How to open a 401(k) without an employer step-by-step

An employer-provided 401(k) is how many Americans first start saving for retirement.  Eighty percent of private employers offer defined contribution retirement plans (such as 401(k)s, 403(b)s, and profit-sharing plans) and 48% automatically enroll eligible employees from the start. 

But if you’re self-employed, a freelancer, an independent contractor, or your job doesn’t offer a retirement plan, how do you open a 401(k) without an employer and access all of its amazing perks? 

It’s simple. If you’re self-employed, you find a plan provider and open a solo 401(k) (the IRS calls it a one-participant 401(k) plan). If you’re not self-employed and your employer doesn’t offer a 401(k), you can explore alternatives. 

But there’s plenty to understand and consider as you compare providers and investment options. So, we created this step-by-step guide for opening a solo 401(k), and laid out the best alternatives for those who are ineligible, to help you get on the road to retirement. 

1. Learn the solo 401(k)s basics

You can call up a provider today and open a solo 401(k), but you should probably understand the basics before you get started. For the most part, the benefits match a typical 401(k) account — you’re just the only person on the plan (unless you include a spouse). 

If you’ve never had a 401(k) or need a refresher, here’s everything to know:

Contribution limits

All 401(k)s, including solo accounts, have higher contribution limits than other tax-advantaged accounts like IRAs. The personal solo 401(k) limit is $23,000 in 2024, plus a $7,500 catch-up contribution if you’re 50 years old or older. 

However, this is based on your income and doesn’t consider employer contributions (which you’ll also pay from your business funds if you’re self-employed). 

As the account owner and employee, you can choose a contribution up to 100% of your earned income until the $23,000 maximum amount (excluding catch-up contributions). 

As your own employer, you can contribute up to 25% of your compensation (as an employee) to your solo 401(k). We’ll dig into this a little further below.

Combined, you can contribute a maximum of $69,000 to your solo 401(k) in 2024. 

This doesn’t just grow your 401(k) balance – traditional contributions decrease your taxable income, which means fewer taxes next year.

Employer contributions

Like a regular employer-provided 401(k), employers can make matching contributions to support employee retirement. Since you’re self-employed, you pull double duty as employer and employee. 

That means you can make your typical contributions with your paycheck, as well as provide employer contributions from your business funds. 

Both employee and employer contributions need to be invested by the annual tax filing deadline. 

If your business is unincorporated, you can deduct both employee and employer contributions from your personal income. Incorporated businesses can deduct employer contributions as a business expense. 

As you can imagine, this gets complicated. So, we’d recommend working with a qualified financial advisor to help you navigate the tax implications and IRS reporting requirements. 

Roth vs. traditional 401(k)s

Both Roth and traditional accounts are available as a solo 401(k). 

You fund Roth accounts with after-tax contributions, which means you already paid Uncle Sam and won’t owe any taxes when you withdraw from retirement. There also aren’t any income limits to contributing like there are with Roth IRAs, so you can enjoy tax-free growth no matter how much you make. 

Traditional accounts take pre-tax contributions, so taxes are deferred until you start withdrawing funds. This is ideal if you’re at the top of your career and expect your total income and tax rate to be lower in retirement. 

2. Confirm your eligibility

The rules are simple: If your business earns income without full-time employees, you qualify for a solo 401(k). This covers sole proprietors and single-member LLCs. 

Even if you have a 401(k) at your day job, you can open a solo account for your side hustle. But contributions are aggregated across accounts, so you won’t increase your annual contribution limit. 

If you hire independent contractors or freelancers, they’re also not full-time employees and don’t impact your eligibility. 

That’s it! Your business tax records will confirm your earned income and eligibility – as long as it’s registered with an Employer Identification Number (EIN).

3. Choose a plan provider

Providers are a dime a dozen, which is great for finding the best deal, but you’ll have to put in the work to compare them all and choose the best fit. 

Providers vary on a few fronts, so you’ll want to compare:

• Account types: Not all providers offer Roth accounts, so confirm it’s available if that’s what you’re looking for. 
• Investment options: Different providers offer different investment options. You can compare investments with sites like Morningstar.
• Fees: Providers typically charge administrative fees, but the rate varies significantly. The lower the fee, the more you save for retirement, so getting a good rate is essential. 
• Service: The best plan providers are easy to contact, regularly communicate performance updates, and are available if you have questions about your 401(k) and its investments. Consider how customer service feels as you communicate with providers and read reviews like Investopedia’s best-of guide to learn more.

