401(k) explained: The most common retirement questions, answered

You have questions? We have answers. Whether you're an employee planning for your future, an employer supporting your team's road to retirement, or a solo entrepreneur, we've got you covered. In this post, we'll tackle some of the most commonly asked questions about 401(k) plans and retirement accounts in general.

401(k) FAQs for employees:

How much should I contribute to my 401(k) account?

Deciding how much you should contribute to your 401(k) account is a personal choice — there's no right or wrong answer. We know that selecting a contribution amount can feel daunting, so we’ve outlined a few questions you may want to think about when making your decision:

• How much do you currently have saved for retirement? Understanding where you’re starting from can help you decide how much to contribute going forward. You may factor in the following to potentially get a better estimate how much to contribute to your 401(k) account to reach your savings goal:

  • Your current age and target age for retirement 

  • Your cost of living 

  • Where you would like to live in retirement

• What are your monthly expenses? You may want to add up your average monthly expenses such as rent or mortgage, utilities, food, and entertainment to get an understanding of how much money you have available each month and how you might want to divide that amongst your different savings accounts. For example, if you had $1,000 left over every month, you could put $700 in retirement and $300 in emergency savings.
  These are hypothetical examples for illustrative purposes only,  and are not intended to be construed as investment or tax advice.

• What are your monthly debt obligations? High-interest debt, like credit card balances, can cancel out investment gains.  You may want to consider a strategy of contributing at least enough to your 401(k) account to receive your full matching contribution, if one is offered by your employer. Then, evaluate your debts with a high interest rate, before evaluating your retirement contributions.

• Do you have savings set aside for emergencies? You could consider saving for unexpected expenses like medical bills or potential job loss in an emergency fund. Depending on the current state of your emergency reserves, you can choose to temporarily reduce the amount of money you put in your 401(k) account to increase your reserves. 

• Does your employer offer a 401(k) match? If they do, it can be helpful to view the matching contribution as a key part of your total compensation. If you don’t contribute enough to receive the full match, you’re potentially leaving part of your total compensation on the table.

• What are your other financial goals? It can be helpful to think about retirement as one of several key components of your overall financial well-being. When setting retirement goals, you may want to consider the costs of other important life events, such as buying a home, traveling, or starting a family. For example, if you're saving to buy a house, you may want to reduce the amount of money you put in your 401(k) account temporarily to increase the amount being saved for your down payment.

• Explore your options: When it comes to your broader financial portfolio, retirement could be just one piece of the puzzle. You can explore additional savings and investing opportunities that fit your needs and adjust your approach as your plans evolve.

While deciding how much to save is an important decision in retirement planning, try not to stress yourself out too much. You always have the flexibility to change your contribution amount whenever you need to.

These are hypothetical examples for illustrative purposes only,  and are not intended to be construed as investment or tax advice.

* Amount includes employee deferrals and employer contributions such as match and profit sharing contributions. The amount does not include catch-up contributions and certain corrective contributions.

Should I contribute to my employer's 401(k) plan even if there's no employer match?

If your employer’s 401(k) plan doesn't offer an employer match, you may wonder if it's worth it to contribute at all. Even if there’s no match, it could be a smart idea to participate in the plan because 401(k) plans have other tax advantages.

These tax advantages are delivered through two types of contributions: Pre-tax elective deferrals and Roth elective deferrals. Your choice between them boils down to a strategic question: would you rather pay taxes now or later?

Think of it this way:

• Pre-tax Elective Deferrals: Pay taxes later. Your contributions are made pre-tax, which reduces your taxable income today. Your contributions plus earnings grow tax-deferred, and you’ll pay income taxes on these funds when distributed. This approach can be compelling if you expect to be in a lower tax bracket when you retire.

• Roth Elective Deferrals: Potentially tax-free income later. Contributions are made after-tax, so there's no upfront deduction to your taxable income. The real payoff can come in retirement: the contributions are always distributed tax-free and the earnings will also come out tax-free if they are part of a qualified distribution.¹² This can be a helpful strategy if you anticipate being in a higher tax bracket in the future.

So while an employer match is helpful, it's not the primary reason a 401(k) plan is so effective. The real power lies in gaining access to a tax-advantaged account that lets you decide how and when you handle your tax obligations. 

What is the difference between pre-tax elective deferrals  and Roth elective deferrals in a 401(k) plan?

