How to set up a solo 401(k) plan
Quick takeaways
- A solo 401(k) plan is a retirement plan for the self-employed. It covers business owners (and spouses) who do not employ W-2 workers.
- You can contribute up to $70,000 total in 2025 (for those under age 50) through your joint employee and employer capacity, with additional catch-up contributions for different age ranges.
- To open a solo 401(k) plan, you will need to confirm your eligibility, estimate your contributions, select your provider, open your plan, fund your account, and choose your investments.
As a self-employed solopreneur, freelancer, or independent contractor, you've embraced the challenge of building your own business. But when it comes to long-term financial security, that independent streak can feel overwhelming. You're not alone: 55% of self-employed people aren’t satisfied with how much they’re currently saving for retirement.1
To remedy this, you may have even decided that opening a solo 401(k) plan could be the next step for your retirement goals. The problem is, you don’t have a team of HR benefits professionals to arrange the logistics.
Fear not: With the right guidance and provider, opening a solo 401(k) plan could be easier than you think. It also can be rewarding, thanks to high contribution limits and the possibility of a reduced end-of-year tax bill. This clear, actionable guide will explain how to open a solo 401(k) plan step-by-step, starting with confirming your eligibility all the way to making your first contribution.
Setting up a solo 401(k) plan: Six steps to follow
Step 1: Confirm your eligibility
A solo 401(k) plan is a retirement plan designed for self-employed professionals. Only owners or partners and their spouses are eligible to participate (so if you have a W-2 employee other than your spouse, this won’t work for you – instead, you may want to consider other 401(k) plan options).
Most small business types are eligible, even if you’re not an official LLC. If you have an employer identification number (EIN) and you are a sole proprietor, LLC, freelancer, consultant, or something similar, then you’re likely able to open a solo 401(k) plan – even if you’re just getting started with your new business.
Step 2: Select a solo 401(k) plan provider
Next, evaluate solo 401(k) plan providers. You may want to consider these criteria to find the best plan for your savings goals:
- Pricing. Is monthly pricing transparent? Are the assets under management (AUM) fees reasonable?
- Compliance. Are IRS filings automated? Does the plan provider offer assistance with compliance tasks? Note: If you have more than $250,000 in assets in your plan, a Form 5500-EZ must be completed and filed with the IRS annually, which a modern provider like Gusto can help with. Solo 401(k) plans also automatically pass nondiscrimination testing.
- Set-up. Is setting up a solo 401(k) plan user-friendly? Does your provider have an easy to use mobile app? Do they offer participant support if needed?
- Investments. What investment options are available for you?2 Are there guided, low-cost portfolio options available?3
Gusto 401(k) offers digital onboarding, transparent pricing, and automation that can be ideal for busy solopreneurs.
Step 3: Open your account
Once you’re ready to open your account, the provider should make it easy. You’ll need:
- An Employer Identification Number (EIN), which you can apply for here if you don’t have one yet. The sole proprietor’s social security number cannot be used as it’s the business entity that sponsors the plan, not the person.
- Your basic business information, such as name, address, and estimated annual income.
- Desired contribution structure — i.e. how much you’ll contribute as an employer vs. employee — and plan year. The “plan year” is a 12 month period designated for the administration of your plan. Most people choose to use the calendar year, but you can choose a different 12 month period if it’s better for your business or aligns with your company’s fiscal year.
A sole-proprietership has until its business tax filling deadline to open a plan. If you operate as a corporation, you can open a plan and make employer contributions up until your business tax filing deadline (note that employee contributions are due earlier, see Step 5).
With a Gusto Solo 401(k) plan, the setup process can take as little as 9 minutes.
Step 4: Estimate your contributions
One of the great benefits of a solo 401(k) plan is that you can contribute to your retirement in two ways: as the employee and as the employer. It looks like this:
- As an employee, you can contribute $23,500 (or $31,000 if you’re over age 50) in 2025.4
- As your own employer, you can contribute up to 25% of your net self-employment income for most business types.
Putting the two contribution buckets together, those under age 50 can contribute up to $70,000 total in 2025. If you’re in the 50-59 or 64+ age groups, you can also make catch-up contributions, with the limit increasing to $77,500. Those in the 60-63 age range may be able to make extended catch-up contributions of up to $81,250.4
Know the contribution limits when opening a solo 401(k) plan – sample contribution table
| Age Group | Employee Contribution ($)4 | Employer Contribution ($)4 | Total Contribution Limit ($)4 |
|---|---|---|---|
| Under 50 | $23,500 | $46,500 | $70,000 |
| 50-59 and 64+ | $31,000 | $46,500 | $77,500 |
| 60-63 | $34,750 | $46,500 | $81,250 |
Table does not represent a scenario with after-tax contributions.
Decide which type of contributions you’ll make
With a solo 401(k) plan, you may be able to choose from pre-tax and/or Roth elective deferrals, or after-tax contributions. Consider the advantages of each:
- Pre-tax elective deferrals: I want to lower my taxable income for the current year. A pre-tax elective deferral contribution reduces your taxable income for the current year. If you’re in a high tax bracket (for example, your spouse has a high-earning job and you’re married, filing jointly) this could be a good option for you. You won’t pay the taxes on this money until you withdraw it, and you’re making a bet that by that point, your income will be lower, placing you in a lower tax bracket.
