Self-Employment Side Hustle? Benefits of a Solo 401(k) Plan

By Michael Ruger, CFP®
Partner and Chief Investment Officer at Greenbush Financial Group

‍Today, more and more individuals have side hustles in addition to their main W-2 jobs. Others may be full-time business owners but only generate a modest amount of self-employment income. In both cases, one of the most powerful retirement and tax planning tools available is the Solo 401(k) plan.

In this article, we’re going to walk through some of the tax strategies and wealth accumulation strategies we use with clients who have self-employment income and may benefit from a Solo 401(k). Specifically, we’ll cover:

• What a Solo 401(k) plan is

• How a Solo 401(k) can reduce tax liability

• How to use a Solo 401(k) to build a larger Roth bucket

• How to decide between pre-tax vs. Roth contributions

• What happens when the Solo 401(k) is terminated

What Is a Solo 401(k) Plan?

A Solo(k) plan, also called an Individual(k), is a retirement plan designed for owner-only businesses. This means the business cannot have any full-time employees working more than 1,000 hours per year, other than the owner and possibly their spouse.

Because these plans only cover the business owner, they are typically simple to administer, often have little to no administrative costs, and still provide the full benefits of a traditional 401(k) plan.

Solo 401(k) plans include:

• Pre-tax employee deferrals

• Roth employee deferrals

• Employer contributions

• Potential 401(k) loan provisions

Contribution Limits (2026)

Solo 401(k) plans allow for relatively high contribution limits. For 2026:

• Employee deferral limit: $24,500 (under age 50)

• Age 50+ catch-up: $32,500 total deferral

• Employer contribution: Up to 20% of net self-employment income (sole proprietor/partnership)

• S-Corp employer contribution: Up to 25% of W-2 wages

Example

Let’s say a sole proprietor generates $40,000 in net self-employment income and is under age 50.

They could contribute:

• $24,500 as an employee deferral

• $8,000 as an employer contribution (20% of $40,000)

That’s a total of $32,500 going into a retirement account from just $40,000 of side hustle income.

That’s a powerful savings and tax planning opportunity.

Reducing Tax Liability

One of the primary reasons business owners establish Solo 401(k) plans is to reduce their overall tax liability.

If someone has:

• W-2 income: $200,000

• Self-employment income: $40,000

That self-employment income gets stacked on top of their W-2 income and may be taxed at a high marginal tax rate.

However, if that business owner contributes $30,000 of that $40,000 into a Solo 401(k) using pre-tax contributions, they may only pay income tax on $10,000 instead of the full $40,000.

That can result in significant tax savings.

Solo(K) Plans Can Potentially Eliminate Federal & State Income Taxes

If a business owner has less than the annual employee deferral limit in net income, they may be able to defer 100% of their self-employment income into the Solo 401(k).

Example:

• Net self-employment income: $20,000

• Employee deferral limit: $24,500

Since the income is lower than the limit, they could defer the entire $20,000 pre-tax, avoiding federal and state income tax on that income.

Note: They still must pay self-employment tax, but they can avoid income tax on that portion.

Building a Larger Roth Bucket

Another major benefit of a Solo 401(k) is the ability to build Roth retirement assets, which can be extremely valuable long-term.

Roth contributions are made after-tax, but:

• The money grows tax-deferred

• Withdrawals after age 59½ are tax-free

One major advantage of a Roth Solo 401(k) is:

There are no income limits for Roth 401(k) contributions.

This is very important because many high-income earners are phased out of Roth IRA contributions, but they can still contribute to a Roth Solo 401(k).

Example

Imagine a 29-year-old business owner with a side hustle contributing $24,500 per year to a Roth Solo 401(k). The money grows tax-deferred for 30 years and then all of the earning in the account can be withdrawn tax free after age 59½.

