When is the Best Time to Open a Solo 401(k)?

By | April 21, 2023

As a self-employed individual or a small business owner, opening a Solo 401(k) can help you save for retirement and reduce your taxable income. However, timing is crucial when it comes to setting up your Solo 401(k) plan. In this post, we’ll discuss the factors you need to consider to determine when is the best time to open a Solo 401(k). Whether you’re just starting out or have been in business for a while, read on to ensure you make the most informed decision for your financial future.


As a small business owner or self-employed individual, you may be wondering when the best time is to set up a Solo 401(k). This retirement plan offers significant advantages over other retirement savings options, such as traditional IRAs or SEP-IRAs, but it has specific eligibility requirements and deadlines to consider. In this article, we will discuss all the essential aspects of the Solo 401(k) plan, including who is eligible to set it up, contribution limits, tax benefits, and the best time to open one.

Who is Eligible to Set Up a Solo 401(k)?

To qualify for a Solo 401(k), you must be a business owner or self-employed individual without any full-time employees other than the owners or their spouses. This means that independent contractors or freelancers who operate their own business are eligible to set up this type of retirement plan. Additionally, the business must be an incorporated entity, such as an LLC or a sole proprietorship.

Contribution Limits for Solo 401(k)

The contribution limits for a Solo 401(k) are more generous than those for other retirement plans. For the 2021 tax year, you can contribute up to $19,500 in elective deferrals, plus an additional $6,500 if you are over 50, for a total of $26,000. On top of that, as an employer, you can contribute up to 25% of your compensation or up to $58,000, whichever is less, for a total contribution of up to $64,500, or $73,500 if you are over 50. This means that you can save a significant amount of money for retirement while reducing your taxable income.

Tax Benefits of a Solo 401(k)

One of the main advantages of a Solo 401(k) is the tax benefits it offers. Any contributions you make to the plan are tax-deductible, which means they are subtracted from your taxable income. For example, if you earn $100,000 in the 2021 tax year and contribute $19,500 to your Solo 401(k), your taxable income will be reduced to $80,500. Additionally, any earnings on your investment within the plan are tax-deferred until you withdraw them. This can result in significant tax savings over time.

The Deadline for Setting up a Solo 401(k)

You can set up a Solo 401(k) for a prior tax year up to the day you file your business tax return, including extensions. For example, if you want to make contributions for the 2020 tax year, you can set up the plan and make contributions until October 15, 2021, if you file for an extension. This means that you have some flexibility in determining the best time to set up your plan, but it’s important to keep in mind the deadlines to maximize the tax benefits.

Asset and Creditor Protection

Another important advantage of a Solo 401(k) is the asset and creditor protection it provides. The plan assets are protected from creditors, including bankruptcy proceedings. This means that your retirement savings are safe from any legal claims against your business or personal assets. Additionally, the plan’s assets are protected from any lawsuits against your business.

When is the Best Time to Open a Solo 401(k)?

The best time to set up a Solo 401(k) is before filing your business tax return, as it allows for valuable deductions that can reduce your taxable income. Additionally, setting it up early in the year provides more time to maximize contributions and take advantage of the different investment options. However, even if you missed the deadline for the current tax year, you still have time to set up the plan and make contributions for the prior year until the tax filing deadline, including extensions.

Frequently Asked Questions

  1. Can I set up a Solo 401(k) if I have employees?
    No, you must not have any full-time employees other than the business owners or their spouses to set up a Solo 401(k).

  2. Can I contribute to both a Solo 401(k) and a traditional IRA?
    Yes, you can contribute to both plans, but the contribution limits apply to each plan separately.

  3. Can I take out a loan from my Solo 401(k)?
    Yes, you can take out a tax-free and penalty-free loan of up to $50,000 or 50% of your account balance, whichever is less.

  4. Is IRA Financial Group a law firm?
    No, IRA Financial Group is a retirement account facilitator, document filing, and do-it-yourself document service.

  5. Where can I learn more about the Solo 401(k) rules and strategies?
    You can check out other videos on Adam Bergman’s YouTube channel for more information about the Solo 401(k) plan.


Choosing the right retirement plan is critical to ensuring a comfortable retirement, and the Solo 401(k) is an excellent option for small business owners and self-employed individuals. It allows for significant contributions and tax benefits, as well as asset and creditor protection. The best time to set up a Solo 401(k) is before filing your business tax return, but you still have some flexibility regarding the deadlines. As with any investment decision, it’s critical to consult a financial advisor or tax professional to make the most informed decision for your specific circumstances.