A one-participant 401(k) or solo 401(k) is an attractive retirement savings option for self-employed workers or business owners. While they’re similar to the standard 401(k) plans often offered at larger workplaces, one-participant 401(k)s allow solo business owners to exceed the contribution limits that other plans are subject to. Consider speaking with a financial advisor if you need help saving and planning for retirement.
What Is a One-Participant 401(k)?
A one-participant 401(k) is a retirement plan specifically tailored for sole proprietors, freelancers and small business owners with no employees besides their spouse.
Also known as an individual 401(k), these plans combine features of a traditional 401(k) with a profit-sharing plan, allowing you to contribute both as an employee and employer. As a result, a business owner with a one-participant 401(k) can potentially save well beyond the normal 401(k) contribution limit of $22,500 in 2023 and $23,000 in 2024.
One-Participant 401(k) Contribution Limits
The IRS permits one-participant 401(k) owners to save up to $66,000 in 2023 or $73,500 if they’re 50 or older. These totals comprise both the employee and employer contributions, the latter of which can equal up to 25% of their compensation from the business.
For the tax year 2023, the employee contribution limit for a one-participant 401(k) plan mirrors that of a standard 401(k) and similar plans: $22,500. If you’re 50 or older, you can add catch-up contributions of up to $7,500. Employee contributions can be made on either a pre-tax or Roth basis.
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For example, Mary works as a personal trainer through an S Corporation that she operates, earning approximately $115,000 per year. She has a one-participant 401(k) and makes the maximum allowable contribution as an employee in 2023 – $22,500.
But one-participant 401(k) owners can also contribute up to 25% of their compensation as an employer. For Mary, this means she can make an additional contribution of $28,750 to her 401(k) if she wants. As a result, Mary is eligible to make a combined contribution of up to $51,250 to her one-participant 401(k).
Setting Up a One-Participant 401(k)
Setting up a one-participant 401(k) starts with eligibility. Again, you must be self-employed or a business owner with no full-time employees other than yourself and a spouse.
From there, you’ll need to select a financial institution that offers one-participant 401(k) plans. Banks, brokerage firms and mutual fund companies are common providers. Compare fees, investment options and features before making a decision.