You're the Boss - Give Yourself a 401(k)

Many self-employed professionals find themselves in a familiar cycle: earning well, working hard, and still feeling like they can't step off the treadmill because too much of their income is going to taxes rather than into a retirement account they control. For business owners with self-employment income — whether operating as a 1099 contractor, sole proprietor, single-member LLC, S-Corp, or C-Corp — and no full-time employees other than a spouse, the Individual 401(k) (sometimes called a Solo 401(k)) can be one of the most flexible tax-advantaged retirement accounts available.

The core advantage is a dual-contribution structure that lets you save as both employee and employer. For the 2026 tax year, the combined annual limit is $72,000. As the employee, you can defer up to $24,500 into a pre-tax or Roth account, provided your business generates at least that much in eligible compensation. Your business then contributes the employer profit-sharing portion on top of that. If you operate as an S-Corp or C-Corp, the business can contribute up to 25% of your W-2 wages. If you're a sole proprietor or single-member LLC, the calculation works out to approximately 20% of net profit (technically 20% of net earnings from self-employment after deducting one-half of self-employment tax, which typically approximates 20% of net profit).

The strategy scales further for households where a spouse is legitimately employed by the business and earns compensation from it. Under the spousal provision, each spouse can make their own $24,500 employee deferral, and the business profit share can be applied to both accounts. For 2026, that brings the combined household contribution potential to $144,000 — still administered under a single plan document. For entrepreneurial couples focused on efficient retirement savings, this can be a meaningful planning opportunity.

For owners closer to retirement, catch-up contributions add capacity. Business owners aged 50–59 (or 64 and above) can add an $8,000 catch-up, bringing their total limit to $80,000. Those in the SECURE 2.0 "super catch-up" window of ages 60–63 can add $11,250, bringing their total to $83,250. One important nuance: starting with the 2026 tax year, if you're an S-Corp or C-Corp owner and your prior-year FICA wages (W-2 Box 3) exceeded $150,000, any catch-up contributions must be designated as Roth. Sole proprietors typically aren't affected because they don't receive W-2 wages from the business, but it's worth confirming your specific situation with your advisor.

Beyond contribution capacity, the Individual 401(k) offers liquidity features many other self-employed retirement accounts don't. If your plan document permits loans, you may borrow up to $50,000 or 50% of your vested balance (whichever is less) without triggering a taxable event, as long as the loan is repaid according to the plan's terms. Defaulted or unrepaid loans generally become taxable distributions — with a 10% additional tax if you're under age 59½ — so the loan feature is best used as a short-term cash management tool rather than a distribution strategy. You can also roll over funds from prior 401(k)s or IRAs into the plan to consolidate your retirement assets.

The Individual 401(k) is somewhat more complex to establish than a SEP or SIMPLE IRA, but the added contribution capacity often justifies the additional administrative work for those who qualify. Setup deadlines depend on your entity structure. S-Corps, C-Corps, and partnerships must adopt the plan by December 31, 2026 to allow for 2026 employee salary deferrals. Sole proprietors and single-member LLCs filing Schedule C with no employees have additional flexibility under SECURE 2.0 Section 317 — they can generally adopt the plan and make first-year employee deferral elections as late as their personal tax-filing deadline (April 15, 2027 for the 2026 tax year, without extensions). Employer profit-sharing contributions can typically be funded up until your business tax-filing deadline, including extensions.

If your business has full-time non-spouse employees, the Individual 401(k) is no longer the right structure. In that case, you'll want to explore better suited plans for your business.

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This information is for general educational purposes and should not be considered formal tax or legal advice.