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If you unintentionally overpay your credit card bill, you may see a negative balance on your account. Although overpaying a credit card isn’t ideal — that cash flow could’ve been used toward another expense, after all — it’s usually not cause for concern.

If you overpaid your credit card, interest isn’t charged on the amount — in fact, that amount is owed back to you. What you do next, whether that’s requesting a refund or applying the overpayment to next month’s bill, is your choice.

How Credit Card Overpayments Happen

An overpayment on a credit card happens when you pay more than the total outstanding balance on your account. This is common and simply results in a negative balance, or credit, on your account

There are a number of ways an overpayment can happen. These include accidentally making a duplicate payment, getting a merchant refund after paying your balance, keying in the wrong amount when making an online payment, or redeeming rewards as statement credits. An overpayment won’t lead to any interest or fees, and you can easily resolve it by making new purchases or requesting a refund from your issuer.

Recommended: When Are Credit Card Payments Due

How You Could Have Overpaid Your Credit Card

Here’s a closer look at some common scenarios that can lead to a credit card of overpayment.

Making a Manual Payment

If you enrolled in automatic credit card payments but forget and also manually pay your bill, you might accidentally pay twice. Other ways a manual payment can lead to overpayment include accidentally adding an extra digit (e.g., typing $1,000 instead of $100) when entering the payment amount, or making a payment before the statement is generated, and overestimating the amount you owe.

Receiving Refunds

Another common scenario resulting in an overpaid credit card is if you return a purchase to a merchant or get a refund for a service. If a refund is processed after the statement balance has already been paid in full, or if the refund exceeds the remaining balance, you can end up with an overpayment on your credit card.

Statement Credits and Rewards

Redeeming cash-back rewards as a statement credit can lead to an overpayment if they are applied to an account that is already paid in full or has a low balance. Having a fee (like an annual fee) waived or reversed after you have already paid the bill, can also result in a credit balance.

How to Rectify Overpaying Your Credit Card

If your credit card balance is under $0, and you’re owed money back, there are a few ways to move forward.

Request a Refund

Under the Fair Credit Billing Act (FCBA), you have the right to request a refund if you overpay your credit card by more than $1. You can do this by sending a written request, calling the number on the back of the card, or going to the issuer’s website to request a refund

The credit card rules state that the issuer must give you a refund in the payment method of your choosing within seven business days of receiving your request. Additionally, it must, in good faith, make attempts to return unapplied overpayments that have been on the account for over six months.

Allow the Negative Balance to Roll Over Next Month

Another way to address a negative balance on a credit card is simply to do nothing. If you don’t explicitly request a refund, the bank will automatically apply the credit toward future purchases. The negative balance will act as a credit, reducing your balance until it returns to zero.

If your credit is greater than your new statement balance, your adjusted credit amount will roll over again. It will continue this way until you’ve effectively used all of your account’s overpayment credit or you ask for a refund.

Enable Autopay on Your Credit Card

If you’re not already enrolled in automatic payments, enabling autopay for your credit card bill can help prevent overpayments due to manual payment errors. Leveraging your card’s autopay feature is a responsible way to use a credit card since it ensures you pay the correct amount on your account on time.

Many credit card issuers allow you to set up autopay to pay either the statement balance (the amount owed from the last billing cycle) or the current balance (the total amount owed at that exact moment). You can also typically choose to pay the minimum payment or a fixed custom amount.

Does an Overpaid Balance Affect Your Credit Score?

An overpaid credit card balance does not negatively impact your credit. A negative balance is usually reported to credit bureaus as a “0 balance,” which keeps your credit utilization (how much of your credit limit you’re using) low. A low credit utilization ratio can positively impact your credit file. However, a negative balance does not have a more positive impact on your credit profile than paying your statement balance in full and having a zero balance.

The Takeaway

If you unintentionally overpay your credit card, you’ll have a negative balance, which is essentially a credit owed back to you by the issuer. This generally isn’t a problem and won’t negatively impact your credit. You have two main options for resolving an overpayment: you can contact your issuer to request a refund, which they must process within seven business days, or you can simply let the credit balance remain on your account and have it automatically applied to reduce your future purchases until the credit is used up. Setting up autopay can help prevent future overpayments.

Looking for a new credit card? Consider credit card options that can make your money work for you. See if you're prequalified for a SoFi Credit Card.

FAQ

What happens if I overpay my credit card?