A key tax advantage for both pre-tax and Roth elective deferrals is your investment earnings can compound without being taxed each year. Growth from dividends or investment gains is sheltered from annual taxes, allowing your money to potentially grow more effectively over time.

And while both have tax benefits, that's also where they differ¹³:

• A pre-tax elective deferral provides a tax benefit when contributed by lowering your taxable income for the year the contributions are made.

• A Roth elective deferral provides a tax benefit when distributed, since contributions are made with after-tax income but the earnings are not taxed when distributed as long as the distribution is qualified. The distribution will be qualified if it has been at least five years since you first contributed Roth assets under the plan and you are either age 59½ or older, disabled or have died.¹²

Choosing between pre-tax and Roth elective deferrals can be a strategic bet on your future income. Here are two common scenarios to help you think it through:¹³

Who pre-tax elective deferrals might be for: Consider Taylor, a 45-year-old senior manager in a high tax bracket. They're at their peak earning potential and want to lower their substantial income tax bill now. They expect to have a lower, fixed income in retirement, meaning they'll likely be in a lower tax bracket at that time. For Taylor, benefitting from the tax deduction today could be more valuable than paying taxes on the funds when distributed.

These are hypothetical examples for illustrative purposes only,  and are not intended to be construed as investment or tax advice.

Who Roth elective deferrals might be for: Think of Cameron, a 28-year-old designer just starting her career. Her income is relatively low now, so an immediate tax deduction may not be as impactful. She may expect her salary—and her tax bracket—to increase significantly over the next few decades. She also has decades left until retirement, so those contributions have many years to grow, meaning more of her eventual earnings could compound completely tax-free. By paying taxes on the compensation used to make the contributions now, while their tax rate is low, she could be locking in tax-free growth and, more importantly, tax-free withdrawals in the future when she anticipates being in a much higher tax bracket.¹²

You can learn more with our guide to understanding the difference between a traditional and Roth elective deferral contribution to a 401(k) plan.

Can I contribute to a 401(k) plan and an IRA at the same time?

There are different types of retirement accounts; two of the most well-known are 401(k)s and IRAs (Individual Retirement Accounts). Generally, an employer can provide a 401(k) plan to their employees, and an IRA is a retirement account that can be opened by the individual and they can be either a traditional or Roth IRA. 

Not only can you contribute to both a 401(k) plan and an IRA in the same year, an IRA owner has until their tax filing due date (without extensions) to make a contribution to their IRA for a given tax year — also known as a carryback contribution. This can help you save more money for retirement.

Keep in mind that there are rules and limits to if and how much can be contributed to a traditional or Roth IRA, which we outline in detail here.

What does it mean to rebalance my portfolio and how often should I do it?

Rebalancing is the process of bringing your portfolio in line with your targeted asset allocation. It may be necessary if your portfolio has drifted off course or if your targeted asset allocation has changed. It can often mean selling a portion of any investments that are too large as a percentage of your portfolio, and buying more of investments that are too small. Historically, your portfolio will fluctuate over time as the market shifts, and rebalancing your 401(k) or IRA account can help to manage your risk level, which could help protect you from financial loss. Keep in mind there is always risk when investing, including the potential loss of principal. 

Rebalancing your portfolio can be a time-intensive process that might require professional expertise to be done correctly. Luckily, Gusto Retirement offers an auto-rebalancing feature for all Gusto 401(k) plans. For Gusto 401(k) customers, we track current holdings relative to an individual’s desired portfolio and rebalance the individual’s portfolio automatically when it drifts too far from the intended mix.¹

Research has shown there's no right or wrong way to approach rebalancing. It's all about what makes you feel comfortable and confident and meets your investment objectives and time horizons. Generally speaking, rebalancing your portfolio may help with:

• Managing risk: Rebalancing helps you maintain a risk level that suits your investment objectives, that way your investments match your chosen level of risk tolerance.

• Harnessing market movements: For more skilled investors, embracing market fluctuations can be advantageous through timely portfolio adjustments.

• Staying goal-oriented: Realigning your investments through rebalancing can help keep them in sync with your overall financial goals.

• Planning for your future: Rebalancing your investments can help keep you in sync with your overall financial goals and intended retirement timeline.

