Solo 401(k) for Self-Employed: How I'm Sheltering $69,000/Year in My Roofing Business

title: "Solo 401(k) for Self-Employed: How I'm Sheltering $69,000/Year in My Roofing Business" excerpt: "As a 40-year-old business owner discovering FIRE, the Solo 401(k) is my secret weapon for catching up. Here's the math and how I set it up." date: "2025-11-22" category: "Tax Strategy" author: "Jonathan" readTime: "8 min read"

I discovered FIRE at 40. And when I started calculating my path to financial independence, I had a problem.

I'd been running my roofing business for years, making good money, staying frugal. But I was only contributing $6,500 a year to a traditional IRA. Meanwhile, my friends with W-2 jobs were maxing out their 401(k)s at $23,000/year—plus getting employer matches.

I felt behind. Like I'd missed the boat on tax-advantaged retirement accounts just because I was self-employed.

Then I discovered the Solo 401(k).

This year, I'm sheltering up to $69,000 from taxes. As a self-employed 40-year-old playing catch-up, this is the tool that changed everything.

Here's exactly how it works, how I'm using it, and why you should consider it if you're self-employed and serious about FIRE.

What is a Solo 401(k)?

A Solo 401(k) (also called an Individual 401(k) or Self-Employed 401(k)) is a retirement account designed for business owners with no employees (other than a spouse).

Here's the key insight that blew my mind when I learned about it:

You get to contribute as BOTH the employee AND the employer.

That means you're essentially giving yourself the employer match that W-2 workers get—except you control both sides of the equation.

Think of it like this: When you work for someone else, you contribute to your 401(k) (employee), and your company might match it (employer). With a Solo 401(k), you're playing both roles.

And that's where the big contribution limits come from.

The Math: Why Solo 401(k) Beats Everything Else

Let me show you the comparison, because this is what convinced me.

Traditional IRA (What I Was Doing):

Max contribution: $7,000/year ($8,000 if 50+)
That's it. No employer match because there's no employer.
Annual tax shelter: $7,000

SEP IRA (What My Accountant First Suggested):

Max contribution: 25% of net self-employment income
For my roofing business (~$100k net income): About $25,000
Better than a traditional IRA, but still limited.
Annual tax shelter: $25,000

Solo 401(k) (What I'm Doing Now):

Employee contribution: Up to $23,000 (2024 limit, $23,500 for 2025)
Employer contribution: Up to 25% of compensation (~$25,000 for me)
Total: Up to $69,000 if you're 50+ (includes $7,500 catch-up)
My annual tax shelter: $48,000+

That's nearly 7x more than a traditional IRA and almost 2x more than a SEP IRA.

The Real Power: Catch-Up Contributions

Here's where it gets interesting for those of us starting FIRE late.

If you're 50 or older, you can contribute an extra $7,500/year in catch-up contributions. That brings the total to $69,000/year.

But even at 40, the math is powerful. Let me show you what contributing $48,000/year looks like:

My 10-Year Projection:

Starting at 40 with minimal retirement savings, contributing $48,000/year at 8% return:

Year 1 (age 41): $51,840
Year 5 (age 45): $293,000
Year 10 (age 50): $694,000

By the time I'm 50, I could have almost $700k in tax-advantaged accounts just from my Solo 401(k). Add in my existing investments and continued savings, and Coast FIRE becomes very real.

Compare that to the traditional IRA path:

Contributing $7,000/year for 10 years at 8% return: $101,000

The difference is $593,000. That's the cost of not knowing about the Solo 401(k).

How I Set Mine Up: The Real Process

I'm not going to sugarcoat this—setting up a Solo 401(k) took me longer than opening a traditional IRA. But it wasn't complicated. Here's what I actually did:

Step 1: Made Sure I Qualified

To use a Solo 401(k), you need:

Self-employment income (check—roofing business)
No full-time employees (part-time or seasonal workers under 1,000 hours/year are OK)
You can have a W-2 job too, but it affects your contribution limits

I qualify because my business is just me. If I hire full-time employees in the future, I'll need to switch to a regular 401(k).

Step 2: Chose a Provider

I went with Fidelity because:

No account fees
Easy online setup
Good investment options (I'm all-in on index funds)
Can do both Traditional and Roth contributions

Other solid options: Vanguard, Schwab, E*TRADE. They all offer Solo 401(k)s with similar features.

I avoided boutique providers that charge annual fees. When you're trying to reach FIRE, every fee matters.

Step 3: Gathered My Paperwork

What I needed:

Business EIN (I already had this)
Proof of self-employment (Schedule C from tax return)
Social Security number
Basic business info (name, address, type of business)

The whole application took about 30 minutes online.

Step 4: Set Up the Account

Fidelity's process was straightforward:

Fill out the online application
Choose my investments (I went with total market index funds)
Set up automatic contributions

Total time from application to first contribution: About 2 weeks.

The hardest part? Understanding the contribution limits and how they work. Which brings me to...

Employee vs. Employer Contributions: How It Actually Works

This confused me at first, so let me break it down the way I wish someone had explained it to me.

Employee Contribution (Up to $23,000):

This comes from YOU as the worker
Can be Traditional (pre-tax) or Roth (post-tax)
Subject to the annual 401(k) limit ($23,000 for 2024)
This is the equivalent of what you'd contribute at a W-2 job

Employer Contribution (Up to 25% of Compensation):

This comes from YOU as the business owner
Always pre-tax (Traditional)
Based on your net self-employment income
This is the equivalent of the employer match at a W-2 job

Here's my actual 2024 plan:

My roofing business net income: ~$100,000

Employee contribution: $23,000 (maxing it out)
Employer contribution: $25,000 (25% of $100k)
Total: $48,000

All of that is pre-tax, lowering my taxable income from $100k to $52k. That's a massive tax savings on top of the retirement growth.

