Self-Employment Side Hustle? Benefits of a Solo 401(k) Plan
A Solo 401(k) offers business owners and side hustlers a powerful way to reduce taxable income and accelerate retirement savings. This guide explains contribution limits, tax strategies, and how to choose between pre-tax and Roth contributions in 2026. Learn how to build a tax-efficient retirement plan and potentially eliminate income taxes on self-employment income. Discover why Solo 401(k) plans can outperform SEP IRAs in many cases.
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
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Who qualifies for a Solo 401(k)?Business owners with no full-time employees working more than 1,000 hours per year.
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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.
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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).
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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.
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Do Solo 401(k) contributions reduce taxes?Yes, pre-tax contributions reduce your taxable income.
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Can I make Roth contributions to a Solo 401(k)?Yes, employee deferrals can be Roth, with no income limits.
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What happens when I stop my side hustle?The Solo 401(k) is typically rolled into a Traditional IRA and/or Roth IRA.
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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.
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Do I have to file anything for a Solo 401(k)?Once the account exceeds $250,000, you must file Form 5500 annually.
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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.
Self-Employment Income In Retirement? Use a Solo(k) Plan To Build Wealth
It’s becoming more common for retirees to take on small self-employment gigs in retirement to generate some additional income and to stay mentally active and engaged. But, it should not be overlooked that this is a tremendous wealth-building opportunity if you know the right strategies. There are many, but in this article, we will focus on the “Solo(k) strategy
It’s becoming more common for retirees to take on small self-employment gigs in retirement to generate some additional income and to stay mentally active and engaged. But, it should not be overlooked that this is a tremendous wealth-building opportunity if you know the right strategies. There are many, but in this article, we will focus on the “Solo(k) strategy.”
What Is A Solo(K)
A Solo(k) plan is an employer-sponsored retirement plan that is only allowed to be sponsored by owner-only entities. It works just like a 401(k) plan through a company but without the high costs or administrative hassles. The owner of the business is allowed to make both employee deferrals and employer contributions to the plan.
Solo(k) Deferral Limits
For 2025, a business owner is allowed to contribute employee deferrals up to a maximum of the LESSER of:
100% of compensation; or
$31,000 (Assuming the business owner is age 50+) or
$34,750 (For individuals age 60-63)
Pre-tax vs. Roth Deferrals
Like a regular 401(K) plan, the business owner can contribute those employee deferrals as all pre-tax, all Roth, or some combination of the two. Herein lies the ample wealth-building opportunity. Roth assets can be an effective wealth accumulation tool. Like Roth IRA contributions, Roth Solo(k) Employee Deferrals accumulate tax deferred, and you pay NO TAX on the earnings when you withdraw them as long as the account owner is over 59½ and the Roth account has been in place for more than five years.
Also, unlike Roth IRA contributions, there are no income limitations for making Roth Solo(k) Employee Deferrals and the contribution limits are higher. If a business owner has at least $31,000 in compensation (net profit) from the business, they could contribute the entire $31,000 all Roth to the Solo(K) plan. A Roth IRA would have limited them to the max contribution of $8,000 and they would have been excluded from making that contribution if their income was above the 2025 threshold.
A quick note, you don’t necessarily need $31,000 in net income for this strategy to work; even if you have $18,000 in net income, you can make an $18,000 Roth contribution to your Solo(K) plan for that year. The gem to this strategy is that you are beginning to build this war chest of Roth dollars, which has the following tax advantages down the road……
Tax-Free Accumulation and Withdrawal: If you can contribute $100,000 to your Roth Solo(k) employee deferral source by the time you are 70, if you achieve a 6% rate of return at 80, you have $189,000 in that account, and the $89,000 in earnings are all tax-free upon withdrawal.
No RMDs: You can roll over your Roth Solo(K) deferrals into a Roth IRA, and the beautiful thing about Roth IRAs are no required minimum distributions (RMD) at age 73 or 75. Pre-tax retirement accounts like Traditional IRAs and 401(k) accounts require you to begin taking RMDs at age 73 or 75 based on your date of birth, which are forced taxable events; by having more money in a Roth IRA, those assets continue to build.