For a more in-depth dive on this topic, check out our guide to rebalancing your 401(k) account.¹ As always, before making any financial decision, consult your advisor or tax professional to discuss what's best for you.

How much should I pay in 401(k) plan fees?

Fees are a normal part of investing, but it can be challenging to know if the fees you're paying are high, low, or par for the course. Fees can significantly impact your retirement savings, especially when compounded over time.

From the people managing your investments to those handling the paperwork, there are different types of 401(k) fees to be mindful of. The Department of Labor divides these fees into three types:

• Investment fees: These are charges for managing your 401(k) investments. The fees are usually a portion of your invested money and can vary based on how the funds are managed. In addition to fund fees, your financial advisor (if you have one) might also charge a fee for their advice. In many cases  investment fees could make up the biggest part of 401(k) costs.

• Administration fees: Organizations who administer your 401(k) plan handle many tasks like day-to-day administration, recordkeeping, reporting, and compliance testing. They charge a fee – either a flat rate or a percentage of the 401(k) plan balance – for their work.

• Individual service fees: Sometimes, you might need specific services, such as distributing funds, processing a 401(k) loan, or rolling over funds to a new provider. Providers can charge you extra for these one-time services.

The industry-average fee charged by 401(k) providers is 1.21%.² 

401(k) FAQs from employers

Am I required to offer a retirement plan?

Potentially, yes. Whether or not you’re required to provide an employer sponsored retirement plan depends on your business location and where your employees live, due to state-mandated retirement programs. The rules of these programs vary greatly from state to state, but they could help bridge the retirement gap for the millions of U.S. workers who currently don’t have access to an employer-sponsored plan.⁴

While not every state requires employers to offer a retirement benefit, offering a 401(k) plan can bring many advantages, including:

• Significant tax credits and deductions: Offering a 401(k) plan can be more affordable than ever, thanks to powerful tax credits for small businesses introduced by the SECURE 2.0 Act. These incentives can cover your plan's startup costs and provide additional credits for making employer matching contributions or adding an automatic enrollment feature. ⁵

• 401(k) plans are easier than ever to open and administer: If you’re worried about the complexity of offering a retirement benefit, a Safe Harbor plan may be a great fit for your company. A Safe Harbor 401(k) plan is a retirement savings plan that automatically satisfies most nondiscrimination testing if employers elect to make required contributions to their employees’ 401(k) accounts.⁶ That means you can help boost employee savings and potentially reduce your own administrative work. With Gusto’s Safe Harbor 401(k) plan, we handle most of the administrative and regulatory work–including government filing and record keeping–so you don't have to spend so much time on administering the plan.

• A 401(k) plan can help attract talent and boost employee loyalty: With employee turnover being a significant business cost, a 401(k) plan can be a strategic tool. In fact, 93% employees say offering a 401(k) influences their decision to choose an employer.¹¹ As one of the most highly-demanded benefits, it can give you a competitive edge in hiring and can foster long-term loyalty that could keep your best talent on board.

• A 401(k) plan can help increase productivity, too: Offering a 401(k) plan could signal that you’re investing in your employees’ overall financial well-being and can offer your team peace of mind. If you decide to offer a match, you're also increasing their total compensation, helping them save more for retirement while potentially reducing their financial burden.

When is the best time to start a new 401(k) plan?

The most impactful time to start a new 401(k) plan can be as soon as you're able. Every month you offer a plan is another month you and your employees can save for their future. No matter when you decide to launch, the process can be managed smoothly. Here are a few timing considerations to be aware of:

• Employee savings goals: A mid-year start means employees have fewer pay periods to reach their annual contribution limit. However, they can adjust their deferral rates to contribute more with each paycheck, and most may appreciate the opportunity to start saving immediately rather than waiting for a new year. However, since your highly compensated employees are more likely to be able to defer at a greater rate, starting plans towards the end of the year can also lead to nondiscrimination testing issues.

• Nondiscrimination testing: For standard 401(k) plans, the first year's compliance testing is prorated based on the plan's start date. While a shorter year can present challenges for some providers, Gusto Retirement is designed to manage this automatically. We monitor your plan's activity every payroll from day one to assess compliance risk and provide guidance, to help your plan stays on track no matter when you start.

• Improved employee experience: Launching a new 401(k) plan is an exciting benefit for your team. While some companies align this with their annual open enrollment period, a mid-year launch can be a powerful way to boost morale and engagement on its own. In our opinion, the key to a great employee experience is clear communication about the new benefit, which can be done effectively at any time of year.

