You may contribute to a Solo 401(k) and SEP IRA in the same year. It all depends on the forms you use, which we’ll explain later. Your small business can maintain both plans, but there’s really no advantage to utilizing both for a business owner. Generally, unless you have full-time employees, the Solo 401(k) plan is the superior option. Once you hire employees for your business (other than a spouse or partner), you can no longer have a Solo 401(k). These plans are for owner-only businesses and the self-employed. The SEP IRA (Simplified Employee Pension) remains a solid option for expanding small businesses.

What is a Solo 401(k) for Small Business Owners?

A Solo 401(k) is a retirement plan specifically designed for the self-employed. You don’t need your own business to open one. In fact, many people who have regular jobs can have one. The key is that you need some sort of self-employed income. This will generally come from a side job, oftentimes “gig” work. This may include driving for a ride-share company, hiring speaking engagements, or an Etsy store.

Of course, if you have your own business, you can get the most advantage of the Solo 401(k). The caveat is that you cannot have any full-time employees, aside from your spouse or a business partner. A full-time employee is someone who works more than 1,000 hours for you during the year. Of course, temp workers and seasonal employees can be hired, so long as they don’t exceed the hour threshold. When calculating your net earnings for contribution limits, remember to account for self employment tax, which can affect your overall contribution amount.

One of the biggest advantages of the Solo 401(k) is the high annual contribution limits. For 2025, contribution limits to a Solo 401(k) plan are as follows:

The Solo 401(k) allows for both employee contributions and employer contributions, providing greater flexibility in how you save for retirement.

Read More: IRS Announces 2025 401(k) and IRA Contribution Limits

What is a SEP IRA?

A SEP IRA, known as a Simplified Employee Pension, is another option for the self-employed. It’s especially beneficial for small business owners who have full-time employees. There are two major differences between a Solo 401(k) and SEP IRA. First, there is “no catch-up” contribution. There is no increase in the amount you may contribute at age 50. Secondly, there isn’t an employee deferral. All contributions are based on a percentage of your annual income. Generally, it’s 20% for business owners and 25% for self-employment work.

Contributions to a SEP IRA can be made up until the due date of your business income tax return, including extensions, providing flexibility for business owners. Net self-employment income is determined after deducting half of the self employment taxes paid, which is relevant for determining contribution limits to the plan. Therefore, it’s harder to max out your contributions to the max.

If you have other employees, you must contribute on their behalf the same percentage you take yourself. However, you do not have to make contributions every year. During a down year, you may skip saving altogether. A SEP is a very cost-effective way to offer a retirement plan for small business owners. On the other hand, it doesn’t really make much sense for an owner-only business.

Learn More: How to Correctly Diversify Your Retirement Account

Contribution Limits and Tax Benefits

One of the standout features of the Solo 401(k) plan is its higher contribution limits compared to SEP IRAs.

For 2024, the annual contribution limit for a Solo 401(k) is set at $69,000. Additionally, if you’re 50 or older, you can make a catch-up contribution of $7,500, bringing your total possible contribution to $76,500. Looking ahead to the 2025 taxable year, the contribution limit increases to $70,000, with the same $7,500 catch-up contribution. Notably, individuals aged 60 to 63 can benefit from an even higher catch-up contribution limit of $11,250, allowing for a maximum contribution of $81,250.

It’s crucial to remember that contributions must be made by the tax filing deadline or the extension of the employer’s return. This flexibility can be particularly beneficial for small business owners and self-employed individuals who may need additional time to finalize their contributions.

You can contribute up to 25% of your total compensation up to a maximum of $69,000 for 2024 or $70,000 for 2025.
 If you’re self-employed, your contributions are generally limited to 20% of your net income. However, with a SEP IRA, there is no catch-up contribution, dramatically reducing the amount you can save each year, once you hit age 50.

When Can You NOT Do Both?

If you use a financial institution or custodian to set up your SEP IRA, you need to be aware of what form they use. If they use the standard IRS Form 5305, then you cannot also set up a Solo 401(k). This form is provided by the IRS, so it is unusual that you are limited in your options when you use it.

However, there is a workaround. You simply need to set up the SEP IRA not using the From 5305. You can essentially take the basics of the form and tweak it for your use. Of course, your financial institution must accept the form in order to be eligible. You can work with an attorney or financial planner to help design the form. Solo 401(k) plans follow the same rules as traditional 401(k) plans regarding contribution limits, withdrawals, and penalties. But again, if you have zero full-time employees, it’s probably not worth the hassle anyway!

Solo 401(k) and SEP IRA: Contribution Limits

As detailed above, the Solo 401(k) is the far superior option for the self-employed. When calculating your contribution limits, it’s important to consider your net earnings, which are determined after deducting self-employment taxes and retirement contributions. It is only when you hire non-spouse or non-owner full-time employees that a SEP IRA makes sense. Contributing to both plans makes little sense.

The only time it may be useful is if you have both a small business and other self-employed income. A SEP IRA can be set up for your business where only that income will be contributed to the plan. A self employed individual can benefit greatly from the flexibility and higher contribution limits of a Solo 401(k) plan. If you have a side job, apart from the business, you can set up a Solo 401(k) for your own use.

Example

Let’s say Phil is a part owner in a small cafe. He has two partners, and each owns 33% of the business. As a small business owner, Phil can take advantage of the SEP IRA to contribute a percentage of his business income to his retirement plan. He starts a SEP IRA for his business and decides to contribute 10% to the plan. Generally, all partners would contribute the same amount, assuming they earn compensation from the business. The business earns $200,000 during the year. Therefore, he will contribute $20,000 to his SEP IRA (10% of $200,000).

