Dan Boyle, CFA® | May 01, 2026

Many of our clients are happily retired and no longer work. They are enjoying the fruits of their many years of savings and compounded returns. For our clients who are still working, I recommend saving in tax-advantaged accounts if they qualify, in this order: 1) a Health Savings Account, 2) an employer's 401(k) plan and 3) individual IRAs, whether traditional or Roth.

But what about clients who work for themselves or have a side hustle that generates some income, either alongside a primary job or in retirement? There is an option for them that can maximize savings and, if they choose, minimize taxes: the Solo 401(k).

The 401(k) itself was born with the Revenue Act of 1978 that included a provision – Section 401(k) – that allowed employees to avoid taxes on deferred compensation. However, these plans were designed for large corporations with hundreds of employees. Complexity and cost for small businesses limited 401(k) use, largely relegating small firms to Savings Incentive Match Plan for Employees (SIMPLE) IRAs or Simplified Employee Pension (SEP) IRAs.

While SIMPLE and SEP IRA plans are generally free to set up and easy to administer, in most cases contribution amounts end up lower than a corporate 401(k). For a SIMPLE IRA, an employee can contribute up to $17,000. For employees over 50 an additional $4,000 catch-up contribution is allowed and for those 60-63 the catch-up is a higher $5,250. Employers also contribute to the SIMPLE IRA, but the amount is limited to either a 3% match or 2% of compensation. Total contributions are allowed only to the extent the business has net earnings (profit); if the business has a loss the employees have no "taxable compensation." SIMPLE IRA pre-tax balances are also included in calculations for a "backdoor" Roth conversion, a technique for high earners to circumvent income limits for direct contributions to a Roth IRA.

For a SEP IRA, the 2026 contribution limit is $72,000, a significant improvement over the SIMPLE IRA. It is limited to 25% of an employee's compensation or the employer's net earnings (profit) or 20% of net earnings if self employed. This restriction leaves a large group of low-income business owners or those making just a few dollars from a side hustle with a limited contribution amount. SEP IRA pre-tax balances are also included in calculations for the "backdoor" Roth conversion.

In response to the desire for low-to-middle income earners to save more aggressively with minimal cost and complexity, Congress authorized the Solo 401(k) in the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001. The Solo 401(k) allows business owners to "double dip" - act as both employee and employer with high contribution limits.

As an employee, the business owner follows the corporate 401(k) contribution limits, which in 2026 are $24,500 for those younger than 50, an additional catchup contribution of $8,000 for those 50 or older and a higher catchup contribution of $11,250 for those 60-63. As examples, a 30-year-old can contribute $24,500, a 50-year-old $32,500 and a 61-year-old $35,750. In isolation the Solo 401(k) employee contribution amount is higher than the SIMPLE IRA and usually less restrictive than the SEP IRA's 25% cap on compensation.

But employee contributions are just part of the contribution equation. As the employer, the business can make an additional profit-sharing contribution. For "C" and "S" corporations, the employer contribution is 25% of wage compensation. For sole proprietorships and single member Limited Liability Corporations (LLCs), the calculations are slightly more complicated but generally work out to about 20% of business profit. The total contribution limit of $72,000 is the same as the SEP IRA but higher by the amount of any catch-up contributions ($80,000 for those over 50 and $83,250 for those 60-63).

In addition to higher contributions at lower income levels, the Solo 401(k) has other advantages. Like its corporate cousin, business owners can take a loan of up to 50% of account balances for a maximum of $50,000. If 50% of account balances are less than $10,000, the business owner can borrow up to the account balances. Clients that have a full-time job with corporate 401(k) access and a side hustle can maximize retirement savings by coordinating employee contributions between the two plans to stay within the contribution limits while making employer contributions into the Solo 401k. Further, Solo 401(k) balances are excluded from calculations for the "backdoor" Roth conversion.

There are some disadvantages for the Solo 401(k). The plan becomes complicated to administer, just like corporate 401(k)s, once employees are added to the firm. However, a spouse is allowed. For Solo 401(k)s that exceed $250,000 in assets, IRS Form 5500-EZ is required to be filed annually and for the final year of the plan (SIMPLE and SEP IRAs have no such filing requirements). While the form isn't overly complex the failure to file can result in significant penalties - $250/day and possibly others assessed by the Department of Labor. The IRS also requires "recurring and substantial" contributions to deem the plan ongoing, typically looking for annual contributions in three of the past five years. Solo 401(k) plans must be set up by December 31st to accept contributions for that specific year with funding by the April 15th tax deadline.

If you generate business income and have no retirement plan or utilize SIMPLE or SEP IRAs, the Solo 401(k) might be an option for you. Everyone's circumstance is different, but there are creative ways to take advantage of the higher contribution limits. For example, if you have taxable assets, you can fund a Solo 401(k) Roth account and reimburse yourself from your taxable account. If you do this over many years it has the effect of moving taxable assets into tax-advantaged Roth form.

Our custodian, Charles Schwab, offers Solo 401(k) plans at no cost. I've personally set one up for my wife, so I know the ins-and-outs of how they work. If you are interested, I'd be more than happy to have a conversation with you.