Saving for retirement becomes more complex once you run your own business. You might want higher contribution limits, flexible tax planning, or a way to accelerate savings during strong income years.
Solo 401k and IRA options both offer tax advantages, yet they work differently and can lead to very different outcomes for business owners. Many people want clarity on which plan supports their long-term goals, how each option affects current taxes, and what role income level plays in the decision.
Read on for a clear breakdown of how Solo 401k plans compare with Traditional and Roth IRAs. Below we outline the main features, contribution rules, and planning considerations so you can evaluate which structure aligns with your savings priorities without feeling overwhelmed by technical details.
Solo 401k vs Traditional IRA vs Roth IRA (2025)
Before we dive deeper into the finer details, here’s an overview of the three accounts side by side.
| Feature | Solo 401k | Traditional IRA | Roth IRA |
| Eligibility | Business owners and self-employed individuals with no employees other than a spouse. | Anyone with earned income. | Anyone with earned income, subject to MAGI limits. |
| Restrictions | Must not have eligible employees. Beginning in 2025, certain long-term part-time employees age 21+ working 500+ hours in 2 consecutive years must be allowed to defer. Adding such employees means the plan is no longer treated as “solo.” | Deduction may phase out if you are covered by a retirement plan at work and your MAGI falls within the IRS phase-out range for 2025. | Contributions phase out at higher MAGI. For 2025: full at ≤$150,000; partial at $150,000–$165,000; none ≥$165,000 (single/HOH). |
| Contribution Limits (2025) | Up to $70,000 in total annual additions; $77,500 if age 50+ with catch-up deferrals. Limits depend on compensation and plan design. | $7,000; $8,000 if age 50+. | $7,000; $8,000 if age 50+; subject to MAGI phase-outs. |
| Investment Options | Broad investment menu with self-directed features at some providers. Direct account control may be available. Collectibles and certain transactions remain prohibited. | Generally traditional market assets based on custodian policy. Some custodians permit alternatives, but prohibited-investment and prohibited-transaction rules still apply. | Similar to a Traditional IRA. Prohibited-asset and prohibited-transaction rules apply. |
| Roth Account Availability | Yes, if the plan includes a designated Roth feature. | No. | Yes. |
| Tax Deduction | Pre-tax contributions are deductible subject to Section 415 limits. Total annual additions capped at $70,000 (or $77,500 with age-50+ catch-up) for 2025. | Deductible up to the IRA limit, but deduction phases out based on MAGI when covered by a workplace plan. | Contributions are not deductible. |
| Withdrawals | Generally available at age 59½. Roth 401(k) amounts also require a 5-year period for qualified tax-free treatment. Early withdrawals may trigger a 10% additional tax. | Withdrawals allowed at 59½; taxed as ordinary income. Early withdrawals may incur a 10% additional tax. | Contributions can be withdrawn anytime. Earnings can be tax- and penalty-free if the Roth IRA is at least 5 years old and you are 59½ or older. |
| Required Minimum Distributions (RMDs) | Pre-tax accounts: RMDs start at 73. Roth 401(k) accounts: no pre-death RMDs beginning in 2024. | Yes, starting at 73. | None during the original owner’s lifetime. |
Eligibility
A Solo 401k suits business owners and self-employed individuals who do not have employees other than a spouse. The plan is built for one-participant arrangements. Beginning in 2025, long-term part-time employees aged 21 or older who work at least 500 hours in two consecutive 12-month periods must be allowed to make elective deferrals. Allowing those employees to participate would make the plan no longer treated as “solo.”
Traditional and Roth IRAs are open to anyone with earned income. There is no business-owner requirement. Contribution deductibility or Roth access may change based on income, but basic eligibility is straightforward.
Income Limits
Income affects IRA contributions more than Solo 401k participation. The Solo 401k has no income limits. It also has no minimum income requirement to participate. Contribution calculations still depend on compensation and plan rules.
Roth IRA contributions depend on modified adjusted gross income (MAGI). For 2025 (single or head of household):
- MAGI ≤ $150,000: full contribution
- MAGI $150,000–$165,000: partial contribution
- MAGI ≥ $165,000: not eligible to contribute
Traditional IRAs accept contributions at any MAGI level. Deduction rules change when you are covered by a workplace plan. For 2025 (single or head of household covered by a plan):
- MAGI ≤ $79,000: full deduction
- MAGI $79,000–$89,000: partial deduction
- MAGI ≥ $89,000: no deduction
📝 Note: If you are not covered by a workplace plan, deductibility for a Traditional IRA does not phase out for single filers.
Contribution Limits
Contribution caps vary widely. A Solo 401k has the highest potential limit of the three plans. For 2025, the combined employee and employer total can reach $70,000 if you are under age 50. It can reach $77,500 if you are at least age 50.