Tax-Free To Beneficiaries: When you pass assets on to your beneficiaries, the most beneficial assets to inherit are often a Roth IRA or Roth Solo(k) account. When they changed the rules for non-spouse beneficiaries, they must deplete IRAs and retirement accounts within ten years. With pre-tax retirement accounts, this becomes problematic because they have to realize taxable income on those potentially more significant distributions. With Roth assets, not only is there no tax on the distributions, but the beneficiary can allow that Roth account to grow for another ten years after you pass and withdraw all the earnings tax and penalty-free.
Why Not Make Pre-Tax Deferrals?
It's common for these self-employed retirees to have never made a Roth contribution to retirement accounts, mainly because, during their working years, they were in high tax brackets, which warranted pre-tax contributions to lower their liability. But now that they are retired and potentially showing less income, they may already be in a lower tax bracket, so making pre-tax contributions, only to pay tax on both the contributions and the earnings later, may be less advantageous. For the reasons I mentioned above, it may be worth foregoing the tax deduction associated with pre-tax contributions and selecting the long-term benefits associated with the Roth contributions within the Solo(k) Plan.
Now there are situations where one spouse retires and has a small amount of self-employment income while the other spouse is still employed. In those situations, if they file a joint tax return, their overall income limit may still be high, which could warrant making pre-tax contributions to the Solo(k) plan instead of Roth contributions. The beauty of these Solo(k) plans is that it’s entirely up to the business owner what source they want to contribute to from year to year. For example, this year, they could contribute 100% pre-tax, and then the following year, they could contribute 100% Roth.
Solo(k) versus SEP IRA
Because this question comes up frequently, let's do a quick walkthrough of the difference between a Solo(k) and a SEP IRA. A SEP IRA is also a popular type of retirement plan for self-employed individuals; however, SEP IRAs do not allow Roth contributions, and SEP IRAs limit contributions to 20% of the business owner’s net earned income. Solo(K) plans have a Roth contribution source, and the contributions are broken into two components, an employee deferral and an employer profit sharing.
As we looked at earlier, the employee deferral portion can be 100% of compensation up to the Solo(K) deferral limit of the year, but in addition to that amount, the business owner can also contribute 20% of their net earned income in the form of a profit sharing contribution.
When comparing the two, in most cases, the Solo(K) plan allows business owners to make larger contributions in a given year and opens up the Roth source.
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 (FAQs):
What is a Solo(k) plan?
A Solo(k) is a 401(k)-style retirement plan designed for self-employed individuals or business owners with no employees other than a spouse. It allows both employee and employer contributions, offering high contribution limits and flexible tax options.
How much can you contribute to a Solo(k) in 2025?
For 2025, you can contribute the lesser of 100% of your compensation or up to:
$31,000 if age 50 or older
$34,750 if age 60–63
These limits include employee deferrals and do not count potential employer profit-sharing contributions.
Can Solo(k) contributions be Roth or pre-tax?
Yes. You can choose to make contributions as pre-tax, Roth, or a combination of both. Roth contributions are made with after-tax dollars but grow tax-free, and qualified withdrawals are also tax-free.
Why might Roth Solo(k) contributions be advantageous for retirees?
Roth Solo(k) assets grow tax-free, have no required minimum distributions (RMDs) once rolled into a Roth IRA, and can be passed to beneficiaries without income tax. For retirees in lower tax brackets, contributing to Roth accounts may provide long-term tax benefits over pre-tax deferrals.
Can you make Roth contributions to a SEP IRA?
No. SEP IRAs only allow pre-tax contributions and do not offer a Roth option. This makes the Solo(k) plan a more flexible choice for self-employed individuals looking to build tax-free retirement income.
How does a Solo(k) compare to a SEP IRA?
A Solo(k) allows both employee deferrals (up to 100% of income) and employer profit-sharing contributions, plus the option for Roth contributions. A SEP IRA limits contributions to 20% of net earned income and only allows pre-tax contributions, typically resulting in lower total contribution potential.
Is a Solo(k) a good option for retirees with part-time income?
Yes. For retirees earning even modest self-employment income, a Solo(k) can be a powerful tool to continue saving for retirement—especially with Roth contributions that provide future tax-free income and estate planning advantages.