Should I offer an  employer match in the 401(k) plan? 

While not typically required, an employer match can be a strategic investment in your talent and your company. It can be one of the most powerful levers you can pull to turn a good benefits package into a great one—Gusto Retirement customers see an 85% participation rate in plans with a match.¹⁴

Here’s why offering an employer match can be a calculated business decision:

It’s a powerful tool for talent: In a competitive market, a 401(k) plan is one of the most in demand employee benefits, and including an employer match can be an even more compelling tool for both attracting new talent and retaining the valuable people you already have.  

It drives employee participation: An employer match is an effective way to encourage employees to save for retirement which can help you pass nondiscrimination testing. When your team sees you contributing to their future, they may be more likely to participate and contribute meaningfully themselves.

It comes with significant tax advantages: Your employer matching contributions are considered a business expense and are generally tax-deductible, which can lower your company's taxable income and offset the cost of the program.¹³

Depending on the plan you choose, you have flexibility in how you structure your employer match. A common formula is a dollar-for-dollar match up to a certain percentage of an employee's salary, such as “100% of the first 3% of compensation deferred.” 

One key consideration is that 401(k) plans must pass annual nondiscrimination tests. A Safe Harbor match is designed to solve this. By committing to make a specific match (or nonelective) contribution on behalf of your participating employees, including yourself, your plan automatically satisfies most of these testing requirements, simplifying your responsibilities as a plan sponsor.⁶ Safe harbor match and discretionary match are the two types of employer matching provided specifically by Gusto Retirement. 

What's the difference between a 401(k) plan and a pension plan?

Both 401(k) plans and pension plans are employer-sponsored retirement plans. A 401(k) is a defined-contribution plan, which means the employer contribution amount going into the plan is specified, but the future benefit isn't set. With a 401(k) plan, employees and employers can contribute, and often employees can choose their own 401(k) investments.

A pension plan is a defined-benefit plan that provides a specified benefit amount at retirement. With a defined benefit plan, employees don't contribute and have no control over the plans' investment decisions.

Do I receive a tax credit for sponsoring a 401(k) plan?

Maybe! The SECURE 2.0 Act, which passed in late 2022, expanded existing and created new tax credits. These credits could (potentially) fully cover the costs of a new 401(k) plan for up to three taxable years, beginning with the first year the plan is established, or if elected, the taxable year preceding the taxable year the plan is established.⁵ Here’s a look at the available credits: 

• The start-up tax credit: Offers a credit of 100% of qualified start-up costs for employers with up to 50 employees or 50% for those with 51-100 employees.⁵

• The auto-enrollment tax credit: $500 per year for including an eligible or qualified automatic-enrollment contribution feature in your plan for the first three years they are included. All Gusto 401(k) plans include an automatic-enrollment feature by default, helping you immediately take advantage of this tax credit.⁵

• The employer contribution tax credit: To encourage small employers to set up an employer matching contribution, you can receive a credit up to $1,000 per year per eligible employee for offering a match. This credit is phased out over five years with 100% for the first and second years of the plan, 75% in the third year, 50% in the fourth year and 25% in the fifth year.⁵

The impact? For qualifying businesses with up to 50 employees, 100% of startup costs can now potentially be covered while those with 51-100 could get 50% of startup costs covered.

The SECURE 2.0 Act also established Starter 401(k) plans, which is a streamlined 401(k) plan for employers that have never offered a retirement plan. Gusto Retirement was one of the earliest providers to offer a Starter 401(k) plan, and we're still one of the few that provide this option as we’re committed to making retirement accessible to all businesses and savers. A Starter 401(k) plan can be a great option for a small business that can't afford the administrative complexities and heavier price tag of a traditional 401(k) plan but still want to allow employees to save for retirement.

You can dive deeper into all things SECURE 2.0 with our guide for employers.

How much does it cost to offer a 401(k) plan?

The cost of a 401(k) plan can be a critical consideration for any business, but particularly for small businesses where budget predictability is key. Two primary models guide the cost of offering a 401(k) plan; let’s take a look at how they work below. 