If you unintentionally overpay your credit card, you’ll have a negative balance, which is a credit owed back to you by the card issuer. This overpayment won’t negatively impact your credit. You have two main ways to fix it: You can request a refund from your issuer, which they must process within seven business days, or you can simply allow the negative balance to remain on your account, where it will be applied as a credit to reduce future purchases.

Does a negative balance have an effect on my credit score?

A negative balance, or credit, on your credit card does not negatively affect your credit. Issuers usually report a negative balance as a “0 balance” to the credit bureaus. This keeps your credit utilization low, which is good for your credit file. However, carrying an overpayment does not provide an additional boost beyond simply paying your statement balance in full.

How long do you have to dispute a credit card charge?

You have 60 days to dispute a credit card charge, starting from the date it appears on your statement. The bank is legally required to acknowledge your dispute within 30 days of receiving it. A resolution must be enacted within two billing cycles or a maximum of 90 days from your dispute date.

How can I request a refund after overpaying my credit card?

You can request a refund for a credit card overpayment by sending a written request, calling the number on the back of your card, or by visiting your issuer’s website. Under the Fair Credit Billing Act (FCBA), the issuer must issue the refund in your preferred payment method within seven business days of receiving your request, provided the overpayment is more than $1. Alternatively, you can simply let the credit remain on your account, and it will automatically be applied to reduce the cost of your future purchases until the credit is used up.

Photo credit: iStock/Really Design

SoFi Credit Cards are issued by SoFi Bank, N.A. pursuant to license by Mastercard® International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

SOCC-Q126-041

A credit card annual fee is a recurring cost assessed by an issuer to maintain an active account. It is essentially a membership fee that helps card companies fund high-end rewards, exclusive perks, and administrative services

While there are plenty of credit cards on the market that don’t come with an annual fee, the credit cards that charge an annual fee may have specific cardholder perks that can outweigh the cost of the fee for some users.

Below, we take a closer look at how annual fees work, what they typically cost, and some simple ways you might be able to avoid paying them altogether.

What Is a Credit Card Annual Fee?

A credit card annual fee is a yearly, recurring charge levied by card issuers to maintain a card account, often unlocking premium rewards and perks. Annual fees for credit cards can range anywhere from $95 up to $695 or more for premium cards. These fees help issuers pay for high-value rewards, such as cash back, access to airport lounges, travel credits, specialized insurance, and lucrative sign-up bonuses.

An annual fee may be worth it if the card’s rewards and benefits exceed the cost of the fee. However, there are numerous credit cards on that market that offer rewards — including cash back, points, miles — and other benefits that do not charge annual fees.

How Do Credit Card Annual Fees Work?

The first fee is typically billed on your first monthly statement after opening the account. Subsequent fees are generally charged as a lump sum once every 12 months, usually during your account anniversary month. Some issuers will break the fee into smaller monthly installments, though this is not common.

You pay your credit card annual fee just like you’d pay any other credit card charges listed on your monthly statement.

Which Credit Cards Typically Have an Annual Fee?

There are three main types of annual fee credit cards:

Reward Cards

Credit cards that offer a high-value rewards structure or that have a strong introductory bonus often come with an annual fee. If the card is used strategically, it’s possible to earn enough credit card rewards to cancel out the cost of the annual fee. You may earn rewards like cash back, travel points, or discounts on specialty purchases.

Premium Travel Credit Cards

A premium card that offers luxe perks like free passes to airport lounges or a travel concierge is likely to charge an annual fee to use the card. If you’re considering one of these cards, you’ll want to crunch the numbers to make sure you’ll use enough of the perks to offset the cost of the annual fee.

Secured Credit Cards

A secured credit card is designed to help consumers with poor or limited credit build their credit file. These cards require a deposit to “secure” the card, and that amount also usually serves as the card’s credit limit. On top of the deposit, some secured credit cards charge an annual fee. However, many major card issuers offer secured cards without an annual fee, so it’s a good idea to shop around.

Recommended: What Is the Average Credit Card Limit?

How Are Credit Card Annual Fees Charged?

As mentioned, card issuers typically bill the annual fee once a year, starting the first month you own the card. So if you opened a card on February 10, 2026, you can expect to receive a bill for the annual fee on your February 2026 statement and every upcoming February statement after that.

The annual fee shows up on the credit card statement alongside other credit card charges, and you pay the annual fee as part of that month’s credit card bill. Remember that even if you have an authorized user on a credit card, it’s still the primary cardholder’s responsibility to make payments, which includes any fees.

