What distinguishes a self-employed 401(k) from other retirement accounts?

A self-employed 401(k), also known as a solo 401(k), is specifically designed to cater to the retirement savings needs of self-employed individuals or business owners without any employees, other than a spouse. What distinguishes this type of retirement account is its ability to allow for significantly higher contribution limits compared to other retirement accounts like IRAs.

The solo 401(k) permits contributions both as the employee and as the employer, enabling self-employed individuals to maximize their retirement savings. This structure typically allows much larger total contributions: for 2023, individuals can contribute up to $22,500 as an employee and an additional 25% of their net earnings as an employer, with the combined contribution not exceeding $66,000 (or $73,500 for those aged 50 and older), which is substantially higher than what most IRAs allow.

This ability to contribute greater amounts makes the self-employed 401(k) particularly advantageous for those looking to aggressively save for retirement and may be a strategic option for those who have fluctuating incomes, such as freelancers or sole proprietors.