Because I’m self-employed, I had to pick the best way to make tax-deductible contributions for my retirement. Do the same for yourself with this guide to self-employed retirement plan options.
Individual Retirement Account (IRA)
The simplest option– which anyone with earned income can use, regardless of whether you’re in business for yourself– is a Traditional or Roth IRA. The downside is that you can only contribute $6,000 per year ($7,000 if you’re 50 or older), and you must have income of less than ~$150,000 in 2021 for the Roth IRA option. There’s no income limit for deducting your contributions to a Traditional IRA.
You can only contribute if you had at least that much in net income for the year. For example, if you only made $3,000, you can only contribute $3,000.
Individual 401k (aka Solo 401k)
If you don’t have any employees besides your spouse or a partner or shareholder in the business, and if you want to contribute more than an IRA lets you, or want to get around the Roth phase-out income limit, then the Individual 401k is probably your best bet. You can contribute as both an employee*– $23,500 IRS limit for 2025– as well an employer (pre-tax only, as of writing, called ‘profit-sharing’ contributions; no employer ‘matching’ is allowed with solo 401ks) with up to 25% of your net earnings. The grand total of both your employee + employer contributions can’t be more than $58,000 for 2021.
Set up an Individual 401k for free with Fidelity. They charge few fees.
Just so you know, you will have to file Form 5500 with your taxes each year if you go this route, which will be handled no problems by your tax software or accountant.
*Note that this employee limit is aggregated across ALL jobs and 401k contributions you might make as an employee for a given tax year, so no ‘double-dipping’ allowed even if you have a day job with a 401k and a side hustle with a Solo 401k!
Maximum total contributions for any 401k
The maximum contribution to a 401k, including a solo 401k, is $70,000 in 2025. This is a combination of employee (pre-tax, Roth, or after-tax) + employer contributions. So, if you contribute $23,500 (the max pre-tax or Roth contribution) as an employee in 2025, you can contribute up to $70,000 – $23,500 = $46,500 as an employer (IF you had enough W-2 wages to be able to do that much.)
Any age 50+ ‘catch-up’ contributions can be made in addition to the above as employee contributions. Also note that any 401k (403b contribs are different, WARNING!) plan contributions made to ‘day job’ employer do NOT deduct from the overall IRS limit ($70,000 in 2025) that you can contribute, but they DO deduct dollar for dollar from what you can contribute as an employee. For example, you could contribution $23,500 in 2025 to your day job’s 401k plan and still contribute $70,000 K to your solo 401k (assuming you had enough income, so $280,000 in W-2 wages since you can contribute 25% as the employer.)
How to make Employer solo 401k contribution for S-corp
Make your S-corp solo 401k employeR contribution from your BUSINESS bank account, since it is an employer expense item (tell your accountant about it!) As long as your W-2 wages already account for any employee contributions you’ve made (and all social security taxes), then the calculation for S-corps is just 25% * your Box 5 (‘Medicare’) wages.
Timing of solo 401k contributions
These depend on your business structure, but sole props and single-participant LLCs can file employee or employer contributions by April 15th aka tax filing time.
Other biz structures must do employee contributions by Dec 31st, and employer ones by their filing due date (March 15th for S-corps, partnerships, and LLCs taxed as partnerships, April 15 for C-corps, sole props & single-owner LLCs), per this: https://www.fidelity.com/learning-center/smart-money/solo-401k-contribution-limits#:~:text=Employee%20contributions%20are%20tax%2Ddeferred,%2Dfiling%20deadline%2C%20including%20extensions.
Clarifying point: It seems like sole props– including single-owner LLCs, which I believe the IRS just calls sole props– can actually wait until tax-filing time to open the solo 401k, whereas the internet often claims you need open it in the calendar year that you want to contribute (maybe that was and older IRS rule pre-2023). IRS Publication 560 as of 2023 appears to state clearly that you have up until tax-filing time to establish: https://www.irs.gov/pub/irs-pdf/p560.pdf (I’m not an accountant, though, so check with yours!)
Solo 401k reporting requirements
You must submit a form 5500-EZ for ‘single participant’ solo 401k plans with a combined balance of more than $250,000. Do NOT miss this, since late filings can come with steep penalties: https://www.irs.gov/retirement-plans/one-participant-401k-plans
S-corp considerations
For S-corps, note that you can only contribute from W-2 wages, NOT from K-1 earnings. This is true both for employee contributions as well as employer contributions. More on S-corp solo 401ks here: https://www.solo401k.com/blog/maximizing-solo-401k-contributions-for-s-corporation-owners
That said, you don’t have to do it from payroll, and can just make employee contributions directly from your biz bank account into your solo 401(k) during the calendar year. For the employer portion, that can also come from your biz bank account before tax-filing time (compute it after creating your W-2; all S-corp contributions must come from W-2 wages for both employee + employer!)