• Asset-Based Pricing Model: Many traditional providers charge fees based on a percentage of the plan's total assets (known as Assets Under Management or AUM fee), often bundled with additional per-participant charges and administrative fees. The fees you and your employees pay will increase as the plan's assets grow—either from new contributions or market gains. This can make long-term costs difficult to predict.

• Flat-Fee Pricing Model: A more modern approach is a flat-fee structure. This model typically consists of a set monthly base fee for the plan and a low, fixed fee for each participating employee.

Gusto Retirement Services, LLC does not charge asset-based (AUM) fees for recordkeeping and administering your Gusto 401(k) plan, so your plan's cost is not tied to its market performance or asset size. This creates a transparent and predictable pricing structure that is easy to budget for.^{9, 10}

By separating plan costs from assets, the flat-fee model can be more affordable, especially as your business and your employees' savings grow. It’s a straightforward approach designed to make offering a 401(k) plan manageable for businesses of any size.

Can my business contribute to employees’ 401(k) account without them contributing?

Yes, you absolutely can. Contributing to your employees' 401(k) account regardless of whether they contribute themselves can be a powerful feature of a well-designed retirement plan.

This is accomplished through what are known as nonelective (AKA profit sharing) contributions. Unlike a matching contribution, which is conditional upon an employee deferring their own money into the plan, a nonelective contribution is given to eligible employees whether they contribute to the plan or not. Nonelective contributions are the most flexible form employer contributions. They allow your business to share its success directly with your team by contributing a portion of company profits to their 401(k) accounts.

A potentially key advantage is that these contributions are typically discretionary. This provides your business with significant flexibility—you can decide each year whether to make a contribution and how much it will be based on your company's performance. In a profitable year, you can be generous; in a leaner year, you can scale back or skip it entirely. There’s no fixed, ongoing commitment like there is with a safe harbor contribution.

What happens if my 401(k) plan fails nondiscrimination testing?

Failing your annual nondiscrimination testing can seem alarming, but it’s a common issue with clear, mandatory solutions. These IRS-required tests exist so that your 401(k) plan doesn't unfairly favor Highly Compensated Employees (HCEs) over Non-Highly Compensated Employees (NHCEs). If your plan fails, it simply means the contribution levels between these two groups are imbalanced, and you must take corrective action within a specific timeframe.

If a standard 401(k) plan fails ADP (which looks at employee deferrals) or ACP (which looks at match) testing, the employer typically has two primary options for correction:

• Issue Corrective Distributions: A common solution is to refund a portion of the contributions made by or for your HCEs. These refunded amounts are then treated as taxable income for those employees in the year they were contributed. While this fixes the test, it's not an ideal employee experience and can limit the amount of money an HCE can save.

• Make Additional Employer Contributions: You can make a Qualified Nonelective Contribution (QNEC) to the accounts of your NHCEs to raise their contribution rates and bring the plan into balance. This is a more generous but also more costly solution for the business.

While corrections are possible, the best approach can be proactive prevention. A modern 401(k) provider like Gusto Retirement can continuously monitor your plan’s activity to project testing outcomes and provide actionable guidance, minimizing surprises after the year is over. However, the most effective strategy could be to eliminate the risk altogether by adopting a Safe Harbor 401(k) plan design, which is structured to automatically pass most of these annual tests by default.⁶

If I decide to offer a 401(k) plan, do I have to offer it to all employees?

Generally, yes—if an employee meets the plan's eligibility requirements, you must offer them the opportunity to participate. You cannot arbitrarily exclude certain employees or groups of employees, such as a specific department, from your 401(k) plan without triggering more testing.

However, "all employees" doesn't necessarily mean every single person on your payroll from their first day. Federal regulations set minimum standards for eligibility, which gives employers a framework for when an employee must be allowed to participate in the plan.

Rules for Newly Hired Employees

Federal law (specifically the Employee Retirement Income Security Act of 1974, commonly known as ERISA) sets the maximum waiting periods you can require before an employee is eligible to join your 401(k) plan. While you have the flexibility to be more generous, you cannot set requirements that are more restrictive than these standards:

1. Age Requirement: You can require employees to be at least 21 years old.

2. Service Requirement: You can require employees to complete a specific period of service, which is most commonly defined as working 1,000 hours within a defined 12-month period. 

Once a new hire meets both the age and service requirements defined in your plan document, they must be allowed to enter the plan (participate).