We also see this strategy used for retirees who do consulting work. If someone is 65+ and earning self-employment income but doesn’t need the income, they can contribute to a Roth Solo 401(k) and move that money into a tax-free growth bucket instead of a taxable brokerage account.

This can be a powerful long-term tax strategy regardless of age of the business owner.

To Roth or Not to Roth?

Remember, there are two types of contributions to a Solo 401(k):

1. Employee Deferral → Can be Pre-Tax or Roth

2. Employer Contribution → Typically Pre-Tax

For sole proprietors and partnerships:

• Employer contribution = 20% of net earned income

For S-Corps:

• Employer contribution = 25% of W-2 wages

• Important: Only W-2 wages count — not S-Corp distributions

While SECURE Act 2.0 opened the door for Roth employer contributions, we are still waiting on full IRS guidance for this to be widely implemented in Solo 401(k) plans. So for now, employer contributions are generally still pre-tax, while employee deferrals can be Roth or pre-tax.

General Rule of Thumb

You might consider:

• Pre-tax contributions if you are in a high tax bracket today

• Roth contributions if you are in a lower tax bracket today or want tax-free income later

This is where tax planning and coordination with a financial advisor and CPA becomes very important.

What Happens When the Solo 401(k) Is Terminated?

Eventually, the self-employment income may stop. When that happens, the Solo 401(k) is typically terminated, and the assets are rolled into IRAs.

Typically:

• Pre-tax Solo 401(k) money → Traditional IRA

• Roth Solo 401(k) money → Roth IRA

The money can then continue growing in those IRA accounts, and the Solo 401(k) plan is closed.

Working With an Advisor Who Understands Solo 401(k) Plans

Solo 401(k) plans are extremely powerful, but there are important rules and nuances business owners must be aware of.

For example:

• If you hire employees, you may have to discontinue the plan

• Plan documents must be set up properly

• Once plan assets exceed $250,000, you must file Form 5500 annually

• There are coordination issues between your CPA and financial advisor

• You must choose between pre-tax vs. Roth strategies

• You must compare Solo 401(k) vs. SEP IRA vs. SIMPLE IRA

Because of these moving parts, it’s important to work with an advisor who understands how to design and manage Solo 401(k) plans properly as part of an overall financial and tax strategy.

Our firm offers free consultations for business owners and individuals with side hustle income who want to evaluate whether a Solo 401(k) plan makes sense for their situation. If you’d like help determining whether this strategy is right for you, we’d be happy to help you build a plan around your specific goals. Feel free to schedule your complementary consult via our website.

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Frequently Asked Questions About Solo 401(k) Plans

1. Who qualifies for a Solo 401(k)?
   Business owners with no full-time employees working more than 1,000 hours per year.
2. Can I have a W-2 job and a Solo 401(k)?
   Yes. As long as you have self-employment income, you can open a Solo 401(k) for that income.
3. How much can I contribute to a Solo 401(k)?
   In 2026, employee deferrals are $24,500 (under 50), plus employer contributions up to 20% of income (or 25% of W-2 wages for S-Corps).
4. Can I contribute 100% of my side hustle income?
   Yes, if your income is below the employee deferral limit, you may be able to defer the entire amount.
5. Do Solo 401(k) contributions reduce taxes?
   Yes, pre-tax contributions reduce your taxable income.
6. Can I make Roth contributions to a Solo 401(k)?
   Yes, employee deferrals can be Roth, with no income limits.
7. What happens when I stop my side hustle?
   The Solo 401(k) is typically rolled into a Traditional IRA and/or Roth IRA.
8. Is a Solo 401(k) better than a SEP IRA?
   In many cases, yes, because it allows Roth contributions and higher contributions at lower income levels.
9. Do I have to file anything for a Solo 401(k)?
   Once the account exceeds $250,000, you must file Form 5500 annually.
10. Can I take a loan from a Solo 401(k)?
    Some Solo 401(k) plans allow participant loans, similar to traditional employer 401(k) plans.