A growing number of freelancers and sole proprietors are turning to solo 401(k)s to cut their tax bills and save more for retirement, a shift highlighted on The Big Money Show this week. The discussion comes as self-employment rises across the United States and independent workers seek flexible ways to manage uneven income and higher quarterly tax payments.
Hosts and guests on the program pointed to a clear motive: higher contribution ceilings than many other plans and the chance to make both employee and employer contributions within a single business. For many, that can translate into tens of thousands in additional pre-tax savings each year.
“The surge in popularity of solo 401(k)s comes as freelancers and self-employed Americans look to shelter more income from taxes.”
Why solo 401(k)s are drawing interest
Solo 401(k)s, also called individual 401(k)s, are designed for businesses with no full-time employees other than the owner and a spouse. The plan lets the owner wear two hats. As the “employee,” they can defer salary like a traditional workplace 401(k). As the “employer,” they can add a profit-sharing contribution.
For 2024, the employee deferral limit is $23,000, with an extra $7,500 available as a catch-up for those 50 and older. Total contributions—including profit sharing—can reach as high as $69,000, or $76,500 with catch-up. Those figures often exceed what a SEP IRA can produce at lower income levels because the employee deferral is not tied to a percentage of net earnings.
The plan can be set up with traditional (pre-tax) and Roth features, giving owners flexibility to manage their current tax bill and future taxable income in retirement.
The tax and cash-flow calculus
Analysts on the program said tax planning is a main driver. Pre-tax contributions reduce adjusted gross income, which can lower quarterly estimated taxes and chip away at the 15.3% self-employment tax’s income base. For those in higher brackets, the near-term savings can be substantial.
Still, cash flow matters. Independent workers face uneven revenue and must balance contributions with expenses and reserves. Financial planners often recommend mapping expected net income before year-end and adjusting contributions late in the year to avoid shortfalls.
Deadlines, paperwork, and common pitfalls
While powerful, solo 401(k)s come with rules. Plans generally must be established by December 31 to allow employee deferrals for that tax year, even if contributions are made later. Profit-sharing contributions can often be made up to the tax-filing deadline, including extensions.
Owners with more than $250,000 in plan assets must file Form 5500-EZ annually. Missing that filing can trigger penalties. Adding a non-spouse full-time employee typically disqualifies the plan and may require a move to a different retirement arrangement.
- Eligibility: No full-time employees other than the owner and spouse.
- Key dates: Establish by year-end for deferrals; fund by filing deadlines.
- Compliance: Form 5500-EZ required once assets exceed $250,000.
How solo 401(k)s compare to SEP IRAs and SIMPLE IRAs
For many sole proprietors, the main alternatives are SEP IRAs and SIMPLE IRAs. SEP IRAs are easy to open and fund but lack employee deferrals and Roth options. At modest income levels, the absence of an employee deferral can cap contributions well below what a solo 401(k) allows.
SIMPLE IRAs permit salary deferrals but have lower limits and different match rules. They can work for very small firms with a few employees, but they do not match the higher ceilings and design flexibility of solo 401(k)s for a true one-person business.
What experts say to watch next
The show’s panel suggested three forces that could keep interest high: higher interest rates that make tax deferral more valuable, more Americans choosing contract work, and greater awareness of Roth options that hedge future tax risk.
- Income volatility: Plans that allow late-year fine-tuning may gain favor.
- Roth demand: Tax diversification is top of mind for many savers.
- Regulatory shifts: Any change to contribution limits or filing rules could reshape choices.
For freelancers and solo owners, the message is straightforward. The solo 401(k) can be a strong tool to reduce current taxes and build retirement savings faster, but it requires attention to eligibility, deadlines, and filings. Many advisors recommend comparing a solo 401(k) with a SEP IRA using projected net income before year-end, then setting contributions that fit cash flow and tax goals. As more Americans work for themselves, interest in these plans is likely to grow alongside the need for clear guidance and careful planning.