Rules for Part-Time and Seasonal Workers

Recent legislation (Section 125 of the SECURE 2.0 Act of 2022) created new rules for Long-Term, Part-Time (LTPT) employees, expanding eligibility beyond the traditional 12 month/1,000-hour service requirement. Here’s a simple breakdown of the current rules:

• Eligibility Threshold: As of 2025, employees must be allowed to participate in the plan if they work between 500 and 999 hours each year for two consecutive years.

• What They Can Do: Once eligible, LTPT employees have the right to contribute their own money to their 401(k) account.

• Your Obligation: A key distinction is that you are not required to provide employer matching or profit-sharing contributions to these specific employees unless they meet the plan’s regular eligibility requirements..

401(k) FAQs from the self employed

Can I have a 401(k) plan if I’m self-employed?

Yes, you absolutely can. For self-employed individuals and small business owners with no employees (other than a spouse), the ideal solution could be a Solo 401(k) plan, also known as an Individual 401(k) plan. Here’s why the Solo 401(k) plan can be so compelling for the self-employed:

• Higher Contribution Limits: You can contribute as an "employee" (up to $24,500 in 2026, plus a catch-up if you're 50 or older) and as your own "employer" (up to 25% of compensation). This allows for a total combined contribution of up to $72,000 for 2026, far exceeding IRA limits.⁸

• Roth Flexibility: Your employee contributions can be made as a Roth deferral, enabling tax-free growth and possibly tax-free withdrawals in retirement.¹² Roth deferrals in a 401(k) plan are not subject to the MAGI limits applicable to a Roth IRA that potentially restrict higher earners from making contributions.

• Potential for Plan Loans: Unlike all types of IRAs, a Solo 401(k) plan can allow you to take a loan from your 401(k) account.

A Solo 401(k) plan is for a business owner with no employees, other than a spouse or other owners. If you hire employees later, including children of owners, the plan will need to be transitioned to a standard 401(k) plan to include them. It is one of the most effective ways for a self-employed individual to save for retirement and reduce taxable income.

How does a 401(k) plan work for the self employed?

A 401(k) plan for the self-employed, known as a Solo 401(k), allows a business owner with no employees (other than a spouse) to save for retirement. It functions by recognizing your unique position as both the "employer" and the "employee" of your own business.

This dual role is the key to how it works and what makes it so powerful. You get to contribute from both perspectives, which dramatically increases your savings potential compared to other types of retirement accounts.

Here's a breakdown of how it works: 

• You contribute as the "employee." Just like in a traditional 401(k) plan, you can make employee deferrals, up to a maximum of $24,500 for 2026 ($32,500 for 2026 if including $8,000 catch-up if age 50-59 or 64+, $11,250 if age 50-53).⁸ These can be made as pre-tax elective deferrals to lower your immediate taxable income, or as Roth elective deferrals for tax-free growth and withdrawals if a qualified distribution.¹² It’s important to note the elective deferral limit is an annual taxpayer limit and is the aggregate total of all elective deferrals contributed to any 401(k) plan in the participant’s (employee’s) tax year.

• You also contribute as the "employer." On top of your employee deferrals, your business can make an "employer" contribution of up to 25% of your eligible compensation. While legally these contributions can be made as either pre-tax or Roth, this is a newer option and many service providers are not offering it yet. If made on a pre-tax basis it gives your business a valuable tax deduction.

The combination of these two contributions allows for a much higher overall savings limit. The total cannot exceed the combined annual limit, which for 2026 is $72,000 (not including catch-up) or your compensation for the year (whichever is lower).⁸

To set up a Solo 401(k) plan, you'll need an Employer Identification Number (EIN) from the IRS. Once you have that, you can open a Solo 401(k) plan with a provider like Gusto Retirement. If you eventually hire employees, you could then transition the Solo 401(k) plan into a standard 401(k) plan.

How do you open a 401(k) plan if you are self employed?

Opening a Solo 401(k) plan begins with a few key preliminaries. First, you'll need to confirm your eligibility—the plan is designed for business owners that run a business with no employees, other than a spouse or other owners. Next, because a 401(k) plan is a formal business retirement plan, if your business doesn’t already have a federal Employer Identification Number, you must obtain a free Employer Identification Number (EIN) from the IRS.

With your EIN in hand, your next step is a strategic one: selecting a plan service provider. 

