Solo 401(k) vs. Traditional IRA: Which Retirement Plan Best Fits Your Goals?

Key Points 

• Solo 401(k) plans and Traditional IRAs are valuable retirement tools that offer their own unique advantages.
• Self-directed versions of both account types provide greater flexibility by allowing investments in alternative assets.
• Comparing contribution limits, tax advantages, and investment options can help you optimize your retirement investing strategy.

Planning for retirement opens the door to a wide range of options, each with its own benefits and opportunities. Solo 401(k) plans and Traditional IRAs are two popular choices for investing toward long-term financial goals. Self-directed versions of these accounts bring added flexibility to invest beyond Wall Street and tailor your investment portfolio to your interests. Which of these options might be right for you? Here’s a quick and easy-to-follow walkthrough to help you decide.

What Is a Solo 401(k)?

A Solo 401(k), also referred to as an Individual 401(k), is designed for self-employed individuals or small business owners with no full-time employees other than perhaps a spouse. Its hallmark feature is the combination of employer and employee contributions, allowing for substantial savings potential. For 2025, people under age 50 can contribute up to $70,000 annually, while those aged 50 to 59 or 64 and older can contribute up to $77,500. Notably, individuals aged 60 to 63 have a higher catch-up contribution limit, allowing for total contributions up to $81,250. The dual contribution structure offers flexibility to adjust contributions based on income variations while providing the opportunity to maximize retirement savings.

The Solo 401(k) also has a unique loan feature, permitting account holders to borrow up to $50,000 or 50% of their account balance, whichever is less. This provision offers liquidity for unexpected expenses or business opportunities without permanently reducing retirement funds.

It's important to be mindful of certain administrative responsibilities associated with Solo 401(k) plans. For instance, when account balances exceed $250,000, the IRS requires the filing of Form 5500 annually. Staying informed about contribution deadlines and regulatory compliance is essential. Even with the administrative considerations, the Solo 401(k) is a powerful tool for self-employed individuals looking to build their retirement savings over time.

What Is a Traditional IRA?

The Traditional IRA has long been a cornerstone of retirement planning, particularly for individuals starting their savings journey. Unlike the Solo 401(k), a Traditional IRA is accessible to anyone with earned income. For 2025, individuals under age 50 can contribute up to $7,000 annually, while those aged 50 and older can add an extra $1,000 catch-up contribution, bringing the total to $8,000. While these limits are lower than those of a Solo 401(k), the Traditional IRA is considered a tried and true foundational tool for building tax-advantaged retirement savings.

Tax deferral is one of the key benefits of Traditional IRAs. Contributions reduce taxable income in the year they’re made, and account growth isn’t taxed until funds are withdrawn. This structure is particularly advantageous for individuals who expect to be in a lower tax bracket during retirement, allowing for reduced tax liability over time. Withdrawals in retirement are subject to ordinary income tax, and Required Minimum Distributions (RMDs) begin at age 73 as of 2025.

The simplicity of a Traditional IRA is one of its strongest features. It requires minimal administration or oversight, offering a user-friendly approach to retirement savings. For those seeking a dependable option to grow wealth with little complexity, the Traditional IRA continues to provide enduring value.

How Do Self-Directed Retirement Accounts Work?

Both the Solo 401(k) and Traditional IRA offer self-directed options, which elevate their potential by removing the constraints of conventional investment menus. A Self-Directed Solo 401(k) opens the door to alternative investments, giving self-employed individuals the ability to hold assets like real estate, cryptocurrency, private loans, and even tax liens. This flexibility might be particularly appealing for entrepreneurs and investors who want their retirement accounts to mirror their interests and passions.

Similarly, a Self-Directed Traditional IRA expands the horizons for individuals who want to incorporate tangible assets into their retirement portfolios. Especially for investors with deep knowledge of specific markets, diversifying investments within a Self-Directed Traditional IRA can provide stability and growth opportunities that basic Wall Street portfolios may not offer.

Adding checkbook control to either of these self-directed accounts further enhances their utility. By forming an LLC or trust owned by the retirement account, investors can manage everyday transactions through a dedicated entity and associated checking account. This setup streamlines the process of investing in alternative assets, covering expenses, or responding quickly to market opportunities.

Which Option Is Right for You?

Choosing between a Solo 401(k) and a Traditional IRA ultimately depends on your financial situation, goals, and level of involvement in managing your retirement savings. For self-employed individuals who want to maximize contributions and explore alternative investments, the Solo 401(k)—particularly in its self-directed form—is a compelling choice. Its high contribution limits, loan provisions, and investment flexibility amount to a powerful tool for aggressive savings and diversification.

On the other hand, the Traditional IRA offers simplicity and accessibility. It’s an excellent option for those starting their retirement journey or who prefer a more hands-off approach. When self-directed, it provides the same access to alternative investments as the Self-Directed Solo 401(k), opening up a versatile choice for investors of all levels.

Tapping into the Full Potential of Your Retirement Savings

Solo 401(k)s and Traditional IRAs offer empowering opportunities to support your retirement goals. Understanding their features and weighing how they align with your financial strategy is the first step toward creating a plan that works for you. Self-directed options maximize the flexibility of these accounts, allowing you to gain control over your investment choices and diversify your portfolio. If a self-directed retirement account sounds like what you’re looking for, contact Broad Financial today! Our team is here to simplify the process of setting up a Self-Directed Solo 401(k) or Self-Directed IRA.