The History of the Solo 401(k) Plan

When Did the 401(k) Start? – Key Historical Milestones

Before we dig deeper, here’s a quick timeline of the Solo 401(k) history:

Year	Milestone	What Happened
2001	Solo 401(k) Expansion	The Economic Growth and Tax Relief Reconciliation Act (EGTRRA) significantly increased contribution limits, making Solo 401(k) plans a preferred option for self-employed individuals.
1981	Official 401(k) Launch	On November 10, 1981, the IRS issued formal rules allowing salary deferrals into 401(k) plans—this marked the true beginning of the modern 401(k).
1978	401(k) Added to Tax Code	The Revenue Act of 1978 introduced Section 401(k), permitting employees to defer compensation into retirement plans starting in 1980.
1974	ERISA Passed	The Employee Retirement Income Security Act set federal standards for retirement plans and laid the foundation for 401(k)-style accounts.
1962	Keogh Plans Introduced	Congress created retirement plans for the self-employed under the Self-Employed Individuals Tax Retirement Act.
1956	IRS Validates CODAs	The IRS approved cash or deferred arrangements (CODAs) in profit-sharing plans as tax-deferred, paving the way for 401(k)-style contributions.
1950s	Early CODAs Offered	Some companies began letting employees defer part of their wages into retirement accounts—an early version of the 401(k) concept.

If you’re self-employed, one of the biggest financial challenges you face is preparing for retirement without the safety net of an employer-sponsored plan. Corporate employees often have access to 401(k)s, pensions, and matching contributions, while entrepreneurs and small business owners must build their retirement security on their own. That’s where the Solo 401(k) comes in.

More than just a retirement plan, the Solo 401(k) represents freedom, flexibility, and control—the very qualities that define entrepreneurship. It allows self-employed individuals to access the same powerful savings tools as Fortune 500 employees, but without the red tape or costly compliance rules. To understand why the Solo 401(k) has become the plan of choice for millions of independent workers, we need to look at how it came to be. Its history reveals not just a series of legislative changes, but a broader effort by Congress and the IRS to level the playing field for small business owners.

What Is the Solo 401(k)?

The Solo 401(k), sometimes called an Individual 401(k), One-Participant 401(k), or Self-Employed 401(k), is a qualified retirement plan designed exclusively for self-employed individuals and small business owners with no full-time employees other than a spouse or business partner.

Although many investors assume it’s a new invention, the Solo 401(k) has deep roots in U.S. retirement legislation. The plan follows the same rules as a traditional employer 401(k), but with one important distinction: because it covers only the business owner (and possibly a spouse), it is not subject to the complex and costly compliance requirements under ERISA (Employee Retirement Income Security Act of 1974).

This exemption makes the Solo 401(k) simple to administer, yet just as powerful as its corporate counterpart.

How Did the Solo 401(k) Begin?

To understand the Solo 401(k), it helps to trace the broader history of retirement savings in the U.S.

Early Retirement Savings: The Foundation

• 1950s: Companies began offering profit-sharing plans that allowed employees to defer some of their compensation. These were called Cash or Deferred Arrangements (CODAs).
• 1962: Congress passed the Self-Employed Individuals Tax Retirement Act, often called the Keogh or H.R. 10 plan. For the first time, self-employed individuals could enjoy some of the same retirement benefits as employees.

ERISA and the 401(k) Era

• 1974: ERISA redefined retirement plans, setting rules for reporting, funding, vesting, and fiduciary responsibility.
• 1978: The Revenue Act of 1978 introduced Section 401(k) to the Internal Revenue Code, allowing employees to make tax-deferred contributions through salary reductions.
• 1981: The IRS issued formal regulations for 401(k) plans. This marked the birth of the modern 401(k), which quickly spread among large employers.

A Unified System

• 1980s: Congress streamlined retirement plan rules for both incorporated and unincorporated businesses. This ensured that self-employed individuals could access the same tax incentives as employees of large firms.

The Turning Point: EGTRRA of 2001

The Economic Growth and Tax Relief Reconciliation Act (EGTRRA), passed in 2001, was the catalyst that brought the Solo 401(k) into widespread use starting in 2002.

EGTRRA introduced several key reforms that made the plan especially attractive for small business owners without employees:

• Higher contribution limits: Increased deductible profit-sharing contributions from 15% to 25% of compensation.
• Employee deferrals: Allowed self-employed individuals to make salary deferrals in addition to employer contributions.
• Catch-up contributions: Added extra deferrals for those age 50 and older.
• Roth option: Created the ability to make after-tax Roth contributions inside a 401(k).
• Loan feature: Expanded retirement plan loan options to sole proprietors.

These provisions gave the self-employed the same benefits as large corporate 401(k) plans, while maintaining the simplicity of administration.

Growth of the Solo 401(k)

Before 2002, most self-employed individuals relied on SEP IRAs or SIMPLE IRAs. But after EGTRRA, the Solo 401(k) quickly became the preferred choice.

Why? Because it offers:

• The highest contribution limits of any retirement plan for the self-employed.
• Flexible funding options (employee deferrals + employer profit sharing).
• A Roth feature for tax-free retirement growth.
• Loan provisions that IRAs do not offer.

For a business owner with no employees, the Solo 401(k) provides unmatched control, tax benefits, and savings potential.

Solo 401(k) Today

Today, the Solo 401(k) is the most popular retirement plan for self-employed individuals and small business owners without employees. The IRS designed it to mirror the advantages of the corporate 401(k), while removing the administrative hurdles that don’t apply to owner-only businesses.

As of 2023, 401(k) plans collectively hold over $7 trillion in retirement assets. While large employers dominate much of that figure, Solo 401(k)s continue to grow as more Americans choose self-employment and independent business ownership.

Summary

The Solo 401(k) is more than a financial tool—it’s a symbol of independence for self-employed professionals and small business owners. It allows you to build wealth on your own terms, while still enjoying the tax advantages and growth opportunities of a traditional 401(k). By choosing the Solo 401(k), you’re not only investing in your retirement—you’re investing in your freedom. Whether you’re a consultant, freelancer, or small business owner, this plan empowers you to take control of your financial future with the same advantages that large corporations provide their employees.

At IRA Financial, we believe retirement planning should never be out of reach. With the Solo 401(k), it isn’t. It’s the plan designed for you: simple, powerful, and built to reward your independence.

Take the Next Step With a Solo 401(k)

If you’re self-employed, the Solo 401(k) is the most powerful way to save for retirement while keeping full control of your financial future. At IRA Financial, we design Solo 401(k) plans specifically for entrepreneurs, consultants, and small business owners. Our specialists will help you set up your plan correctly, take advantage of every available tax benefit, and ensure IRS compliance—so you can focus on growing your business and your retirement wealth.

👉 Schedule a Free Consultation to explore how a Solo 401(k) fits your business.
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