You can opt for a traditional brokerage, which may offer a wide range of investment options but requires you to manage more of the administrative and compliance duties yourself. 

Alternatively, a modern 401(k) plan administrator like Gusto Retirement can provide a more streamlined service. With a Gusto Solo 401(k) plan, we handle all of the hard parts with automated compliance, fully digital contributions, plan admin, IRS filings, and much more.

How much can I contribute to a Solo 401(k) plan?

The total amount you can contribute to a Solo 401(k) plan is determined by combining your "employee" and "employer" contributions with annual limits set by the IRS. Here are the specific limits for 2026.

• Employee Elective Deferral Contribution: You can contribute up to $24,500.

  • Age 50-59 and or 64+ Catch-up: If you are age 50-59 or 64 or over, you can contribute an additional $8,000, bringing your total employee contribution to $32,500.⁸

  • Age 60–63 Enhanced ("Super") Catch-Up: Additional $11,250 instead of $8,000 means a total employee contribution of $35,750

• Employer Contribution: Your business can contribute up to 25% of your compensation, up to the annual compensation cap established by the IRS ($360,000 for 2026).⁸

• Overall Limit: The total combined contributions from both your employee and employer roles cannot exceed $72,000 for 2026 or your total compensation (whichever is less), excluding catch-up contributions.⁸

This structure allows you to help maximize savings based on your business's performance and personal retirement goals each year, all while significantly lowering your taxable income.¹³

Can a sole proprietor have a 401(k) plan?

Yes. Sole proprietors are ideal candidates for a Solo 401(k) plan. The plan recognizes you as both the "employer" and the "employee," which allows you to make contributions to your own retirement in both capacities.

The crucial detail is that your contributions are calculated based on your net adjusted self-employment income—your profit after business expenses and certain tax deductions—not your gross revenue. This means you can only contribute to your retirement from the money you actually earned (your profit), not from the total money that passed through your business. This applies to both the employer and employee contributions.

Can I have both pre-tax and Roth elective deferrals in a single solo 401(k) plan?

Yes, absolutely. A key advantage of a Solo 401(k) plan is that you can have both pre-tax elective deferrals and Roth elective deferrals within the same, single plan.

Here’s how it works:

• Your "employee" deferrals can be designated as either pre-tax, Roth, or a combination of both, up to your annual limit. This allows you to decide year by year whether you want an immediate tax deduction or prefer to pay taxes now in exchange for tax-free withdrawals in retirement.¹²

• Your "employer" contributions are typically made on a pre-tax basis.

By using both contribution types, you can build tax diversification directly into your retirement strategy. This means you'll have a mix of tax-deferred and tax-free funds growing in one convenient account, giving you more control over your taxable income in retirement.¹³

Can I have a solo 401(k) plan and a regular 401(k) plan? What about a solo 401(k) plan and a SEP IRA plan? 

Yes, you can have more than one retirement plan, but the contribution rules between each, like a solo 401(k) plan and a SEP IRA plan, are specific and depend on the relationship between the businesses. There are also plan document restrictions that must be taken into consideration when a solo 401(k) and SEP IRA plans are offered by the same plan sponsor.

Can I have a Solo 401(k) plan and a regular 401(k) plan?

This is a common scenario for people with a day job (who participate in their employer’s 401(k) plan) and a self-employment side business (who open a Solo 401(k) plan).

• Employee Contributions are Shared: The "employee" contribution limit ($24,500 in 2026, plus catch-up) is an individual taxpayer limit that is aggregated across all 401(k) plans. For example, in 2026 if you defer $10,000 to your employer’s 401(k) plan at your day job, you can only defer up to $14,500 to your Solo 401(k) plan as an "employee."⁸

• Employer Contributions are Separate: The "employer" contribution limit is separate for each business as long as the two businesses are unrelated. Your regular employer's contributions do not impact your ability to make an employer contribution to your Solo 401(k) plan from your own business profits.

Please note that you cannot have a Solo 401(k) plan for yourself and a regular 401(k) plan for your employees in the same company unless they offer identical benefits.

Can I have a Solo 401(k) plan and a SEP IRA plan?

This is more complex and depends entirely on the business structure.¹³

• For Two Unrelated Businesses: Yes. If you work for a company that provides you with a SEP IRA and you also run your own, separate business, you can open a Solo 401(k) plan for that business. The contribution limits are independent.