4. Submit an application

Once you’ve settled on a provider, applying to open a solo 401(k) is easy. You’ll just need a few key items:

• EIN: A unique business identifier provider by the IRS for taxes. 
• Personal identification: You’ll also need to provide I.D. documents like your driver's license or passport to verify your identity. 
• Beneficiary details: Provide your account beneficiary’s name and contact information in case you pass away. 
• Bank information: Link a bank account to fund contributions to your solo 401(k). 
• Fees: You might have to pay some fees up front, so review your contract and have any required funds ready to go. 

Different providers might have different requirements, so always follow the provided application process to avoid any hiccups. If you want to make contributions and deduct them from your taxable income this year, you’ll need to open the account by December 31. 

5. Consider your tax advantages

Your 401(k) type (Roth vs. traditional) and other retirement accounts impact your tax advantages, so it’s important to understand how your solo 401(k) fits into your plans.

• Roth accounts: When you open a Roth 401(k), you pay income taxes up front, so you don’t receive any additional tax benefits for the year. Instead, your account grows tax-free and can be withdrawn tax-free upon retirement. 
• Traditional accounts: Contributions to traditional 401(k) accounts are tax-deductible, so the more you contribute, the fewer taxes you’ll owe for the tax year. 
• IRA deductions: Traditional IRA contributions are also tax deductible, but higher-income earners with a 401(k) might not qualify for IRA deductions. Depending on your income, deductions may be reduced or eliminated entirely. So, confirm how your 401(k) contributions impact your total tax deductions if you own both a 401(k) and IRA. 

6. Determine your contribution amount 

Once you understand how your contributions impact your tax strategy, you can set up contributions according to your budget and retirement goals. Auto-contributions are ideal because you can set it and forget it. After all, retirement is a long-term game, and you don’t need to check your balance more than a few times a year.

If you’re not sure where to start, consider 50/30/20 budgeting. This breaks your income into three spending categories:

• 50% to basic needs (rent, groceries, car payments)
• 30% to personal wants (hobbies, travel, new clothes)
• 20% to savings (retirement, emergency savings, debt)

This way, you can split the 20% of your income between short-term goals (a home down payment) and long-term goals (retirement). 

Need help prioritizing your finances? Get a personalized financial plan to pay off debt, max your tax advantages, and start working towards financial independence. 

7. Make your investment choices

You get to select your own investments with a solo 401(k). And since you’re the employer and employee on the account, you can choose providers based on the investments you want to make. 

This is much more customizable than employer-provided 401(k)s, which limit your investment pool to a set menu of employer selections. 

Your portfolio is determined by your financial goals and risk tolerance. 

Age can also play a part, since you’re better able to recover from losses with an aggressive allocation while you’re younger than when you’re 50+ and counting down the years until retirement. 

Some common investment allocation strategies include:

*Hypothetical performance based on Morningstar between 1970 and 2016 and an annually-rebalanced portfolio.

Generally, stocks are riskier than bonds and cash. However, they have the potential for higher returns – and bigger losses. . 

A moderate allocation is ideal for most investors, but people with 20+ years left to grow their investments likely have room to take some risks for big wins. 

If you’re interested in fast growth with as little risk as possible, consult a financial advisor to help build and maintain your portfolio. 

Investors should transition to a moderate or conservative allocation by age 50 when catch-up contributions kick in and maximizing every dollar invested is more important than ever. Retirement goals count on compound interest over time, and you don’t want to lose decades of hard work gambling with your retirement. 

8. Start saving for retirement with your solo 401(k)

Now, the easy part: Begin making contributions and enjoy watching your account grow over the years! 

It’s a good idea to check your balance quarterly or so to make sure your asset allocation still aligns with your goals and risk tolerance. 

You can also evaluate investment performance and adjust as you see fit, though generally, it’s best to ride out any long-term market fluctuations. Investments tend to course-correct with time. 