Traditional and Roth IRAs share a combined annual limit. For 2025, you can contribute:
- $7,000 if under age 50
- $8,000 if age 50 or older
This limit applies across all IRAs. A contribution to a Roth IRA reduces the amount available for a Traditional IRA and vice versa.
Investment Options
Investment flexibility varies by Solo 401k provider and plan type. A Solo 401k can include a broad menu when structured as a self-directed plan with direct account control. This may allow access to real estate or private placements if the provider permits these assets. Collectibles and any prohibited transaction involving disqualified persons remain restricted.
Traditional and Roth IRAs at retail custodians tend to focus on stocks, bonds, mutual funds, and ETFs. A self-directed IRA may allow alternative assets. Prohibited-investment and prohibited-transaction rules still apply across all IRAs.
📝 Note: Even in self-directed accounts, the Internal Revenue Code restricts certain assets and transactions. Violations can trigger significant tax consequences.
📌 Also read: The Best Roth IRAs
Roth Contributions
A Solo 401k may include designated Roth deferrals. For 2025, Roth employee deferrals can reach:
- $23,500
- $31,000 if age 50 or older (includes the $7,500 catch-up)
Some plans allow after-tax contributions and in-plan Roth conversions. These strategies depend on the plan document and remain subject to the overall additions cap of $70,000 or $77,500.
A Traditional IRA does not accept Roth contributions. A Roth IRA allows up to $7,000 for 2025 or up to $8,000 if age 50 or older. MAGI phase-outs determine whether you can contribute the full amount.
Withdrawals
Withdrawal rules differ based on tax treatment. A Solo 401k allows distributions at age 59½. Qualified Roth 401(k) withdrawals require age 59½ and a 5-year period. Early withdrawals may trigger income tax on taxable amounts and a 10% additional tax. Pre-tax withdrawals are taxed as ordinary income.
A Traditional IRA allows withdrawals at 59½. Earnings and pre-tax contributions are taxed as ordinary income. Early withdrawals may incur a 10% additional tax unless an exception applies.
A Roth IRA allows contributions to be withdrawn at any time. Earnings are tax- and penalty-free if the account is at least 5 years old and you are 59½ or older.
Required Minimum Distributions (RMD)
Pre-tax Solo 401k accounts and Traditional IRAs both require RMDs beginning at age 73. Roth 401(k) accounts have no pre-death RMDs starting in 2024. The IRS Uniform Lifetime Table determines the amount required each year.
A Roth IRA has no RMD during the original owner’s lifetime.
Solo 401k vs Traditional IRA vs Roth IRA: What should business owners choose?
Business owners can use all three accounts if they qualify. A Solo 401k often becomes the primary tool because it allows the highest annual contributions and offers both pre-tax and Roth deferrals when the plan includes those features. This structure can help business owners save more during strong income years.
The Solo 401k is sometimes described as offering “10x contributions” or “unlimited investments,” but these ideas are simplified. The 2025 annual additions cap still applies, and investment flexibility depends on the provider and IRS rules.
Traditional and Roth IRAs remain useful secondary accounts. They can add tax diversity, provide an additional Roth avenue, or support long-term planning once Solo 401k contributions are maximized.
Wrapping It Up
Each plan offers something meaningful for business owners, and the right choice depends on how you prefer to manage taxes, income fluctuations, and long-term savings goals. A Solo 401k can help you set aside more during profitable years, while IRAs add flexibility through different contribution rules and tax treatments.
A few points can help guide your decision:
- Review how steady or variable your business income is.
- Track how much room you realistically want for annual contributions.
- Consider whether pre-tax savings, Roth savings, or a mix aligns better with your long-term outlook.
- Evaluate whether you want broader investment flexibility through a self-directed structure.
These factors can clarify which accounts deserve attention each year as your business and financial priorities evolve.
Disclaimer:
The Carry Learning Center is operated by The Vibes Company Inc. (“Vibes”) and contains generalized educational content about personal finance topics. While Vibes provides educational content and technology services, all investment advisory services discussed on this website are provided exclusively through its wholly-owned subsidiary, Carry Advisors LLC (“Carry Advisors”), an SEC registered investment adviser. The information contained on the Carry Learning Center should not be construed as personalized investment advice and should not be considered as a solicitation to buy or sell any security or engage in a particular investment, accounting, tax or legal strategy. Vibes is not providing tax, legal, accounting, or investment advice. You should consult with qualified tax, legal, accounting, and investment professionals regarding your specific situation.
The accounts, strategies and/or investments discussed in this material may not be suitable for all investors. All investments involve the risk of loss, and past performance does not guarantee future results. Investment growth or profit is never a guarantee. All statements and opinions included on the Carry Learning Center are intended to be current as of the date of publication but are subject to change without notice.
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