If you’re self-employed or freelancing and still using a regular IRA for retirement savings, you’re leaving massive money on the table.

Regular IRA limit: $7,000/year ($8,000 if 50+)
Solo 401k limit: $69,000/year ($76,500 if 50+)

That’s not a typo. You can contribute nearly 10 times more to a Solo 401k than a traditional IRA.

And yet, most freelancers, consultants, and side hustlers have no idea this exists.

Here’s how Solo 401ks work, how to set one up in about 30 minutes, and how to max out your contributions even if you’re only making $50-100K from self-employment.

What Is a Solo 401k? (And Why It’s Better Than SEP IRAs)

A Solo 401k is a retirement plan designed for self-employed people with no employees (other than a spouse).

It works like a regular 401k, except you’re both the employer AND the employee. This means you get to make contributions from both sides.

Why it beats other self-employed retirement options:

Solo 401k wins on:

• Roth option (SEP IRAs don’t offer this)
• Loan provision (you can borrow from it)
• Contribution flexibility (employee + employer contributions)

Who Can Open a Solo 401k?

You’re eligible if:

• You have self-employment income (freelancing, consulting, side business)
• You have NO full-time employees (other than your spouse)
• You operate as: sole proprietor, LLC, S-corp, C-corp, or partnership

You’re NOT eligible if:

• You have full-time W-2 employees (then you need a regular 401k)
• You only have W-2 income with no self-employment
• Your “business” is just investment income (doesn’t count)

Examples of who can use Solo 401ks:

• Freelance software developer with 1099 income
• Consultant with LLC or sole proprietorship
• Side business owner (Etsy shop, coaching, writing)
• Real estate agent (commission-based income)
• Physician with private practice
• Uber driver (though most won’t make enough to max it out)

Important: If you have a W-2 job AND self-employment income, you can still open a Solo 401k. But your contribution limits are combined across both accounts (more on this later).

The Two Types of Contributions (This Is Where It Gets Good)

Here’s the magic: As a self-employed person, you’re BOTH the employee and employer. So you get to contribute from both sides.

Contribution #1: Employee Deferral (Up to $23,500)

This is money you defer from your self-employment income.

• Limit: $23,500 in 2026 ($31,000 if you’re 50+, includes $7,500 catch-up)
• Tax treatment: Can be traditional (pre-tax) or Roth (after-tax)
• Based on: Nothing—you can contribute up to the limit regardless of income

Example:

You earn $100,000 from freelance consulting. You can defer $23,500 as the “employee” contribution.

This works exactly like a regular 401k employee contribution.

Contribution #2: Employer Profit-Sharing (Up to $45,500)

This is money you contribute as the “employer” (yourself) based on business profits.

• Limit: Up to 25% of your compensation (complex calculation, but basically ~20% of net self-employment income)
• Maximum: $45,500 in 2026 (combined employee + employer can’t exceed $69,000)
• Tax treatment: Always pre-tax (no Roth option for employer contributions)

Example:

You earn $100,000 from freelancing.

• Self-employment tax reduces this to ~$92,350 in net earnings
• Employer contribution: 20% of $92,350 = $18,470

Total you can contribute:

• Employee deferral: $23,500
• Employer profit-sharing: $18,470
• Total: $41,970 tax-deferred

The $69,000 Limit (How to Actually Max It Out)

To hit the full $69,000 limit, you need to earn about $280,000+ in self-employment income.

Here’s why:

The IRS limits employer profit-sharing contributions to 25% of your W-2 compensation OR 20% of your net self-employment earnings (after deducting half of self-employment tax).

The math:

$69,000 total limit

• $23,500 employee contribution
  = $45,500 needed from employer contribution

To contribute $45,500 as profit-sharing, you need:
$45,500 ÷ 0.20 = $227,500 in net self-employment income

After adding back self-employment tax, that’s roughly $280,000 in gross self-employment income.

Translation: Most freelancers won’t max out the full $69,000. But even contributing $30-50K is way better than the $7,000 IRA limit.

How to Calculate Your Exact Contribution Limit

Use this formula:

Step 1: Calculate net self-employment income

• Gross self-employment income: $______
• Minus: Business expenses
• Minus: Half of self-employment tax (7.65% of net income)
• = Net self-employment income

Step 2: Calculate maximum employer contribution

• Net self-employment income × 20% = Max employer contribution

Step 3: Calculate total contribution

• Employee deferral: Up to $23,500
• Plus: Employer contribution from Step 2
• = Total Solo 401k contribution (max $69,000)

Example:

Gross income: $100,000
Business expenses: $10,000
Net income: $90,000
Half of SE tax: ~$6,885
Net self-employment income: $83,115

Max employer contribution: $83,115 × 20% = $16,623
Employee deferral: $23,500
Total contribution: $40,123

Solo 401k vs SEP IRA (Which Is Better?)