• For a Single Business: Generally, no. Most SEP IRAs are established using a standard IRS form (Form 5305-SEP) that explicitly prohibits the business from maintaining any other qualified retirement plan. If your business has a SEP IRA of this type, you cannot also have a Solo 401(k) plan unless a special prototype plan document is used to establish the SEP IRA plan.

The key takeaway is that contribution limits are tied to specific rules about the individual and the business entity. It's a calculated decision that requires careful planning to maximize your savings without over-contributing. 

^Disclosures

¹This information is for illustrative purposes only, and is not intended to be construed as investment or tax advice or as an assurance or guarantee of future performance. Investing involves risk, and investments may lose value. Investment advisory services for Gusto’s 401(k) product (when 3(38) fiduciary services are appointed) are offered by Gusto Investment Services, LLC, an SEC-registered investment adviser. Expense ratios for custom portfolios will vary. For more information regarding these fees, see the ADV 2A Brochure and Form CRS.These expense ratios are subject to change by and paid to the fund(s). View full fund lineup.

² Information is illustrative, for informational use only,  not investment or tax advice. Consult a qualified tax/financial advisor. Investing involves risk, including the loss of principal. Illustrative savings based on asset-based fees for a $100,000 account balance over 20 years. Actual savings will vary depending on plan type, participant count, and additional fees. Average investment expense of plan assets for 401(k) plans w/ 10 participants and $100,000 in assets is 1.21% of assets, per 26th Edition of the 401k Averages Book w/ data updated through September 30, 2025 (inclusive of Investment management fees, fund expense ratios, 12b-1 fees, sub-transfer agent fees, contract charges, wrap and advisor fees or ANY other asset based charges). Investment advisory services for Gusto's 401(k) product (when 3(38) fiduciary services are appointed) and IRA products are offered by Gusto Investment Services, LLC, an SEC-registered Investment adviser. Managed portfolios have blended expense ratios ranging from .058% to .061% of assets under management. When combined with assumed account fee of .25% charged by Gusto 401(k) Investments. LLC, estimated total AUM fees for one of the managed portfolios can be under .31%. See Form ADV 2A Brochure for fee info. Expense ratios subject to change by and paid to the fund(s). View full fund lineup.

⁴As of June 2026. This information is general in nature and is for informational purposes only. It should not be used as a substitute for specific tax, legal and/or financial advice that considers all relevant facts and circumstances. Deadlines, fees, and other program details are subject to change by the state without notice and should be checked prior to making any decisions.

⁵ Actual eligibility and credit amounts depend on the number of employees, employee compensation levels, and individual tax circumstances. You should consult a tax professional to determine what types of tax credits or deductions your company is eligible to claim. Note that any employer contribution credit cannot also be used as a deduction.

⁶  Safe Harbor 401(k) plans automatically satisfy Top Heavy, ADP, and ACP testing requirements provided they remain safe harbor for the full plan year and don't make any non-safe harbor employer contributions. Removing Safe Harbor contributions mid-year will also require plans be subject to all compliance testing. All plans of related entities must be administered by Gusto Retirement Services, LLC in order to provide compliance testing.

⁷You should consult a tax professional and/or Financial Advisor to determine the best tax advantaged retirement plan for your situation.

⁸Varies by age and may be adjusted annually to account for IRS cost-of-living adjustments. Learn more.

⁹See Gusto Investment Services, LLC’s Form ADV 2A Brochure for more information regarding investment fees.

¹⁰See here for more information regarding Gusto's fees.

¹¹ Research run by Gusto Retirement (formerly Guideline) using Suzy research insights based on data collected December 2023, from a survey of 1038 US-based respondents. Guideline was not identified as the survey sponsor. Though the survey is broad in scope, the experiences of the respondents in this survey may not be representative of all people.

¹² Roth distributions will be tax-free if the following conditions are met: Roth contributions are always distributed tax-free. The earnings on Roth contributions will be tax-free if the following conditions are met: (a) you're either over age 59½, disabled, or have died AND (b) it has been 5 years since your first Roth contribution under the current plan. Please consult a qualified financial advisor or tax professional to determine what is applicable to your financial situation.

¹³This content is for informational purposes only and is not intended to be taken as tax advice. Please contact a tax professional for further information.

¹⁴Based on Gusto internal analytics as of June 2026