Solo 401(k) vs. SEP IRA: When Each Makes Sense

I mentioned the SEP IRA earlier because that's what my accountant initially suggested. Here's when each makes sense:

Choose a SEP IRA if:

You want something SUPER simple
Your income is high enough that 25% gets you close to the $69k limit anyway
You don't want to deal with annual filing requirements (more on this below)
You might hire employees soon (SEP is easier to maintain with employees)

Choose a Solo 401(k) if:

You want to maximize contributions (especially if income is under $250k)
You want the option for Roth contributions
You might take a loan from your retirement account (Solo 401(k) allows it, SEP doesn't)
You're serious about FIRE and want every tax advantage

For me, the Solo 401(k) was the obvious choice. The extra contribution room alone made it worth the slightly more complex setup.

The One Catch: Form 5500-EZ

Here's something nobody told me until after I set up my account:

If your Solo 401(k) balance exceeds $250,000, you have to file Form 5500-EZ with the IRS every year.

It's not complicated—just a one-page form reporting your account balance. But it's an extra thing to remember.

For me, this won't be an issue for a few years. And honestly? If I'm complaining about having to file a form because my retirement account has over $250k, that's a good problem to have.

My Take: What I'm Actually Doing

Here's my personal Solo 401(k) strategy as a 40-year-old late-starter:

2024-2025 (Ages 40-41):

Contribute $48,000/year
All Traditional (pre-tax) to maximize tax savings now
Invest 100% in total market index funds (VTI/VTSAX equivalent)
Target: Build account to $100k by end of 2025

2026-2029 (Ages 42-45):

Continue $48,000/year contributions
Consider shifting some to Roth for tax diversification
Target: $400k by age 45

2030+ (Age 46+):

Maintain maximum contributions
Start planning Roth conversion ladder for early retirement
Target: $700k by age 50 (Coast FIRE territory)

The key insight for me: I can't change the fact that I didn't start at 25. But I can maximize every year from 40 forward.

The Solo 401(k) is how I'm making up for lost time.

What If You Have a W-2 Job AND Self-Employment?

Quick note on this because I get asked: Yes, you can have both a regular 401(k) at a W-2 job AND a Solo 401(k) for your side business.

BUT: Your total employee contributions across both accounts can't exceed $23,000 (or $30,500 if 50+).

So if you contribute $15,000 as an employee to your W-2 job's 401(k), you can only contribute $8,000 as an employee to your Solo 401(k).

However: The employer contribution limits are separate. Your side business can still contribute up to 25% of net self-employment income.

This is actually a powerful strategy if you have a W-2 job with a match (max that out first for free money) plus self-employment income (use Solo 401(k) employer contributions to shelter more).

Common Questions (Because I Had Them Too)

Can I take a loan from my Solo 401(k)?

Yes, unlike a SEP IRA. You can borrow up to 50% of your vested balance or $50,000, whichever is less. I don't plan to do this (it defeats the purpose of compounding), but it's nice to know it's there for emergencies.

What happens if I hire employees?

Your Solo 401(k) converts to a regular 401(k), and you'll need to offer it to eligible employees. This is why I'm being careful about hiring full-time help in my roofing business right now.

Roth or Traditional contributions?

For me at 40 with business income, I'm doing Traditional (pre-tax) to maximize tax savings now. When I'm in early retirement with lower income, I'll do Roth conversions.

But this depends on your situation. If you expect higher income in retirement or want tax-free growth, Roth makes sense.

What investments should I choose?

I'm keeping it simple: Total market index funds. Low fees, broad diversification, boring but effective.

I'm not picking individual stocks or trying to beat the market. I'm 40 and behind—I need consistent growth, not home runs.

Action Steps: How to Set Up Your Own Solo 401(k)

If you're self-employed and serious about FIRE, here's what to do:

1. Calculate Your Max Contribution

Use this formula:

Employee: Up to $23,000 (or $30,500 if 50+)
Employer: 25% of net self-employment income
Total: Employee + Employer (max $69,000 total)

2. Choose a Provider

My recommendation:

Fidelity (what I use—no fees, easy setup)
Vanguard (if you prefer their index funds)
Schwab (great platform, good customer service)

Avoid providers with annual account fees.

3. Gather Your Info

Business EIN
Schedule C (or equivalent proof of self-employment)
Decide Traditional vs. Roth

4. Open the Account

Takes about 30 minutes online
Choose your investments (I suggest low-cost index funds)
Set up contributions

5. Make Your First Contribution

You have until your tax filing deadline (usually April 15) to make prior-year contributions. So you can open an account in January 2025 and still contribute for 2024.

6. Track It

I log my contributions monthly and track my progress toward FIRE. This is part of what keeps me motivated.

The Bottom Line

If you're self-employed and didn't know about the Solo 401(k), you're leaving tens of thousands of dollars in tax savings and retirement growth on the table every year.

I wish I'd set this up at 35. Hell, I wish I'd done it at 30.

But I'm 40 now, and contributing $48,000/year to my Solo 401(k) is how I'm catching up. It's how I'm turning my late start into a realistic path to Coast FIRE by 50 and full FIRE by 55.

If you're in the same boat—business owner, self-employed, contractor, freelancer, late-starter—this is your tool.

The math doesn't lie. The Solo 401(k) is the most powerful retirement account for the self-employed. Period.

Now go set yours up.