Phil also works for DoorDash on the side and earns an extra $15,000 per year. He sets up a Solo 401(k), which allows him to contribute the entire amount into the plan. In total, Phil will save $35,000 towards retirement for the year.

During a tough financial year for the cafe, Joe may elect to not contribute anything to the SEP IRA. On the plus side, he may still elect to contribute funds to his Solo 401(k), provided he has other self-employed income.

Other Circumstances

Let’s say Phil was the sole owner of the cafe and had a few full-time employees. In this case, Phil would not be able to contribute to a Solo 401(k) unless he offered the same benefit to the employees of the cafe. This is known as a controlled group. Because he owns more than 80% of each business (the cafe and his DoorDash business), he cannot “stiff” the employees.

Understanding the different retirement plans available can help you choose the best option for your business and personal financial goals.

Essentially, if you are the sole owner of a business that has full-time employees, you cannot exclude them by opening up a separate retirement plan for yourself.

Key Features of Solo 401(k) and SEP IRA

Solo 401(k) Features

A Solo 401(k) plan offers several key features that make it an attractive option for small business owners and self-employed individuals. These features include:

• Higher Contribution Limits: Solo 401(k) plans allow for higher contribution limits compared to SEP IRAs, making it easier to save for retirement. This is particularly beneficial for those looking to maximize their retirement savings.
• Tax-Deferred Growth: Contributions to a Solo 401(k) plan grow tax-deferred, meaning you won’t have to pay taxes on the earnings until you withdraw the funds in retirement. This can significantly enhance the growth of your retirement savings over time.
• Catch-Up Contributions: For those aged 50 and older, Solo 401(k) plans allow for catch-up contributions, making it easier to boost your retirement savings as you approach retirement age. Plus, for those age 60-63, you may contribute even more.
• Employer Contributions: As the employer, you can make tax-deductible contributions, reducing your taxable income. This dual role of employer and employee can be highly advantageous for small business owners.
• Employee Contributions: As the employee, you can make elective deferrals, further reducing your taxable income. This flexibility allows you to tailor your contributions based on your financial situation.
• Roth Contributions: Solo 401(k) plans allow for Roth contributions, which are made with after-tax dollars and grow tax free. This can be a strategic option for those who anticipate being in a higher tax bracket in retirement.
• Loan Provisions: Solo 401(k) plans allow for loans, which can be used to cover unexpected expenses or financial emergencies. This feature provides an additional layer of financial security.

Overall, Solo 401(k) plans offer a range of features that make them an attractive option for small business owners and self-employed individuals looking to save for retirement. With higher contribution limits, tax-deferred growth, and the ability to make both employer and employee contributions, solo 401(k) plans provide a robust framework for retirement planning.

Self-Directing Your Plan

Lastly, we wanted to mention the benefits of self-directing your Solo 401(k) and SEP IRA plans. The benefits of opening your plan with IRA Financial is that you can have checkbook control of your funds. This allows you to make both traditional investments, in addition to alternative investments, such as real estate, precious metals and cryptocurrencies, like Bitcoin.

As a business owner, having checkbook control of your retirement funds allows you to make timely and strategic investment decisions. Further, with checkbook control, you never need to ask for permission to invest. A bank account is associated with your plan and can be used to make investments without a middleman. This allows you to make any investment you want in a timely manner. The checkbook control structure can be used with both a Solo 401(k) and SEP IRA.

Learn More: How Do Self-Directed IRAs Work?

If you have any questions about either plan, please contact us to discuss. We can help decide if a Solo 401(k) or SEP IRA is right for you. In certain circumstances, you may want to contribute to both. As always, you should work with a financial advisor to come up with a financial plan that fits your needs.

This article provides an in-depth comparison of the Solo 401(k) and the Keogh plan, covering their key features, benefits, drawbacks, and suitability for different types of self-employed professionals.

What Is a Solo 401(k)?

A Solo 401(k), also known as an Individual 401(k) or One-Participant 401(k), is a retirement savings plan designed specifically for self-employed individuals and small business owners with no employees (except for a spouse or other business owner(s)). It functions similarly to a traditional 401(k) but is tailored for sole proprietors or single-member LLCs.

Key Features of a Solo 401(k):

• Eligibility: Available to those with self-employment activity with no other ineligible employees.
• Contribution Limits: Allows contributions as both an employer and an employee.
  • Employee contribution: Up to $23,000 ($30,500 if age 50+) in 2024 and $23,500/$31,000 in 2025.
  • Employer contribution: Up to 25% of compensation (up to $69,000 total, or $76,500 if age 50+) in ’24 and $1,000 more in 2025.
• Tax Advantages:
  • Contributions can be pretax (reducing taxable income) or Roth (tax-free withdrawals in retirement).
  • Tax-deferred growth on investments.
• Investment Flexibility: Allows investments in stocks, bonds, mutual funds, ETFs, and even alternative assets like real estate and cryptocurrencies.
• Administrative Requirements:
  • Minimal paperwork.
  • No annual filing unless assets exceed $250,000 (then IRS Form 5500 is required).

What Is a Keogh Plan?

A Keogh plan, also known as a HR-10 plan, is a tax-deferred retirement plan designed for self-employed individuals and small businesses, including partnerships. It was once a popular option but has declined in use due to the rise of more flexible plans like Solo 401(k)s and SEP IRAs.

