Beyond Small Business Owner Retirement Savings

A Roth solo 401(k) can make up for the loss of your access to an employer-sponsored retirement plan. Planning for retirement is crucial, especially for self-employed individuals or those without access to employer-sponsored retirement plans. One effective option to consider is the Solo 401(k), also known as an Individual 401(k) or Self-Employed 401(k). This plan offers significant tax advantages and flexibility, making it an excellent choice for business owners without full-time employees.

What is a Roth Solo 401(k)?

A Roth Solo 401(k) is a retirement savings plan designed specifically for self-employed individuals or business owners with no full-time employees, except for a spouse. It allows for both employee and employer contributions, enabling higher savings potential. The Roth 401(k) plan allows for traditional (pre-tax) or Roth (post-tax) account, depending on your tax strategy.​

Comparing Solo 401(k) to Other Retirement Plans

Note: Contribution limits are subject to annual adjustments by the IRS.​ Traditional IRA deductibility if covered by workplace plan.

As the Roth Solo 401(k) and SEP don’t income phaseouts they become ideal for high income earners. The employee contribution does not have the 25% of income restriction that the SEP plan has. Instead, it is restricted in that you need enough income to pay payroll taxes. This gives a major boost to those fifty plus that can take advantage of the generous catch-up contribution.

You can rollover your former employer’s 401(k) or prior year IRA and Roth IRA contributions into your own plan. This not only maintains the ERISA creditor protection but also quickly provides the ability to take out a plan loan if circumstances dictate that as a wise decision. For example, as a consultant your cash flows may be uneven. You may use a loan to bridge yourself to your next payment where you can also pay off the plan loan.

Roth Solo 401(k) Eligibility and Setup

To qualify for a Roth Solo 401(k), you must have self-employment activity and no full-time employees other than your spouse. Setting up a Roth Solo 401(k) involves selecting a financial institution to act as the plan’s custodian and completing the necessary plan documents. Many brokerage firms offer Roth Solo 401(k) plans with various investment options, so it’s essential to choose one that aligns with your investment strategy.​

Roth Solo 401(k) Contribution Limits for 2025

For the year 2025, the contribution limits for Roth Solo 401(k) plans have been updated:​

• Employee Contributions: You can contribute up to $23,500 or 100% of your compensation, whichever is less. If you’re aged 50 or older, you can make an additional catch-up contribution of $7,500, bringing the total to $31,000. ​If you’re age 60 to 63 that catch up increases to $11,250.
• Employer Contributions: As you the employer, you can contribute up to 25% of your eligible compensation. However, the total combined contribution (employee plus employer) cannot exceed $70,000 for 2025. ​guideline.com

It is important to note that these limits apply per individual. If your spouse earns income from your business, they can also contribute to the Roth Solo 401(k). It is important to understand that the limit on employee contributions goes across all employer sponsored plans. In that case, if you or your spouse made a $10,000 contribution at another employer, they would be limited to only $13,500 in your Roth Solo 401(k) plan ($21,000 over age 50, 60 to 63, $24,5000. That said, the employer combination employer guideline allows for the employer contribution to max to $70,000 not including the catch-up contributions.

Roth Solo 401(k) vs. Traditional Solo 401(k)

One of the main advantages of the Roth Solo 401(k) is the option to choose between traditional or Roth contributions.

• Traditional Solo 401(k): Contributions are made with pre-tax dollars, which means you get a tax break in the year you contribute. However, your withdrawals in retirement will be taxed as ordinary income.
• Roth Solo 401(k): Contributions are made with after-tax dollars, meaning you won’t get a tax deduction upfront. However, your withdrawals in retirement are tax-free, which can be highly beneficial if you expect to be in a higher tax bracket during retirement. Every custodian doesn’t offer this type of plan. It may be necessary for you to hire a third-party administrator to help create and administer one for you. Larger employer plans do the same. If you need to reach the higher employer limits of the 401(k) plan compared to other plan types, it is well worth it.

