If you’re a solo entrepreneur, saving for retirement might be the last thing on your mind. A Roth solo 401(k) plan can help you start saving while offering appealing tax advantages. This retirement plan allows contributions by a business owner and their spouse who is involved in the business. Plus, any business partners and their involved spouses can participate in their own Roth solo 401(k) plans. The plan is generally limited to one-person businesses, though business partners and spouses are also eligible to participate.
The Roth solo 401(k) offers a number of great benefits for those who can take advantage of it.
What is a Roth solo 401(k)?
A Roth solo 401(k) is a special kind of solo 401(k) account that allows participants to make after-tax contributions. The biggest benefit is that the contributions can grow on a tax-free basis and then be withdrawn tax-free after age 59 ½, so long as the account’s been open for at least five years. So if you use a Roth solo 401(k), you’ll never have to pay taxes again on your contributions and earnings.
A Roth solo 401(k) offers the same contribution limits as a Roth 401(k) with a normal employer. For 2024, the contribution limit is $23,000 and for 2025 it’s $23,500. Those who are age 50 and over can make a $7,500 catch-up contribution in 2024 and 2025, and those 60-63 can make a higher catch-up contribution of $11,250 in 2025. The employer can make profit-sharing contributions to the plan for participants, bringing the total maximum annual contribution to $70,000, plus the additional catch-up for older savers.
Employer contributions, however, must be made to a traditional solo 401(k) account, not the after-tax Roth portion of the account.
One key difference between the Roth solo 401(k) plan and other self-employed retirement plans is that employees can contribute all of their salary up to the annual maximum, and they’re not limited to the 25 percent cap other plans impose. For example, if you have a side gig and earn just $16,000 doing it, you could hide it all away in a Roth solo 401(k) each year. With a Roth IRA, you are limited to a yearly contribution limit of $7,000 in 2024 and 2025, a mere fraction of what you can save in a Roth solo 401(k).
It’s important to note that employee contributions across all your 401(k) accounts cannot exceed the annual cap, $23,000 in 2024 and $23,500 in 2025, for those under age 50 with an additional amount of $7,500 for workers over 50. But even if you’ve hit that limit, you could still make an employer contribution to your Roth solo 401(k), if you have profits from your side gig, up to the combined annual limit there ($69,000 in 2024 and $70,000 in 2025, for those under age 50), which also includes any matching funds from a main employer.
You’ll also need to find a plan custodian that offers a Roth solo 401(k) option. Not all of them do.
Who should consider opening a Roth solo 401(k)?
A Roth solo 401(k) can be an excellent option for a self-employed individual or an eligible spouse who wants to contribute more to a Roth account than would be allowed with a Roth IRA. Additionally, unlike a Roth IRA, the Roth solo 401(k) has no income limitations that reduce or prohibit participants from contributing.
Once a person ceases employment with the business associated with the solo 401(k) account, they can roll it over to a Roth IRA to avoid the required minimum distributions that must otherwise begin at age 72.
Whether or not contributing to the Roth option makes sense will depend on the individual’s overall situation including their tax status and the balance they have between Roth and traditional retirement accounts.
Other small business retirement plans to consider
Other small business retirement plans offer a variety of features that may fit your needs better than a Roth solo 401(k).
SEP IRA
A SEP IRA is a type of IRA plan for small businesses that allows contributions for employees as well as for the business owner. The contributions are made solely by the employer up to a limit of $69,000 (in 2024), or 25 percent of the employee’s compensation, whichever is less. In 2025, this limit will increase to the lesser of $70,000 or 25 percent of the employee’s compensation. As a practical matter, SEP IRAs can be expensive if there are numerous employees, as business owners are required to make the same percentage contribution for the employees as they do for themselves.
Unfortunately, a SEP IRA does not offer a Roth option.
SIMPLE IRA
A SIMPLE IRA is a small business retirement plan limited to companies with 100 or fewer employees. The main appeal with this option is that there’s minimal paperwork for the business owner. Employee contribution limits for a SIMPLE IRA are $16,000 in 2024 and $16,500 in 2025, plus a catch-up contribution of $3,500 for those age 50 and older. There is also a mandatory employer contribution as well, and employers are required to fully match employees’ contributions up to 3 percent of salary or make non-elective contributions of up to 2 percent of all employees’ salary.
A SIMPLE IRA can also be used by someone who is self-employed. There are restrictions on rolling a SIMPLE IRA over within the first two years that the plan was opened.
A SIMPLE IRA does not offer a Roth option.
IRAs
An option to be considered by itself or in conjunction with a small business retirement plan is an IRA. Whether or not you can contribute to a Roth IRA will depend upon your income. But as long as you have earned income, you can take advantage of an IRA, even if it is non-deductible.
Bottom line
For those who are self-employed in a one-person business, a solo 401(k) can be an excellent option. A Roth solo 401(k) offers higher contribution limits than a Roth IRA without the income limitations that accompany a Roth IRA. For those who are self-employed and want to contribute to a Roth account, a Roth solo 401(k) can be a solid option to consider.
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