Key Features of a Keogh Plan:

• Eligibility: Available to self-employed individuals and unincorporated businesses, including partnerships. Unlike the Solo 401(k), it can cover employees.
• Types of Keogh Plans:
  • Defined Contribution Plan: Similar to a profit-sharing or money-purchase plan.
  • Defined Benefit Plan: Functions like a pension with fixed annual contributions.
• Contribution Limits:
  • Defined Contribution Keogh: Up to 25% of compensation (up to $70,000 in 2025).
  • Defined Benefit Keogh: Contributions are based on actuarial calculations and can be much higher.
• Tax Advantages:
  • Contributions are tax-deductible.
  • Tax-deferred growth until withdrawal.
• Investment Flexibility: Similar to the Solo 401(k), offering a range of investment options.
• Administrative Requirements:
  • Requires a formal plan document.
  • Annual IRS reporting (Form 5500 required).
  • Higher administrative costs than a Solo 401(k).

Solo 401(k) vs. Keogh Plan: A Detailed Comparison

Pros and Cons of Each Plan

Solo 401(k) Pros:

High contribution limits with both employee and employer contributions.

More investment flexibility, including real estate and alternative assets.

Roth contribution option for tax-free withdrawals in retirement.

Lower administrative burden than Keogh plans.

Solo 401(k) Cons:

Only available for businesses with no employees (except a spouse or business partner).

Must file IRS Form 5500 once assets exceed $250,000.

Keogh Plan Pros:

Higher potential contributions with a defined benefit structure.

Suitable for businesses with employees.

Allows for a structured pension-like plan with predictable retirement benefits.

Keogh Plan Cons:

Higher administrative complexity and costs.

Requires annual IRS filings and actuarial calculations (for defined benefit plans).

Less flexibility than Solo 401(k) for self-employed individuals without employees.

Which Plan Should You Choose?

Choose a Solo 401(k) if:

• You are a sole proprietor, freelancer, or small business owner with no employees.
• You want a higher contribution limit with flexibility in employee and employer contributions.
• You want Roth contribution options for tax-free withdrawals in retirement.
• You prefer minimal paperwork and administrative requirements.

Choose a Keogh Plan if:

• You have a small business with employees and want a structured retirement plan for them.
• You want a defined benefit plan with higher contributions than a Solo 401(k).
• You are comfortable with additional administrative complexity and costs.

Final Thoughts

For most self-employed individuals and solo entrepreneurs, a Solo 401(k) is the better option due to its high contribution limits, investment flexibility, and lower administrative burden. However, for those with employees or those seeking a structured pension plan, the Keogh plan may still be a viable option.

Before choosing a plan, it’s advisable to consult with a financial advisor or tax professional to ensure the best fit for your financial goals and business structure.

Unrelated Business Taxable Income is the “gross income derived by any organization from any unrelated trade or business regularly carried on by it.” Typically, an exempt organization will not be taxed on its income from activities that are charitable or educational. Such income is exempt even when the activity is a trade or business. However, certain types of investment income, such as dividends, interest, and capital gains, may be exempt from UBIT when associated with IRAs.

However, to prevent tax-exempt entities from competing unfairly with taxable entities, tax-exempt entities are subject to the UBTI tax. This is the case when the entity derives its income from a trade or business that has no relation to its tax-exempt status.

IRC 501 allows tax exemption to a number of organizations, such as non-profits. However, if the organization engages in activity unrelated to its business, and generates income from said activity, it may be liable for UBTI tax.

Understanding UBTI and UBIT

Definition and Purpose

Unrelated Business Taxable Income (UBTI) and Unrelated Business Income Tax (UBIT) are crucial concepts for tax-exempt entities, including Self-Directed IRAs, to understand. UBTI refers to the income earned by a tax-exempt entity that is not related to its exempt purpose. UBIT, on the other hand, is the tax imposed on this income. The purpose of UBTI and UBIT is to ensure that tax-exempt entities do not unfairly compete with taxable businesses and to prevent them from accumulating unrelated business income without paying taxes.

Tax-exempt entities, such as non-profits and IRAs, enjoy significant tax advantages. However, when these entities engage in activities that generate income unrelated to their primary exempt purpose, they must pay taxes on that income. This ensures a level playing field between tax-exempt and taxable entities, preventing tax-exempt organizations from gaining an unfair competitive edge.

UBTI Tax – A Dual Purpose

As you can see, UBTI has a dual purpose:

1. Prevent tax-exempt businesses from competing unfairly with taxable organizations
2. Prevent them from engaging in business unrelated to its primary business objectives

There are many tax advantages that come with an IRA. One example is tax-free gains until you make a distribution. Most passive income investments will not be seen as UBTI. However, funds you generate from income that is UBTI taxable, and goes back into the IRA, is subject to UBTI tax. Tax-exempt organizations must pay tax on UBTI exceeding $1,000 to ensure compliance and maintain a fair competitive landscape. For example, the operation of a gas station by an LLC or partnership that a Self-Directed IRA owns will likely be subject to the UBTI tax.

UBTI vs. UDFI

UBTI also applies to UDFI. “Debt-financed property” refers to borrowing money to purchase real estate. In a case like this, the income attributable to the financed portion of the property will be taxed. Income generated from investments in a tax-exempt account, especially when leveraging debt, can trigger taxes under UDFI and UBIT regulations. Gain on the profit from the sale of the leveraged assets is also UDFI unless the debt is paid off more than 12 months before it’s sold.