401(k) alternatives

You don’t need a 401(k) to save for retirement. While 401(k)s have plenty of benefits, there are several independent plan options with wide investment opportunities, excellent tax advantages, and other perks that make retirement achievable for anyone without traditional 401(k) access. 

So, you don’t have to give up on your dream of financial independence. 

Traditional IRAs

You’ve probably heard of IRAs – individual retirement accounts. Anyone with earned income can open an IRA and contribute up to $7,000 ($8,000 with catch-up contributions) in 2024. 

You can even open multiple IRAs to expand your investment options and tax advantages, but this doesn’t increase your contribution limit. 

IRAs have several advantages over a 401(k), including:

• Increased investment options: Employer-provided 401(k)s provide a pool of available plans and investments, but you get to hand-select the best investments for you with an IRA. 
• The account is tied to you alone: You have to keep track of old 401(k)s and roll them into new accounts when you switch jobs, but an IRA is with you until you cash out or roll over the account balance. 
• Tax-deductible contributions: Like traditional 401(k)s, IRA contributions are tax-deferred, so you don’t owe income taxes until you take cash out. 
• Potential for lower fees: Since you choose your plan provider, you can shop around to find the provider and investments that charge the fewest fees, so more of your money goes towards retirement. 

It’s worth noting that 401(k) contributions can impact your IRA tax deductions. While you might not personally have a 401(k), this rule also applies if your spouse makes 401(k) contributions. 

Roth IRAs

Pre-tax IRAs aren’t your only retirement option. You can also open Roth IRAs to kickstart retirement. However, eligibility to make direct contributions to a Roth IRA begins to phase out at a certain income, depending on your tax filing status.

In 2024, eligibility phases out at these income ranges:

• Single filers and heads of household: $146,000-$161,000
• Married couples filing jointly: $230,000-$240,000
• Married filing separately with a workplace retirement plan: $0-$10,000

Roth IRAs have similar benefits to traditional ones, except after-tax contributions aren’t tax deductible. Instead, your account balance grows tax-free, and you don’t owe any money to the government when you make a qualified withdrawal. 

You also have added flexibility since you can make penalty-free and tax-free withdrawals from Roth IRA contributions at any time. You’ll owe a 10% early withdrawal penalty if you tap into your earnings, though. 

Self-employed IRA options 

If a solo 401(k) isn’t the right fit, or you just want to increase your total annual contributions (look at you, super saver), there are IRA options specifically geared towards the self-employed. 

A Simplified Employee Pension Plan (SEP) is an IRA that allows employer contributions rather than your own direct contributions. As an employer, you can open a SEP IRA and contribute up to 25% (a maximum of $69,000) of your compensation.

Otherwise, it works like a traditional IRA.

To open a SEP IRA, simply create a written agreement, which you can easily do with Form 5305-SEP. They’re pretty flexible with low administrative fees, but you won’t be able to make direct contributions. Still, it can earn your business a few tax deductions. 

If you want to contribute as an employer and employee, you can open a Savings Incentive Match Plan for Employees, or a SIMPLE IRA. Both employers and employees can contribute to these plans. 

In this case, employers are required to contribute:

• Up to 3% matching contributions or
• A 2% nonelective contribution, regardless of the employee’s personal contributions

Employees can choose to contribute up to $16,000 in 2024, plus a $3,500 catch-up contribution if they’re 50 years old or older and the plan permits it. 

Health savings accounts (HSAs)

If you have a high-deductible insurance plan, you might qualify to open an HSA. These plans are designed to cover medical expenses, but you can also save your funds for retirement. 

HSA owners can access the funds penalty-free for any purpose once they reach age 65. You’ll just owe income taxes on anything you don’t spend on qualified medical care.

Like a 401(k), you can make tax-deferred contributions throughout your life to support the account’s growth. Single owners can contribute $4,150 in 2024, while families max out at $8,300. HSAs also permit a $1,000 catch-up contribution beginning at age 50. 

The Playbook take: Boost your contributions with a solo 401(k)

A solo 401(k) is a great alternative if you’re self-employed or have a side gig and you can’t access a 401(k) through your traditional employer. While you can’t open a solo 401(k) unless you have an independent business, there are still solid IRA options available to help you save for retirement. 

Want to organize your retirement accounts? Prioritize your investments and see where you should save with Playbook.