- Roth elective deferrals: I want to grow my retirement savings tax-free. Roth elective deferral contributions are taxed before you contribute (i.e. your current tax rate). That means that when you withdraw the money, you won’t have to pay taxes on the contributions. The earnings on Roth elective deferral contributions are also tax-free when distributed when it’s a qualified distribution. This could make sense in a situation where you’re in a lower tax bracket at the time of the contribution. For example, if you’re a single solopreneur with a new business, you might prefer to pay the lower taxes on your contributions now, rather than in the future when you might be in a higher tax bracket.
- After-tax: I want to save more than the maximum elective deferral contributions allow for. Some plan providers allow you to make after-tax contributions. This could make sense in a situation where you’d like to maximize your 401(k) plan contributions for the plan year, but the 25% maximum employer’s contribution and the $23,500 employee contribution haven’t gotten you all the way to the limit. (More on this in a minute.)
Decide how much to contribute
How much should you contribute to your 401(k) plan? There’s no right or wrong answer – you’ll have to discover your own “just-right.”
Deciding how much to save is a personal choice, but thinking through a few key questions can help you make a decision that feels right for you.
Here are some things to consider:
- What are your other financial goals? It may be helpful to think about retirement savings as one part of your overall financial picture. For example, you might want to adjust your 401(k) plan contributions temporarily to save for a down payment on a house, travel, or other major life events.
- Do you have high-interest debt? High-interest debt, like credit card balances, can potentially outweigh investment gains. You may want to consider contributing enough to your retirement account to receive your full employer match (if offered) and then aggressively paying down high-interest debt.
- Have you saved for emergencies? An emergency fund can help with unexpected expenses such as medical bills or job loss. Building up your emergency savings might mean temporarily reducing your 401(k) plan contributions. However, it could mitigate the chances that you would need to take a loan out of your 401(k) plan for an unexpected expense.
Remember, you have the flexibility to change your contribution amount whenever you need to.
Step 5: Fund your solo 401(k) plan
Once you’ve opened your solo 401(k) plan and decided how much to contribute, it’s time to figure out how you want to contribute. Gusto provides several flexible, digital options you can use to make contributions:
- Payroll. Deduct contributions from your payroll.
- Lump sum. Make a lump sum deposit whenever you want.
- Transfers. Schedule recurring deposits from your business account.
To help stay on track with your retirement goals and benefit from investment strategies like dollar-cost averaging, some people prefer to create a contribution schedule.5
No matter how you decide to contribute, keep these deadlines in mind:
- For sole proprietors (or LLC taxed as a sole proprietor) or a partnership (or LLC taxed as a partnership):
- A formal salary deferral election must be made by December 31st of the tax year.
- Employee contributions are due by your personal tax filing deadline.
- For S Corporations, C Corporations or LLCs taxed as corporations:
- A formal salary deferral election must be made before elective deferrals can be withheld from W-2 compensation and contributed to the plan. Note: pass-through income is not eligible compensation for plan purposes for an S or C Corporation or LLC taxed as a corporation.
- Employee contributions are due by December 31st.
- For any business type:
- Employer contributions are due by your business tax deadline (including extensions).
Step 6: Choose your investments
Finally, select how your retirement contributions will be invested. Typical solo 401(k) plan investments may include mutual funds or exchange-traded funds (ETF), index funds, or target-date funds. Here’s a quick overview of each:
- Mutual funds or ETFs are a collection of individual assets like stocks or bonds that are managed by a fund company. Because the funds are mixed, they can be a good way to diversify investments.6
- Low cost index funds are a type of mutual fund that passively follows a set of rules to track a specific market index. For example a fund’s strategy may be matching the performance of the companies in the S&P 500.
You may want to speak with a Financial Advisor to determine the best option for your portfolio.
When choosing your funds, you may want to watch out for high fees, which can affect your returns. Choosing low-cost funds, like the ones Guideline Investments offers for your Gusto 401(k), can help every hard-earned dollar go further.7
Don’t have the time or know-how to choose stocks, bonds, and funds? Not to worry: A provider like Gusto can help take the stress out of the choice. Our Guideline Investments portfolios and prebuilt investment options can help you create a low-cost, broadly diversified retirement portfolio that can lead to long-term growth.
Why Gusto’s Solo 401(k) plan can be ideal for freelancers & solopreneurs
You want to save for retirement, but you don’t want to spend hours setting up or managing your solo 401(k) plan. We get it.
As a solopreneur, you’ll benefit from Gusto’s:
- Fast, online setup in as little as 9 minutes
- Low-cost, low-fee plans starting at $49/month3 + 0.15% AUM fee8
- Automated 5500-EZ filing if your plan has over $250,000 in assets, contribution tracking, and compliance
- Access to low-fee funds and diversified investment options
- Seamless integration with Gusto payroll
- Award-winning support9 in English and Spanish
Get started by opening a Gusto Solo 401(k) plan today.
For informational purposes only. This should not be considered financial, tax, or legal advice. Contact a financial professional to evaluate what retirement plan is best suited for your situation.