There are a few exceptions from UBTI tax. They relate to the central importance of investment in real estate. Some examples include:

• Dividends
• Interest
• Annuities
• Royalties
• Most rentals from real estate
• Gains/losses from the sale of real estate

The rental income you generate from the real estate that is “debt-financed” loses the exclusion. That portion of income becomes subject to UBTI. As a result, if the IRA borrows money in order to finance the purchase of real estate, the portion of rental income attributable to the debt is taxable as UBTI.

What Triggers UBTI?

UBTI is triggered when a tax-exempt entity, such as an IRA, earns income from a business or investment that is not related to its exempt purpose. This can include income from partnerships, limited liability companies (LLCs), and other business entities. For instance, if an IRA invests in a partnership that operates a business, the income generated from that business is considered UBTI.

Additionally, rental income can trigger UBTI, especially if it involves leasing equipment or property that is not directly related to the entity’s exempt purpose. Investments in master limited partnerships (MLPs) and limited partnerships (LPs) that use leverage can also result in UBTI. These scenarios highlight the importance of understanding the sources of income and their relation to the entity’s exempt purpose to avoid unexpected tax liabilities.

Calculating UBTI

Calculating UBTI involves determining the gross income earned by the tax-exempt entity from its unrelated business activities. This includes income from partnerships, LLCs, and other business entities, as well as rental income and income from MLPs and LPs. Once the gross income is determined, deductions for business expenses, losses, and depreciation are subtracted to arrive at the net income.

The net income is then subject to UBIT, which is calculated using the tax rates applicable to corporations. For example, if a tax-exempt entity earns rental income from a property that is not related to its exempt purpose, the net income after deductions will be subject to UBIT. It is essential to note that UBTI can be complex and may require consultation with a tax professional to ensure accurate calculation and compliance with tax laws.

Failure to file Form 990-T and pay required UBIT by the IRS filing deadline can result in penalties. Therefore, it is crucial for tax-exempt entities to understand UBTI and UBIT to avoid tax liability and maintain their tax-exempt status. Consulting with a tax professional can help navigate the complexities of UBTI and ensure compliance with all relevant tax laws.

UBTI Tax on the Solo 401(k) Plan

Internal Revenue Code Section 511 taxes “unrelated business taxable income” at the UBTI Tax Rate applicable to corporations or trusts, depending on the organization’s legal characteristics. Generally, UBTI is:

• Gross income from an organization’s unrelated trades or businesses
• Less deductions for business expenses
• Losses
• Depreciation,
• Similar items directly connected therewith

A Solo 401(k) Plan is not subject to UBTI tax. Internal Revenue Code Section 515(c)(9) permits a few organizations to make debt-financed investments without being taxed. This includes qualified pensions, such as the workplace 401(k) plan and the Solo 401(k) plan. 

When using a Self-Directed IRA in a transaction that will trigger the UBTI tax, the IRA is taxed at the trust tax rate because an individual retirement account is considered a trust. For 2025, a Self-Directed IRA subject to UBTI is taxed at the following rates:

• $0 – $2,550 = 10% of taxable income
• $2,551 – $9,150 = $255 + 24% of the amount over $2,550
• $9,151 – $12,500 = $1,839 + 35% of the amount over $9,150
• $12,501 + = $3,011.50 + 37% of the amount over $12,500

Real Estate UBTI Implications for Tax Exempt Entities

There is no formal guidance regarding UBTI implications for a Real Estate IRA. However, there is a lot of guidance on UBTI implications for real estate transactions by tax-exempt entities. Income generated from investments in a tax-exempt account, especially when leveraging debt, can trigger taxes under UDFI and UBIT regulations.

Commonly, gains and losses on dispositions of property will not be included unless the property is inventory or property that’s up for sale to customers in the ordinary course of an unrelated trade or business. The exclusion covers gains and losses on dispositions of property used in an unrelated trade or business as long as the property was never on sale to customers.

To reiterate, the following are transactions that may be unrelated business activity:

1. The use of non-recourse loans to buy real estate with a Self-Directed IRA.
2. Investment in an active business (i.e., restaurant) operated through a pass-through entity, like an LLC.
3. Making an investment in a private equity firm operating active businesses through pass-through entities.
4. An investment in master limited partnerships (MLPs) though a pass-through entity.
5. Investing in an investment fund that is using debt for investment purposes.

Get in Touch with a Tax Professional

Do you still have questions regarding the UBTI tax and how it may affect you and your investments? Contact IRA Financial at 800-472-1043.

Understanding Pension Rollovers

Pension plan rollovers allow individuals to take charge of their retirement funds. While pensions are usually linked to your employer, a Solo 401(k) is owned by the employee. Rolling over your pension can update your retirement approach, offering complete control over your investments and distributions.

Transferring assets from a traditional pension plan to a Solo 401(k) provides the flexibility and control associated with modern retirement plans.

What Is a Pension Rollover?

A pension rollover involves moving funds from a pension plan to another retirement account, such as a Solo 401(k). This tax-free transfer allows individuals to manage their investments and defer taxes until withdrawal. Steps include verifying eligibility, obtaining an EIN, selecting a plan provider, and starting the rollover.

This not only enhances your investment options, including self-directed investments like real estate and cryptocurrency, but also allows for larger contributions that are generally tax deductible, boosting your retirement savings potential.

Types of Pensions Eligible for Rollovers

Defined benefit plans are mainly eligible for rollovers. These traditional pensions, typically linked to long-term employment, can be rolled over into a Solo 401(k) upon plan termination. Employees usually choose between a lump sum payment or deferred annuity payments, and opting for a lump sum allows for rolling the funds into a more flexible retirement account like a Solo 401(k).

This option is beneficial for those seeking greater control over their investment choices and retirement strategy. Rolling over your pension transfers not just funds, but also the power to shape your financial future according to personal goals.

