This article will ... Introduce the solo 401(k) as an option for self-employed individuals who want to maximize their opportunity to save for retirement. Explain why it offers the potential for far greater retirement and tax savings than the alternatives of traditional, Roth, SEP, and SIMPLE IRAs. Point out some of the complexities and responsibilities of having a solo 401(k).

As your own employer, you have the power to set up your own 401(k). Not only will you be able to save up to $24,500 in employee salary-deferral contributions for 2026 (possibly more if you’re at least 50). You’ll also be able to make employer contributions based on your business’s profits.

“If you have self-employment income and no employees other than a spouse, you’re exactly who a solo 401(k) was made for,” said Carlos A. Temperan, vice president of personal risk management with the private client group of Coastal Wealth, a MassMutual firm in Coral Gables, Florida.

A solo 401(k) is a retirement plan available to business owners with no employees. Broadly speaking, the only additional person the plan can cover is the business owner’s spouse.

Along with its high contribution limits, a solo 401(k)’s tax savings and tax-deferred growth potential can help you work toward financial independence. (Related: What is a 401(k) and how does it work?)

Why an IRA isn’t good enough for successful solopreneurs

If you’re self-employed, you can save money in an individual retirement account (IRA) just like anyone else with earned income. However, once your business takes off, you might wish you could save more than the IRA’s annual contribution limit, which is $7,500 in 2026 ($8,600 if you’re 50 or older).

“IRA contributions can be great for self-employed workers,” said Sean Mullaney, a financial planner for Mullaney Financial & Tax, Inc., a Certified Public Accountant, and the author of Solo 401(k): The Solopreneur’s Retirement Account. “But for those trying to build sufficient savings for retirement over the long term, only contributing to a traditional IRA or Roth IRA during their careers is likely to leave them short of having the resources desired for a financially successful retirement.”

Further, your income may be too high to make tax-deductible contributions to a traditional IRA or to directly contribute to a Roth IRA. You might still be able to contribute to a Roth through the backdoor method, but you’ll still be limited to that year’s maximum contribution.

It doesn’t matter how high your income gets when it comes to the solo 401(k). There are no income limits or phaseouts to prevent you from contributing when your business succeeds, though contributions are still limited by IRS annual caps and your earned income.

There also isn’t a lower threshold of income where it suddenly makes sense to start a solo 401(k) rather than rely on an IRA.

“I tend to think of this more in terms of time and scale rather than a single income number,” Mullaney said. “For example, for those mostly retired but doing a side hustle in semiretirement, I often prefer a traditional IRA or Roth IRA. Why complicate things for relatively modest amounts? But for those who are going to be self-employed as one’s primary job for the long run, a solo 401(k) is likely to make much more sense.”

Yes, opening and managing a solo 401(k) requires a bit more paperwork and oversight than an IRA. Don’t let these tasks intimidate you. They can be worth the effort depending on your income, contribution goals, and comfort with ongoing plan maintenance.

“If you can run your business, you can run a solo 401(k),” Temperan said.

How a solo 401(k) can help you save more

With a solo 401(k), you gain the opportunity to make large employee salary deferral contributions (called elective deferrals) just like your friends who work for big companies.

“The solo 401(k) offers great tax savings when solopreneurs are subject to high taxes,” Mullaney said. “Further, it can help build up diversified savings for retirement.”

In 2026, you can contribute up to $24,500, plus an additional $8,000 if you are 50 or older or an additional $11,250 if you are 60, 61, 62, or 63. That’s more than three times as much as you could save in an IRA. Some plans allow Roth contributions.

But wait — there’s more. As the employer, you can also make company profit-sharing contributions of up to 20 percent of your self-employment income (Schedule C net profits).¹

Between employer and employee contributions, you can contribute up to $72,000 in 2026 (plus catch-up contributions, if you’re eligible), though you’d need almost $260,000 in self-employment income to be eligible to contribute that much.

In no case can you contribute more than you earn. If your self-employment income is $15,000, your maximum contribution is $15,000.