Also, while written a few years ago and with outdated (2021) numbers, this guide is helpful in explaining the general rules: https://www.mysolo401k.net/wp-content/uploads/2021/02/Contribution-Guide-S-Corporation-C-corporation-LLC-taxed-as-S-corp-C-corp.pdf
SEP IRA or Simple IRA if you have employees
A SEP-IRA lets you, the employer, make discretionary contributions to your employees, but they can’t make any on their own. They can open up their own individual IRAs if they would like to.
A Simple IRA lets employees contribute up to $13,500 ($16,500 for 50+) in 2021, but it’s limited to businesses with 100 or fewer employees. With a Simple IRA, you the employer must make contributions of at least 2% of employee salary through a direct contribution, or you can match some of the employee’s Simple IRA contributions.
You can compare these options in detail here. The SEP and Simple IRAs don’t require any separate IRS filings on behalf of you the employer.
Fidelity also offers a full-blown 401k option if your small business is getting bigger and you want something like what large employers offer. I imagine it costs more and has more hassle than the above options, but check it out if the other options don’t sound right for you and your employees.
WARNING: One downside of ANY pre-tax IRA, including SEP, SIMPLE, or a Traditional/Rollover IRA is that you can’t make tax-free backdoor Roth IRA conversions. For this reason, I prefer the individual 401k for small businesses with no employees (other than spouses.) You could also consider a full blown 401k if you have employees, but make sure the fees & costs don’t outweigh the benefits.
Help your employees retire successfully
Educate your employees about their financial options and investment choices. Vanguard has excellent Target date retirement fund defaults, so make sure your employees get automatically shunted into those based on their ages, and make sure they are contributing at least 10% of their income by default as well. They can easily change this contribution, but you want to set them up for success even if they do nothing, which is very common.
Hire a pro to help you make the choice and set things up
If you want an independent financial advisor to guide you through your options as a small business owner or self-employed person, or to give a seminar to you or your employees on investing and personal finance, contact me.
Details on setting up a Fidelity Self-employed 401(k)
No business bank accounts allowed for funding
Fidelity’s SE 401k does NOT allow you to link a business bank account, as of April 2026. Instead, you must link the plan administrator’s (your) personal bank account.
Letter of Acceptance template for incoming transfers to your Fidelity SE 401k
If you want to move, say, a Vanguard Traditional IRA into your Fidelity SE 401k, you must send a ‘Letter of Acceptance’ wet-signed by the plan administrator (you) to Fidelity. A Fidelity customer service representative gave me this template that you can use. After signing, you can scan/photograph it and upload to Fidelity’s ‘secure message center’:
Instructions for LOA
The plan name can be found in your Fidelity SE 401k under ‘Documents’ if you open any statement (See screenshot of the plan name portion above as an example from my SE 401k.) The administrator’s name is presumably you, the business owner, unless you hired some 3rd party admin or something.
Use your personal address, not the businesses. If you are also the Participant, use your name. If it’s your spouse, who also works in the business and participates in your plan, use theirs.
You SE 401k plan account # is at Fidelity online or on the same form that has the plan name. “Title” is your title, like “Owner”. “Company Name” is your firm’s name (i.e.: Joe Blow LLC.)
LOA Template for transferring assets into Fidelity SE 401k
[Date]
[Plan Name]
[Plan Administrator’s name]
[Plan Administrator’s Address]
[City, State, Zip Code]
RE: Acceptance of Rollover Contribution to the [Plan Name] for the benefit of [Participant name]
This letter confirms that I, [Plan Administrator’s name] on behalf of the [Plan Name] accept the direct rollover contribution of [ amount of dollars or shares] into the [Plan Name] plan on [Date Rollover Received]. I certify that these assets are [pre-tax and being deposited into the Self-employed 401(k) account [account number] or Roth plan assets being rolled into the Roth Self-employed 401(k) account [account number]. [ Choose one.]
The rollover assets will be deposited into cash, unless the assets being rolled into the plan are shares of securities. All assets will be immediately vested.
The letter of acceptance will be retained in the [Plan Name]’s records.
[Plan Administrator’s Name]
[Title]
[Company Name]
Plan Administrator for the [Plan Name]
Sincerely,
[Plan Admins printed name.]
[Date and wet-signature of Plan Admin].
——- End of LOA – Instructions from Fidelity also copied below. Double-check the mailing address before you send the form or check to Fidelity by calling them first! —–
The check should be made payable to “FMTC FBO: participants name”. Please include your Fidelity account number. The Check and LOA should be mailed to the address below:
Fidelity Investments
PO Box 770001
Cincinnati, OH 45277-0003
Once received, please allow three to five business days for processing.