SEP IRA is simpler but worse in almost every way:

SEP IRA only makes sense if:

• You might hire employees soon (easier to convert to a regular SEP)
• You’re extremely low-maintenance and want zero paperwork

Solo 401k makes sense if:

• You want Roth contributions
• You want to borrow from your retirement account
• You want catch-up contributions after 50
• You want maximum flexibility

For 95% of self-employed people, Solo 401k is the better choice.

How to Set Up a Solo 401k (Step-by-Step)

Total time: 30-45 minutes
Cost: $0-50 (depending on provider)

Step 1: Choose a Provider

Top 3 providers for Solo 401ks:

1. Fidelity

• Fees: $0 annual fee, $0 per trade
• Investment options: Stocks, bonds, ETFs, mutual funds
• Roth option: Yes
• Loan option: Yes
• Best for: Most people (best all-around)

2. Vanguard

• Fees: $20/year per fund (waived if you have $50K+ with Vanguard)
• Investment options: Vanguard funds only
• Roth option: Yes
• Loan option: Yes
• Best for: Vanguard loyalists, index fund investors

3. E*TRADE

• Fees: $0 annual fee
• Investment options: Stocks, bonds, options, futures
• Roth option: Yes
• Loan option: Yes
• Best for: Active traders

My recommendation: Fidelity

• Zero fees
• Best platform
• Widest investment options
• Easy setup

Step 2: Gather Required Information

You’ll need:

• Social Security number or EIN (if you have an LLC)
• Business name and structure (sole prop, LLC, S-corp)
• Estimated annual self-employment income
• Banking information (to fund the account)

Do you need an EIN?

• Sole proprietors: Can use SSN
• LLCs, S-corps, C-corps: Need EIN (get one free at IRS.gov, takes 5 minutes)

Step 3: Open the Account Online

At Fidelity:

1. Go to Fidelity.com → Self-Employed 401k
2. Click “Open an account”
3. Select “Solo 401k” (also called “Individual 401k”)
4. Complete application (15 minutes):
   • Personal info
   • Business info
   • Beneficiaries
5. Sign electronically

Approval: Instant for most applicants

Step 4: Adopt the Plan Document

Fidelity automatically generates a plan document. You’ll need to:

1. Download it
2. Review it
3. Keep it in your records (you don’t file it with the IRS)

This is your official Solo 401k “plan” required by IRS rules.

Step 5: Fund the Account

Two ways to contribute:

Option 1: Bank transfer (ACH)

• Link your business checking account
• Transfer funds (takes 2-3 business days)

Option 2: Rollover from existing retirement accounts

• Roll over old 401ks or Traditional IRAs
• Tax-free if done as a direct rollover

Step 6: Make Your First Contribution

Employee deferral:

• Decide: Traditional (pre-tax) or Roth (after-tax)
• Enter contribution amount (up to $23,500)
• Funds come from business income

Employer profit-sharing:

• Must be traditional (pre-tax)
• Calculate based on your net self-employment income
• You can contribute throughout the year or as a lump sum

Deadlines:

• Employee deferrals: By December 31, 2026
• Employer contributions: By your tax filing deadline (April 15, 2027, or October 15 with extension)

Pro tip: You can make employer contributions AFTER the year ends, as long as it’s before your tax filing deadline. This gives you flexibility to see your final income numbers.

Contribution Strategies (How to Optimize)

Strategy 1: Max Employee Deferral Early

Contribute the full $23,500 employee deferral early in the year. This:

• Reduces taxable income immediately
• Gets money invested sooner (more time to grow)
• Simplifies year-end planning

How: Set up automatic monthly transfers of $1,958/month from business checking.

Strategy 2: Calculate Employer Contribution in December

Wait until December to see your actual self-employment income for the year. Then:

1. Calculate your max employer contribution
2. Make a lump-sum deposit before April 15
3. Take the deduction on your tax return

This prevents over-contributing (IRS penalties if you exceed limits).

Strategy 3: Use Roth for Employee Deferrals if You’re Young

If you’re under 40 and in a moderate tax bracket (22-24%):

• Make employee deferrals Roth (after-tax)
• Make employer contributions traditional (no Roth option)

Result:

• Roth grows tax-free (huge benefit over 30+ years)
• Employer contributions still give you tax deduction
• You get both tax treatments, just like the backdoor Roth strategy

Strategy 4: If You Have a W-2 Job AND Self-Employment

Important: Your employee deferrals are combined across ALL 401k accounts.

Example:

• W-2 job: You contribute $15,000 to employer 401k
• Self-employment: Solo 401k employee deferral limit is $23,500 – $15,000 = $8,500

But: Employer profit-sharing contributions are separate. You can still contribute 20% of self-employment income as employer contributions to your Solo 401k.