But let’s say that your business earns $50,000. Assuming that you have another way to pay your bills, you could contribute $24,500 as an employee and almost $9,300 as an employer: a total of almost $33,800.

Solo 401(k) responsibilities: Contribution limits, investments, and information reporting

If you also work for someone else and have access to a 401(k) through that job, you’ll need to pay extra attention to your contributions.

While it’s fine to contribute to both your employer’s 401(k) and your solo 401(k), your employee contributions to both plans combined can’t exceed the annual limit. Using 2026 contribution limits, if you put $4,500 in one plan, you can’t put more than $20,000 in the other (unless you’re old enough for catch-up contributions).

You’ll also need to choose how to invest your contributions. Many people figure it out on their own, but a financial professional can help you understand and narrow your options. Unlike an employer’s plan that might, for example, limit you to a predefined menu of 15 investment funds, your solo 401(k) may give you access to thousands, depending on the plan provider.²

Eventually, your solo 401(k) plan might have enough assets that you’re required to file an annual informational return with the IRS.

“For any year the solo 401(k) has more than $250,000 in total assets at year-end, the solo 401(k) must file a Form 5500-EZ,” Mullaney said. “The solo 401(k) must also file a Form 5500-EZ if it is closed out, regardless of asset size.”

The form is relatively simple to complete, as it just requires you to report your plan’s starting and ending balances for the year as well as any contributions you made during the year and a few other things.

The penalties for failing to file Form 5500-EZ are serious, so it’s crucial to stay on top of this obligation.

Solo 401(k) alternative #1: SEP IRA

A Simplified Employee Pension (SEP) IRA is one alternative to a solo 401(k). If you have employees, it can be expensive because you have to contribute the same percentage of salary for eligible employees as you do for yourself. But you can open a SEP IRA whether you have employees or not.

While it allows you to make the same employer contribution as a solo 401(k), it does not allow you to make any employee contributions. Your overall contribution potential is much lower (especially if you’re old enough to make catch-up contributions).

Having a pretax IRA balance can complicate mega backdoor Roth contributions due to the pro rata rule.

That said, if you can’t afford large contributions, a SEP may suit your needs.

Solo 401(k) alternative #2: SIMPLE IRA or SIMPLE 401(k)

Unlike a SEP IRA, a Savings Incentive Match Plan for Employees (SIMPLE) IRA or SIMPLE 401(k) does allow employee contributions (including catch-up contributions for those 50 and older). SIMPLE plans lack the high elective deferral and profit-sharing limits available with solo 401(k)s.

The maximum employee contribution (which can be Roth or traditional) for 2026 for a company with 25 or fewer employees is $18,100. Catch-up contribution limits are $3,850 for those 50 or older, except that workers ages 60 to 63 have a higher catch-up limit of $5,250.³

“I tend to disfavor the SIMPLE IRA,” Mullaney said. “Few things are as opposite of ‘simple’ as the SIMPLE IRA.”

You won’t be able to save anywhere near those limits with a SIMPLE plan unless your income is high. Each year, employers must contribute either 2 percent of each eligible employee’s pay or match up to 3 percent of each employee’s contributions.

So, if your business is just you, you’re 35 years old, and you earn $100,000 in gross self-employment income, the most you could contribute is $18,100 as an employee and $3,000 as an employer, for a total of $21,100.

Recall from the earlier example that with $50,000 in net self-employment income, you could contribute almost $33,800 to a solo 401(k).

Choosing your small business retirement plan

Compared with the alternatives, a solo 401(k) gives you “more control, more flexibility, and often more room to build tax-advantaged wealth,” Temperan said, though suitability depends on individual circumstances.

When choosing a self-employed retirement plan and planning contributions, be proactive so you can maximize your opportunities and minimize mistakes.

“Having a professional by your side also helps to make sure the investments within the plan match the results you are looking for,” Temperan said.

Talk with a MassMutual financial professional to learn more about how this type of account might fit into your overall financial plan.

Discover more from MassMutual…

Freelance finances: The tax challenge

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Self-employed? A solo 401(k) could help you save aggressively for retirement