You can mix and match contributions between Roth and traditional in the same year. This allows for a flexible tax strategy, depending on your current and anticipated future tax situation. This article shows how you may be able to qualify for a Roth IRA in addition to your Roth Solo 401(k) contributions.

Advantages of a Roth Solo 401(k)

1. High Contribution Limits: The Roth Solo 401(k) offers some of the highest contribution limits of any retirement plan available to self-employed individuals. With the ability to contribute up to $73,500 in 2025, this plan allows you to quickly grow your retirement savings.
2. Tax Flexibility: You can choose whether to make traditional or Roth contributions based on your current tax situation and future expectations. This allows you to tailor your retirement strategy to your financial goals.
3. Catch-Up Contributions: If you’re 50 or older, you can make additional catch-up contributions, which can significantly boost your savings.
4. Spouse Participation: If your spouse works for your business, they can contribute to the Roth Solo 401(k) as well, potentially doubling your retirement savings.
5. Loan Provisions: If you ever need access to cash, the Roth Solo 401(k) allows you to borrow from your account. You can take a loan of up to $50,000 or 50% of your account balance, whichever is less. While this should be a last resort, it’s a benefit not offered by all retirement plans.
6. Investment Flexibility: With a Solo 401(k), you’re able to choose from a wide range of investment options, giving you more control over your retirement funds. Unlike some employer-sponsored plans, you’re not limited to a small set of investment choices. Custodian such as Charles Schwab offer a wide range of options. If you choose to do this on your own, you may have shop around and explore the extent of the investment options available on their brokerage platform.

How the Roth Solo 401(k) Can Help You Maximize Your Savings

Suppose you’re a self-employed doctor under the age of 50 with an income of $400,000 in 2025. You can contribute up to $23,000 to your Solo Roth 401(k) as an employee. You may be eligible to save an additional 47,000 on top of that number in employer contributions. I recommend working with a CPA and or a third party administrator familiar with all of the rules regarding qualifying income. This means you could potentially save $70,000 in in your own Roth Solo 401(k) for the year.

Let’s examine a different situation. You’re 60 years old and you’re and you have an employer that offers a 5% match on a salary of $120,000. You can save 3% in that employer’s plan in order to qualify for their $6,000 in savings. That $6,000 gets subtracted from your $34,250 employer savings plus catch-up. You make $50,000 in you’re the business where you have your solo Roth 401(k). You can still contribute the remaining $28,250 in Roth or traditional contributions. That amount is not subject to the 25% of earnings test for employer contributions.

Final Thoughts on the Roth Solo 401(k)

While the Roth Solo 401(k) offers many benefits, it’s not for everyone. There are a few key considerations to keep in mind:

• Administrative Responsibilities: Roth Solo 401(k) plans require some administration, including filing annual reports if your plan has more than $250,000 in assets. Make sure you’re prepared to handle these responsibilities or hire a professional to assist you.
• Eligibility: If you hire full-time employees in the future, you will no longer be eligible for a Roth Solo 401(k). However, you can explore other retirement plan options, such as a SEP IRA or a traditional 401(k).

The Roth Solo 401(k) is an excellent retirement planning tool for self-employed business owners. With high contribution limits, the ability to choose between Roth and traditional savings, and the option for a loan if needed, it offers numerous advantages. For those looking to build substantial retirement savings, this plan is definitely worth considering.

To learn more about optimizing your retirement savings, check out my previous Forbes article on Smart Ways to Maximize Your Retirement Savings here.
For more details on the Roth Solo 401(k), visit the IRS website here. If you’re ready to set up your own plan, consult with a financial advisor or tax professional to make sure you’re taking full advantage of all the opportunities it provides.

Sources:
1. IRS Solo 401(k) Contribution Limits IRS.gov
2. Roth 401(k) And Roth IRA Contribution Limits 2025 Maximize Retirement– James Brewer Forbes
3. Solo 401(k) Loan Provisions IRS.gov