This is how people contribute $40-50K total:

• $23,500 to W-2 employer 401k (employee)
• $20,000 to Solo 401k (employer profit-sharing from side business)

What You Can Invest In (And What You Can’t)

Solo 401k investment options:

Allowed:

• Stocks
• Bonds
• Mutual funds
• ETFs
• Index funds
• CDs
• Real estate (with special Solo 401k providers)
• Private equity (with special providers)

Not allowed:

• Life insurance
• Collectibles (art, coins, antiques)
• S-corporation stock if you own >50%

Most people should stick to:

• Low-cost index funds (VTI, VOO, VXUS)
• Target-date funds (if you want hands-off)
• Bond funds (if you’re conservative)

Your Solo 401k is a retirement account, not a trading account. Keep it simple.

Loans from Your Solo 401k (A Unique Feature)

Unlike IRAs, you can borrow from your Solo 401k.

Rules:

• Max loan: $50,000 or 50% of account value (whichever is less)
• Repayment period: 5 years (or 15 years for home purchase)
• Interest rate: Prime + 1-2% (you pay interest to yourself)

Example:

You have $100,000 in your Solo 401k. You can borrow $50,000, repay it over 5 years, and the interest goes back into your account.

When this makes sense:

• Emergency cash need (instead of withdrawing and paying penalties)
• Down payment on rental property
• Short-term business investment

When this is a bad idea:

• You’re not disciplined about repayment
• You’re young and missing out on investment growth

Most people should never touch their Solo 401k. But having the option is nice.

Annual Reporting Requirements (Form 5500-EZ)

If your Solo 401k balance exceeds $250,000, you must file Form 5500-EZ annually.

What it is:

• One-page form reporting account balance
• Due by July 31 each year
• Can file electronically (EFAST2 system)

Below $250,000: No filing required.

Cost to file: $0 if you do it yourself, $100-300 if you pay someone.

This is the only “extra paperwork” with Solo 401ks. It’s not complicated.

Solo 401k vs Regular IRA + Mega Backdoor Roth

If you’re maxing everything out:

Solo 401k:

• $23,500 employee deferral
• $20,000 employer contribution (assuming $100K income)
• = $43,500 total

Plus regular backdoor Roth IRA:

• Backdoor Roth: $7,000

Plus HSA:

• $4,300 if you have a high-deductible health plan

Total tax-advantaged savings: $54,800/year

If you also have a W-2 job with a 401k that allows mega backdoor Roth contributions:

• Add another $46,000

Grand total: $100,800/year in tax-advantaged accounts

This is how high earners with side businesses save six figures annually in retirement accounts.

Tax Deductions (How Much You Actually Save)

Solo 401k contributions reduce your taxable income.

Example:

Gross self-employment income: $100,000
Solo 401k contributions: $40,000
Other business deductions (home office, etc.): $10,000

Taxable income: $100,000 – $40,000 – $10,000 = $50,000

Tax savings:

• Federal (24% bracket): $9,600
• Self-employment tax: ~$6,000
• State (assume 5%): $2,000
• Total saved: $17,600

Your $40,000 contribution only “cost” you $22,400 in cash flow after tax savings.

Common Mistakes to Avoid

Mistake 1: Over-Contributing

Problem: You contribute $50,000, but you only earned $80,000. Your max was $40,000.

Consequence:

• 10% excise tax on excess contributions
• Taxes on earnings from excess contributions
• Headache to fix

Solution: Calculate carefully in December before making employer contributions.

Mistake 2: Not Opening the Account Early Enough

Problem: You wait until March 2027 to open a Solo 401k for 2026 contributions.

Consequence: You missed the December 31 deadline for employee deferrals.

Solution: Open the account by October/November to allow time for setup and contributions.

Mistake 3: Hiring an Employee and Not Updating the Plan

Problem: You hire a full-time employee but keep using your Solo 401k.

Consequence: Your plan is no longer compliant (Solo 401ks are for businesses with NO employees).

Solution: Convert to a regular 401k plan (requires working with a provider and offering to employees).

When to Switch from Solo 401k to Regular 401k

Once you hire your first full-time employee (other than your spouse), you can no longer use a Solo 401k.

Your options:

1. Convert to a regular 401k (offer it to employees)
2. Switch to a SEP IRA (simpler, but less flexible)
3. Close the Solo 401k and roll it to an IRA

Most small businesses switch to SEP IRAs because they’re simpler to administer with employees.

The One-Minute Action Plan

If you’re self-employed and not using a Solo 401k:

1. Go to Fidelity.com → Self-Employed 401k
2. Open an account (15 minutes)
3. Make an employee deferral (up to $23,500 for 2026)
4. Calculate employer contribution in December
5. Contribute before April 15, 2027

You’ll save thousands in taxes and build serious retirement wealth.

The Bottom Line

Solo 401ks are the most underutilized retirement tool for self-employed people.

Most freelancers and consultants stick with IRAs ($7,000 limit) when they could be contributing $40-70,000 to a Solo 401k.

The setup takes 30 minutes. The tax savings are huge. The investment growth is compounding.

If you have ANY self-employment income—even from freelancing on the side—open a Solo 401k this week.

Your future self will thank you.