Benefits of Rolling Over a Pension to a Solo 401(k)

Rolling over your pension to a Solo 401(k) offers several benefits that can significantly enhance your retirement savings strategy. It provides tax-deferred growth until withdrawal and protects your retirement distribution from immediate taxation, avoiding additional tax penalties.

A Solo 401(k) plan, tailored for self-employed individuals, offers unique tax advantages that can significantly boost retirement funds. It also enables business owners to make substantial retirement contributions while benefiting from significant tax breaks.

Tax-Free Transfers

A key feature of rolling over a pension to a Solo 401(k) is the tax-free transfer option. A direct rollover lets the plan administrator transfer funds to another retirement account without tax withholding, provided the transfer is done correctly.

This allows you to move your retirement assets without immediate tax consequences, enabling tax-deferred growth until withdrawal.

Increased Investment Options

A Solo 401(k) provides a wider range of investment choices compared to traditional pensions, which often restrict you to specific mutual funds or predefined portfolios. It allows for alternative investments including real estate, cryptocurrencies, and private placements, giving the self-employed the flexibility to customize their retirement investments.

This broader range of investment options can significantly boost your ability to grow retirement funds according to your personal financial strategy.

Higher Contribution Limits

A key benefit of a Solo 401(k) is its higher contribution limits compared to other retirement plans. In 2025, the maximum contribution limit is $70,000 with a catch-up contribution if you are at least age 50, much higher than IRAs. This provides a significant advantage for maximizing retirement savings, as the Solo 401(k) allows for larger contributions from eligible compensation.

This higher limit compared to a SIMPLE IRA, or even the popular SEP IRA, makes the Solo 401(k) an excellent option for significantly boosting retirement funds.

Steps to Roll Over Your Pension Into a Solo 401(k)

Rolling over your pension into a Solo 401(k) involves careful planning. Following a structured approach ensures a smooth transition and maximizes the benefits of your new retirement plan. Most employer-sponsored retirement plans inform participants of their rollover options upon distribution.

Here’s a step-by-step guide to help you through the process.

Verify Eligibility Requirements

Start by verifying eligibility requirements. Solo 401(k) accounts are for individuals with income from self-employment or sole proprietorship, excluding employees except for a spouse. Self-employed individuals and their spouses can contribute, but other employees generally cannot, except spouses involved in the business.

This retirement account is mainly for sole proprietors and small businesses without employees other than a spouse. Meeting these employment qualifications is crucial, as it is a distinctive requirement for Solo 401(k) accounts.

Obtain an Employer Identification Number (EIN)

Obtaining an Employer Identification Number (EIN) is essential to enroll in a Solo 401(k). Visit the IRS website and complete the online application to get an EIN. This number is required for establishing your Solo 401(k) and for tax reporting purposes.

This straightforward process ensures your retirement plan is set up correctly and compliant with IRS regulations.

Choose a Plan Provider

Choosing the right plan provider is crucial for managing your Solo 401(k). Options include financial services companies, online brokerages, or investment firms offering Solo 401(k) plans. Select a provider that meets your needs and offers desired flexibility and investment options.

Creating a trust to hold funds is also required for effectively managing your Solo 401(k).

Initiate the Rollover Process

After choosing a plan provider, initiate the rollover process. Complete the necessary paperwork and work with both the old and new plan administrators for a smooth transfer of funds. Your broker or financial services company will provide the required documentation and guide you through the process.

If you haven’t already, apply online with the internal revenue service to obtain an EIN. This step is crucial for formally establishing your Solo 401(k) and ensuring compliance with tax regulations.

Following these steps will help you successfully roll over your pension into a Solo 401(k) and take control of your retirement savings.

Potential Drawbacks and Considerations

Although rolling over a pension into a Solo 401(k) offers many benefits, there are potential drawbacks and considerations to be aware of. Understanding these can help you make an informed decision and prepare for any challenges.

For instance, this retirement plan may not suit expanding businesses due to complex profit-sharing calculations. Eligible rollover distributions usually exclude required minimum distributions and hardship withdrawals.

Fees and Costs

Maintaining a Solo 401(k) can involve various fees and costs, including account maintenance fees, transaction fees, commissions, mutual fund expense ratios, and sales loads. While opening a Solo 401(k) is free, these ongoing fees can accumulate over time. Considering these costs is important when planning your retirement strategy, as they can affect overall investment returns.

Awareness of these fees and costs enables informed decisions and helps in choosing a plan provider offering competitive rates. Understanding the fee structure also optimizes retirement funds and maximizes savings potential.

Complexity of Management

Managing a Solo 401(k) requires careful financial planning and investment oversight. Unlike traditional pensions, it demands more active involvement in managing investments, ensuring IRS compliance, and tracking contributions and distributions.

This complexity can be challenging, particularly for those unfamiliar with financial planning and investment management.

Impact on Retirement Age

The timing of rolling over a pension can significantly impact the retirement benefits received at retirement. Delayed rollovers can reduce total retirement savings. Therefore, carefully consider the timing to align with your retirement goals and maximize benefits.

Comparing Solo 401(k) With Other Retirement Plans

Comparing different retirement plans can help determine which option best suits your needs and financial goals. Rolling over a pension to a Solo 401(k) enhances investment control, allowing for personalized decisions. The Solo 401(k) facilitates both employee and employer contributions, maximizing potential savings.

Contribution limits for a Solo 401(k) are significantly higher than regular IRAs, enabling larger retirement savings. The Solo 401(k) also offers both Roth and traditional contribution options, providing tax diversification.

