)s are restrictive on timing. To get the employee deferral for a tax year you must have the plan established by the end of that year. SEP IRAs are more forgiving: you can set them up late and still make employer contributions for the prior year. If you wait until tax season to think about retirement, a Solo can bite you.
Administrative rules bite at scale. Once plan assets exceed the threshold for Form 5500 filing (commonly when assets top around $250k), you’ve got an annual filing. Add employees and the plan becomes a full-size 401(k) with all the compliance. Solo is owner-only: if you hire non-owner employees meeting eligibility rules, the simplicity disappears.
Also call out the vendors. Big brokerages love selling Solo plans because they get assets. Some custodians quietly charge transaction fees, account fees, or limit investment options unless you pay for a premium service. Read the fee schedule. Don’t let a slick sales page sell you a “free” plan while routing your trades through high-cost funds.
How to use it like a professional
1) Set it up before year end if you want employee deferrals. No excuses. 2) Pick a custodian that supports Roth deferrals and loans if you need both. 3) Track your payroll and profit-share math so you don’t overshoot IRS limits and trigger penalties. 4) If you plan to hire, understand when the plan’s status changes and what that means for non-owner employees.
Make conversions and Roth decisions deliberately. Roth deferrals cost you pre-tax savings today but buy tax-free growth later. If your business cash flow is tight, don’t saddle yourself with a Roth that forces you to reduce current contributions.
My read on this: For owner-only businesses that can afford to save aggressively, the Solo 401(k) is the superior tool. It gives higher sheltering power, loan access, and potential Roth flexibility. The tradeoffs are timing and paperwork — not deal-breakers if you plan. Ignore the setup deadline and you hand money to Uncle Sam. Pick a shoddy custodian and you hand it to Wall Street.
What to do: Decide now whether you want employee deferrals for this year. If yes, set the Solo 401(k) up before year-end. Shop custodians for low fees, Roth options, and loan availability. If you’re unsure about hiring timelines or compliance when assets grow, talk to a fee-only advisor or a trusted CPA. Protect your downside, maximize your shelter, and treat the Solo like a tool you control — not a product a salesman sells you.
