Balancing retirement savings options is important for individuals who are both self-employed and employed by another company. A common question arises: can you contribute to a Solo 401(k) while also participating in an employer-sponsored 401(k)? Understanding how these two plans can coexist offers opportunities to maximize retirement contributions.
Exploring the possibility of maintaining both accounts requires careful consideration of eligibility criteria, contribution limits, tax implications, compliance requirements, rollover possibilities, and distribution options.
Eligibility Criteria
To determine if you can contribute to both a Solo 401(k) and an employer-sponsored 401(k), it’s essential to understand the requirements for each plan. A Solo 401(k), also known as an individual 401(k), is designed for self-employed individuals or small business owners with no employees, except possibly a spouse. To qualify, you must have self-employment income, such as from freelance work, consulting, or a small business.
Eligibility for an employer-sponsored 401(k) is determined by the employer’s plan rules, which must comply with federal regulations. Employers often set criteria such as a minimum age, typically 21, and a service requirement, often one year of employment. Reviewing your employer’s specific plan documents is critical to understanding these requirements.
Separate Contribution Limits
The ability to contribute to both plans depends on understanding the IRS’s distinct contribution limits. For 2025, individuals can contribute up to $23,500 as an employee across both plans combined. Those aged 50 and above can make an additional catch-up contribution of $7,500. 1Internal Revenue Service. 401(k) Limit Increases to $23,500 for 2025, IRA Limit Remains $7,000
As a plan sponsor, a Solo 401(k) also allows an “employer” contribution. For employees of a corporation, the employer contribution limit is generally up to 25% of compensation; for self-employed individuals, the effective limit is generally 20% of net earnings from self-employment (after the deductible half of self-employment tax), all subject to the overall annual additions cap. 2Internal Revenue Service. Publication 560, Retirement Plans for Small Business
Across employee and employer contributions combined, the total annual additions limit for defined contribution plans is $70,000 for 2025 (not including catch-up contributions). 3Internal Revenue Service. Notice 2024-80, 2025 Amounts Relating to Retirement Plans and IRAs
Tax Considerations
Managing both a Solo 401(k) and an employer-sponsored 401(k) requires understanding how contributions are treated under tax law. Contributions to these accounts are usually pre-tax, reducing taxable income for the year, while designated Roth contributions are made after tax.
Required minimum distributions (RMDs) begin at age 73. If you miss an RMD, the excise tax is 25% of the shortfall, reduced to 10% if corrected within two years. 4Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs
Maintaining Compliance
Ensuring compliance when managing both a Solo 401(k) and an employer-sponsored 401(k) involves understanding the rules governing each plan. You must maintain a written plan document for the Solo 401(k) and adopt required amendments by the IRS deadlines, which are generally tied to the agency’s annual Required Amendments List and due by the end of the second calendar year after the item appears. 5Internal Revenue Service. Required Amendments List
One-participant (Solo) 401(k) plans must file Form 5500-EZ for years in which total plan assets exceed $250,000 at year-end, and a final return is required for the year the plan terminates even if assets are under $250,000. 6Internal Revenue Service. One-Participant Plans: $250,000 Filing Threshold and Final-Year Filing
Rollover Possibilities
Rollovers are a valuable tool for managing multiple retirement accounts. A Solo 401(k) and an employer-sponsored 401(k) each allow rollovers from other qualified plans, such as traditional IRAs, 403(b)s, and former employer 401(k)s. This flexibility enables individuals to consolidate accounts, reduce administrative fees, and streamline investment oversight.
To avoid tax penalties, rollovers must comply with IRS guidelines. Proper timing and adherence to rollover rules are crucial to ensure a smooth transfer of funds without triggering unintended taxable events.
Distribution Options
Distribution strategies are key to managing retirement income effectively. Both Solo and employer-sponsored 401(k) plans offer options such as lump-sum withdrawals, periodic payments, or annuities. Each method has unique tax implications. For instance, lump-sum withdrawals could increase your tax bracket, while periodic payments provide a steady income stream.
Employer-sponsored 401(k) plans often have specific distribution terms outlined in their plan documents. Understanding these terms and planning strategically can help retirees optimize their income while minimizing tax liabilities.