Solo 401(k) vs. SEP IRA

When comparing a Solo 401(k) to a SEP IRA, consider the differences in contribution limits and flexibility. Contributions to a Solo 401(k) can be up to 100 percent of income as an employee contribution, while a SEP IRA limits contributions to 25 percent. Additionally, the SEP IRA requires equal contribution percentages for all eligible employees, whereas the Solo 401(k) can be tailored for a sole owner.

Both retirement account types offer varied investment options and different levels of administrative responsibilities.

Solo 401(k) vs. SIMPLE IRA

Comparing a Solo 401(k) to a SIMPLE IRA reveals significant differences in contribution limits and ease of management. The maximum contribution limit for a SIMPLE IRA in 2025 is up to $16,500, significantly lower than that of a Solo 401(k), making the latter more advantageous for maximizing retirement savings.

For those aged 50 and older, a SIMPLE IRA allows an additional $3,500 in contributions for 2025. However, the Solo 401(k) offers more generous catch-up contribution limits, providing a greater opportunity for older individuals to boost their retirement savings.

The Solo 401(k) also offers more flexibility in investment options and plan management, making it more attractive for self-employed individuals and small business owners.

Maximizing Your Retirement Savings With a Solo 401(k)

Maximizing your retirement savings with a Solo 401(k) involves taking advantage of various contribution options and regularly reviewing your investment strategy. Self-employed individuals must ensure that their combined contributions to the Solo 401(k) and any other retirement plans do not exceed IRS annual limits.

The dual contribution structure of the Solo 401(k) allows individuals to contribute both as an employee and employer, significantly boosting their retirement savings.

Utilizing Catch-Up Contributions

Individuals aged 50 and above can maximize their retirement savings by utilizing catch-up contributions. These contributions allow older individuals to increase their annual contribution limits, enhancing their total savings potential. For 2025, the catch-up contribution limit for a Solo 401(k) is $7,500. Further, if you are between the ages of 60 and 63, that amount is increased to $11,250 thanks to the SECURE Act 2.0.

Unlike a SIMPLE IRA, which does not allow catch-up contributions, the Solo 401(k) offers this valuable opportunity for older investors to bolster their retirement funds.

Profit Sharing Contributions

Profit-sharing contributions in a Solo 401(k) can be another powerful tool to boost your retirement savings. These contributions can be made by the employer, providing an additional source of retirement funds alongside regular employee contributions. Profit-sharing contributions can be made in addition to elective salary deferrals, offering flexibility in annual contributions.

This flexibility allows business owners to enhance their retirement savings significantly and adjust their contributions based on the profitability of their business. By utilizing profit-sharing contributions, you can maximize your retirement savings while taking advantage of the tax benefits associated with these contributions.

Regular Review and Adjustment

Regularly reviewing and adjusting your Solo 401(k) investments is crucial for ensuring alignment with your retirement goals and adapting to changing financial markets. By consistently evaluating your investment performance, you can make informed decisions that help maximize returns and mitigate risks.

This proactive approach ensures that your retirement strategy remains effective and aligned with your long-term financial objectives.

Summary

Rolling over your pension into a Solo 401(k) can provide significant benefits, including tax-free transfers, increased investment options, and higher contribution limits. By following a structured approach and understanding the potential drawbacks, you can make informed decisions that enhance your retirement savings. Comparing Solo 401(k) plans with other retirement options, such as SEP IRAs and SIMPLE IRAs, highlights the advantages of choosing a Solo 401(k) for self-employed individuals and small business owners. With careful planning and regular reviews, a Solo 401(k) can be a powerful tool for securing your financial future.

Frequently Asked Questions

For small business owners, independent contractors, and self-employed individuals who utilize Solo 401(k) plans, these changes can have profound implications, particularly if they own multiple businesses. This article explores the updates to controlled group rules, how they affect Solo 401(k) plan owners, and steps to ensure compliance.

Overview of the 401(k) Controlled Group Rules

Controlled group rules are part of the Internal Revenue Code (IRC) Section 414 and ERISA (Employee Retirement Income Security Act). They define how companies under common ownership or control must be treated for retirement plan purposes. These rules ensure that businesses cannot use multiple entities to avoid providing 401(k) plan retirement benefits or to bypass ERISA nondiscrimination rules that ensure fair access to retirement plans.

There are four types of controlled groups:

1. Parent-Subsidiary Controlled Group: A parent company owns at least 80% of one or more subsidiaries.
2. Brother-Sister Controlled Group: Two or more companies are owned by the same five or fewer individuals, trusts, or estates, with at least 80% combined voting power or ownership.
3. Combined Controlled Group: A combination of parent-subsidiary and brother-sister groups.
4. Affiliated Service: Affiliated service group (ASG) rules were created to ensure that businesses that are economically or operationally connected must be treated as a single entity for retirement plan purposes.

How They Apply to Retirement Plans

For retirement plan purposes, controlled group rules prevent business owners from circumventing contribution limits or testing requirements by operating multiple businesses. If two or more businesses are part of a controlled group, they are generally considered one employer for retirement plan purposes. You must take into account the following:

• Contribution Limits: The combined businesses must adhere to the annual contribution limits as if they were one entity. The owner cannot contribute the maximum amount in multiple Solo 401(k)s for different businesses within a controlled group.
• Nondiscrimination Testing: If a business owner has employees in one business but not in another, controlled group rules ensure that the owner cannot set up a plan solely for their benefit while excluding employees.