Avoiding Credit Card Annual Fees

One of the best ways to avoid an annual fee is to select a card that never charges one. If you have your heart set on a premium card that charges a hefty fee, you might look for a “first year waived” offer, where the issuer waives the annual fee for the first 12 months as a sign-up incentive. However, you’ll be on the hook for the fee for subsequent years.

If you already have a card that charges an annual fee, you may be able to avoid paying it with these strategies:

•   Request a retention offer: It may be worth calling the number on the back of your card and mentioning that you are considering canceling because of the fee. Issuers may offer a statement credit to cover the fee or bonus points to offset its cost.

•   Downgrade your card: Alternatively, you might ask your issuer if you can switch your account to a no-fee version within the same card family. This should allow you to keep your credit line and account age intact, which protects your credit.

•   Cancel the card: If you cannot get a waiver or downgrade, you can close the account. However, this should be seen as a last resort. Closing an account can reduce your total available credit, raise your credit utilization ratio, and potentially shorten your average account age, all of which may negatively impact your credit profile. That said, if the card has an annual fee and not enough perks to make it worth paying, it may still make sense to close it.

The Takeaway

Many credit cards charge an annual fee to fund premium rewards and high-value travel perks. While it’s easy to find excellent credit cards with no annual fee, a card that charges one may be worth the cost if you use its benefits and rewards enough to offset the fee.

Before opening an account with an annual fee, it’s a good idea to calculate whether the perks align with your spending habits and if you’ll gain more in value than you pay out. If you already have one, remember you can often request a retention offer or downgrade the card to a no-fee option to avoid paying the yearly charge.

Looking for a new credit card? Consider credit card options that can make your money work for you. See if you're prequalified for a SoFi Credit Card.

FAQ

How do you pay the annual fee on your credit card?

A credit card annual fee is paid just like any other charge on your monthly statement. The fee is typically billed as a lump sum once a year, usually on your account anniversary month, and appears alongside your purchases and interest charges. You must pay the annual fee by the due date to keep your account in good standing.

How can I avoid paying annual fees on my credit card?

There are several ways to avoid paying an annual fee. The simplest is to choose a credit card that does not charge one. If you have your eye on a premium card, look for sign-up offers where the issuer waives the annual fee for the first year. If you already have a card with a fee, you can try calling the issuer to request a retention offer, such as a statement credit or bonus points. Alternatively, you can ask to downgrade your account to a no-fee card option within the same card family. Canceling the card is a last resort, as it can potentially harm your credit.

Do all credit cards have annual fees?

No, not all credit cards have annual fees. Many excellent credit cards, including those offering cash back and rewards, do not charge a yearly fee. Annual fees are typically associated with premium cards that offer high-value perks, such as extensive travel benefits or high-end rewards programs. Whether a card with an annual fee is worth it depends on if the value of the benefits you use outweighs the cost of the fee.

Photo credit: iStock/Rudzhan Nagiev

SoFi Credit Cards are issued by SoFi Bank, N.A. pursuant to license by Mastercard® International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOCC-Q126-014

A credit card sign-up bonus, also referred to as a credit card welcome bonus, can come in the form of cash back, discounts on purchases, or other rewards, such as airline miles that you can put toward travel. These bonuses are a way for card companies and branded partners — such as airlines and other merchants — to incentivize you to sign up for a new card.

Sign-up bonuses can be a great way to get extra value out of a new credit card. Just beware that there may be strings attached. Here’s a closer look at how sign-up bonuses work, their pros and cons, and how to make the most of them.

How Do Sign-Up Bonuses Work?

Rewards are offered through a variety of credit cards, including co-branded cards. In order to receive your credit card sign-up bonus you must open a new account. Then, depending on the reward you’re being offered, you’ll usually have to meet one of three criteria:

•   First, and most simply, you may receive your bonus after your application is approved or after your first purchase.

•   If your new card is from a branded retailer, you may need to make a purchase with them before you can earn your sign-up bonus.

•   Finally, you may have to spend a certain amount of money over a set period to trigger the bonus. For example, you may have to spend $500 on purchase within the first three months of account opening.

Sign-up bonuses vary by card, as will the amount you’ll have to spend and the timeframe within which you have to do it. You may have to spend thousands of dollars in a short period of time to earn your bonus on some cards, while other cards may have no spending requirement.

Earning Sign-Up Bonuses

Spending requirements to earn a sign-up bonus on a credit card can be high, ranging into the thousands of dollars. The amount usually must be charged to your card within a set period of time, often the first three months after opening your account.