Before SECURE 2, the controlled group rules were relatively strict but straightforward, with well-established definitions of control and ownership. However, SECURE Act 2.0 introduced several changes that broaden the scope of what qualifies as a controlled group, potentially affecting Solo 401(k) participants with multiple business interests.

Key Changes to the 401(k) Controlled Group Rules Under SECURE Act 2.0

One of the most significant changes under SECURE Act 2.0 is the expansion of the controlled group definition. Specifically, the act now broadens the conditions under which businesses are considered part of the same controlled group, making it harder for business owners to avoid treating their various enterprises as a single employer for retirement plan purposes.

In particular, the Act introduced changes regarding common ownership thresholds and indirect control:

Common Ownership – SECURE Act 2.0 reduces the ownership thresholds at which businesses are considered part of the same controlled group. This makes it easier for businesses with shared or overlapping ownership to be treated as a single entity for retirement plan purposes.

Indirect Control – The act also extends controlled group treatment to scenarios where indirect control exists, including cases where ownership is held through trusts, estates, or other entities.

Relaxation of Spousal Attribution Rules

Before the changes in SECURE 2, spousal attribution rules automatically attributed ownership from one spouse to the other for controlled group purposes. This often resulted in two businesses, owned separately by a husband and wife, being treated as part of the same controlled group, even if the spouses did not operate the businesses together. If one spouse established a Solo 401(k) plan, the other spouse and his or her full-time employees, if applicable, would be required to receive the plan benefits even if they were separate businesses. This would entail the spouse wishing to establish a Solo 401(k) to abandon the option and instead establish an ERISA 401(k) plan.

The Act relaxes these spousal attribution-controlled group rules, making it possible for businesses owned by spouses to avoid being grouped together as a controlled group, provided they meet certain criteria. Specifically, if one spouse has no active involvement in the other spouse’s business, the attribution rules would likely not apply. This can prevent the businesses from being treated as a single entity for 401(k) plan compliance purposes, allowing each business to administer its own solo 401(k) plan independently.

Impact on Common Law Relationships

The common law relationship rules were similarly impacted. In states that recognize common law marriages, business ownership between partners in a common law relationship could also trigger spousal attribution under the old rules.

The SECURE Act 2.0 ensures that businesses owned by partners in a common law relationship are treated similarly to those owned by legally married spouses, allowing for the relaxation of attribution rules in these cases as well. This provides consistency in how businesses are treated.

Application in Family-Owned Businesses:

For family-owned businesses, these changes are especially relevant. Prior to the SECURE 2, a family’s separate businesses could have been unexpectedly combined into a single controlled group simply because of spousal ownership, which could complicate 401(k) plan administration. The new controlled group rules allow for more flexibility, ensuring that businesses with separate ownership by spouses or common law partners are not automatically grouped together unless there is active involvement in each other’s businesses.

What is a Solo 401(k)?

A Solo 401(k) is a retirement savings plan designed for self-employed individuals and small business owners with no employees (other than a spouse). This type of plan allows business owners to contribute both as an employer and an employee, potentially leading to higher contribution limits than other retirement options like an IRA.

Key features include:

• High Contribution Limits: In 2024, Solo 401(k) participants can contribute up to $66,000 as a combination of employee salary deferrals and employer contributions (or $73,500 if age 50 or older).
• Flexibility: Business owners can choose traditional or Roth contributions, giving them tax flexibility.
• Investment Options: Invest in traditional, as well as nontraditional (alternative) assets.

Solo 401(k)s are attractive because they offer substantial tax benefits and flexible contributions. However, the rules governing them can become more complex when the owner has multiple business interests, particularly due to controlled group rules.

Impact on Solo 401(k) Plans

The changes to the controlled group rules significantly impact Solo 401(k) plan owners, particularly those who own or control multiple businesses. The main impacts include:

Contribution Limits: If multiple businesses are now treated as a controlled group, the owner must adhere to a single annual contribution limit across all businesses. This can reduce the total amount they can contribute to Solo 401(k) plans.

Plan Aggregation: Owners of multiple businesses may be required to aggregate their retirement plans and ensure that all businesses in the controlled group offer the same benefits to employees, if applicable.

Increased Compliance Requirements: Owners may need to reassess their retirement plan structures and ensure compliance with the new controlled group rules, which may require additional record-keeping and administration.

Compliance Steps for Solo 401(k) Owners

Given the changes brought by the SECURE Act 2.0, Solo 401(k) owners should take several steps to ensure compliance:

1. Review Ownership Structure: Business owners should conduct a thorough review of their business ownership structures, including indirect ownership through trusts, family members, or other entities.
2. Consult a Tax Professional: Given the complexity of the new controlled group rules, it is critical to consult with a tax professional or retirement plan expert to determine whether your businesses now fall under the expanded controlled group definitions.
3. Reassess Contribution Strategy: If businesses are now considered part of a controlled group, Solo 401(k) participants should reevaluate their contribution strategies to ensure they stay within IRS limits and avoid excess contributions.
4. Update Plan Documents: If changes to the controlled group status affect how businesses administer their retirement plans, owners may need to update their plan documents and ensure that they comply with the new rules.

Conclusion

The SECURE Act 2.0 has made significant changes to the controlled group rules that affect Solo 401(k) plans. For small business owners and self-employed individuals with multiple business interests, these changes mean greater scrutiny and potential aggregation of their retirement plans.

However, the changes to the controlled group rules for spouses and common law relationships under the Act provide much-needed relief for businesses that were previously subject to spousal attribution rules. By relaxing these rules, the Act allows businesses owned by spouses or partners in common law relationships to maintain independent 401(k) plans, reducing the administrative burden, and simplifying plan compliance.

To avoid penalties and ensure compliance, business owners must be proactive in reviewing their ownership structures, understanding the new rules, and adjusting their retirement plan strategies accordingly. By staying informed and seeking expert guidance, Solo 401(k) participants can continue to take advantage of the significant tax benefits offered by these plans while remaining compliant with the evolving regulatory landscape.

2025 IRA Contribution Limits

IRA contribution limits remain largely unchanged for next year:

After a $500 increase to the IRA annual limit in 2024, there was no change to next year’s limit. Eligible savers can contribute $7,000 for both 2024 and 2025. For those who are age 50 and older, you can contribute an additional $1,000 annually, bringing your total to $8,000, the same as it was last year. This limit applies to all types of IRAs including Self-Directed IRAs, which can be Traditional or Roth.

Small business owners or self-employed individuals who have a SEP IRA can save $70,000 in 2025, an additional $1,000 over last year’s limit. For those age 60-63, you can contribute an additional $1,750 thanks to SECURE Act 2. For those with a SIMPLE IRA, you can contribute an additional $500 for 2025 which brings the annual limit to $16,500, plus an additional $3,500 if you are at least age 50, which is the same as 2024.

Deductible Phase-Outs

One of the biggest benefits of saving with a traditional IRA is the upfront tax break you receive. However, in order for your contribution to be deductible on your tax return, you must be under a certain income. If you are under the limit, you can take a full deduction. The deductible amount is “phased out” until you reach the maximum annual income, at which point, you do not receive any deduction for your IRA contribution.

The deductibility of your IRA contributions is dependent on your modified adjusted gross income (MAGI) and filing status. Using the chart above, you can determine if you get an upfront tax break from your pretax (traditional) IRA contributions. If your income is below the beginning threshold, your contribution is fully deductible. Conversely, if your income is above the phase-out limit, you receive zero tax break. Everything in between, you would receive a reduced deduction.

Roth IRA Income Restrictions

While a traditional IRA offers tax-deductible contributions for those who qualify, there is no deduction for Roth IRAs since Roths are funded with after-tax money. However, all qualified distributions from a Roth are tax free during retirement. Traditional IRAs are taxable upon withdrawal. The caveat is that high-income earners cannot directly contribute to a Roth IRA. Much like the traditional phase-outs, there are phase-outs on the income limits for Roth IRAs as follows:

Just like the traditional IRA deduction limits, if you are under the beginning number, you can make a full Roth IRA contribution. However, if you are above the income threshold, you cannot make a direct Roth IRA contribution. If you fall within either range, you can make a partial contribution. The 2025 Roth IRA income limit goes up by $4,000 for single filers and $6,000 for married filers filing jointly.

Note: High earners can still get funds into a Roth using the Backdoor Roth IRA strategy. You can simply contribute after-tax funds to a traditional plan and then convert that amount into a Roth at any time.

2025 401(k) Contribution Limits

Whether you are an employee of a business or self-employed, you may contribute more to your 401(k), 403(b), 457 plans, and the Thrift Savings Plan (TSP). The annual limit will increase by $500 in 2025. The catch-up limit will remain the same, but there’s a new catch-up contribution for those ages 60-63.

Here is what you can expect for 401(k) and similar plans next year:

Unlike IRAs, 401(k) plans did see an increase to how much one can put away for retirement. This is especially true for those who are between the ages of 60 and 63 because of a provision to the SECURE Act 2. Employees can contribute up to $23,500 in 2025, plus an additional $7,500 if he or she is at least age 50 (for a total of $31,000). Plus, if you are between the ages of 60 and 63, that number increases to $34,750.

Those with self-employment income can contribute as both the employee and employer up to the annual limit. This means anyone with a Solo 401(k) plan may contribute up to $70,000 in 2025. If you are at least age 50, you may contribute up to $77,500. Lastly, if you’re self-employed between the ages of 60 and 63, you may contribute up to $81,250.

The percentage of your business/self-employment income that is used to determine the amount you can contribute as the employer is known as the 401(a) limit. The compensation used for this calculation increases to $350,000, which is $5,000 more than in 2024.

It’s important to keep in mind that the overall contribution limit is for all 401(k) plans, and types of contributions in the aggregate. Therefore, if you contribute to a 401(k) plan through your employer, this lowers the amount you can save in your Solo 401(k) plan. If you only have one 401(k) plan, you may contribute the maximum to that plan.

Saver’s Credit

The saver’s credit is an incentive for low- and moderate-income earners. This tax credit is provided to those people who save for retirement, and who are under certain income thresholds. To receive the credit, your annual income in 2025 must fall below $79,000 if you are married filing jointly, $57,375 if you file as a head of household, or $39,500 if you are a single filer or married filing separately, up from $76,500, $57,375, and $38,250 respectively.

Conclusion

Because of inflation, we’ve seen solid cost-of-living adjustments to the contribution limits over the last couple of years. That was not the case for 2025, as only 401(k) plans saw a modest increase of $500. The IRA limits remain unchanged. However, there is a significant benefit for those between the ages of 60 and 63, whether you save through a workplace SIMPLE IRA or 401(k) plan. For those individuals, you can now supercharge your catch-up contributions for each of those four years. The ability to save more, especially as you reach those milestone years, is paramount for you retirement planning.

Remember the updated numbers presented here are for 2025. You still have plenty of time to maximize your contributions for this year. 401(k) employee contributions are due by the end of the year, however, most other contributions can be done next year (before you file your taxes).