Make sure you can afford to meet these spending requirements before you decide on a particular card. Even if you technically can afford to meet the requirement, avoid the temptation to overspend on things you don’t need just to earn rewards.

Also, it may take a month or two for your bonus cash or points to appear in your account. If you’re planning to use them for something specific, say to buy a plane ticket to a friend’s wedding, be sure to take this timeframe into account.

Types of Credit Card Bonuses

There are different credit card rewards, depending on the card company and on branded partnerships. An airline is much more likely to offer points toward a flight, while a big box store is more likely to offer you an in-store discount. Here’s a look at some of the most common bonus types.

Cash Back and Bonus Points

Perhaps the two most common sign-up bonuses are getting cash back with a credit card or rewards points that you can use toward booking a hotel room or buying an airline ticket. For example, you might earn 50,000 points after spending $4,000, or you might receive a cash credit after you make your first purchase.

You may receive the bonus all at once, or there may be a tiered system in place with different eligibility requirements you’ll need to meet to earn the full reward.

Purchase Discounts

Another common sign-up bonus is a discount on a current or future purchase. For example, a retailer might offer you 20% off your next purchase when you sign up for their in-store credit card. These cards are often co-branded with a major credit card issuer, and they may be offered by brick-and-mortar stores or online retailers.

Your reward may come in the form of an immediate discount when you’re approved for the card. You could also receive a coupon or discount code. Or you might get a credit when you make your first purchase with the retailer.

Additional Spending Rewards

In addition to rewarding you for spending in the months shortly after opening your account, your credit card company may offer rewards for spending throughout the first year.

Waived Annual Fee

Rewards cards can be a little bit tricky with their various requirements, and there can be credit card costs involved. Often, rewards cards charge an annual fee that helps to offset the cost of the rewards they provide. As part of the sign-up bonus, some rewards cards will waive the card’s annual fee for the first year.

Pros and Cons of Sign-up Bonus Credit Cards

When determining whether or not you want to open a credit card with a sign-up bonus, it’s important to consider both the pros and cons:

Making the Most Out of Your Credit Card Bonus

Before choosing a credit card with a sign-up bonus, consider these ways that you can take advantage of credit card bonuses.

Pick the Most Suitable Card

Reward cards often offer some bonuses that are real attention-grabbers — but make sure the card you choose has a bonus you’ll actually use. For example, look for a card with an airline you fly often or a retailer you frequent. Or make sure that you’ll receive cash back rewards on purchases that you already make or will need to make in the future. It doesn’t make sense to sign up for a card that gives you a bonus you probably won’t use.

You also may want to consider applying for cards with a high spending requirement in the first three months timed to when you’re planning to make a series of big purchases. That way, you won’t be buying anything that you don’t already need, and you’ll be rewarded for the purchases you were going to make. For example, maybe you need a new refrigerator, or perhaps you’re planning a wedding and will put some of the costs on your credit card.

It’s always worth considering how signing up for a new card will affect your credit. Applying for a new card will trigger what’s known as a “hard inquiry,” which can bring down your credit score temporarily. The negative impact to your credit may not be worth it, especially if you’re unlikely to use the bonus, you don’t really need a new credit card, or you’re planning to seek out other loans in the near future.

Look for Special Offers

From time to time, credit cards may offer special sign-up bonuses that are much bigger than usual. Keep an eye out for these, and make sure that you meet the application deadlines. These are usually limited-time offers, so be sure the offer is still valid before you sign up.

Ensure You’re Eligible for the Bonus

In some cases, you may not be eligible to sign up for a credit card and receive its bonus. For example, if you’ve had a specific card and canceled it in the past, you may not be able to sign up for that card again and receive the bonus.

Before you apply, make sure you read the terms and conditions to understand your eligibility and to see if there’s any reason you might not receive your bonus if you sign up. Also, know that if you’ve recently opened several new credit cards, you may be declined automatically for a new bonus card.

Make Sure You Can Pay Down Your Debt

Before signing up for a bonus card, it’s crucial that you understand your ability to pay your bills on time. Bonus rewards cards often carry extremely high interest rates, meaning that any balance you carry from month to month can end up costing you a lot of money, quickly outweighing the rewards you earned initially.

Consider, too, that carrying a high credit card balance can have a negative impact on your credit score. Ideally, you should keep your credit card utilization ratio — calculated by dividing your total credit card balance by your total loan limit — below 30%. If you can, aim to keep your ratio at 10% to give you the best shot at maintaining a high credit score.

You’ll also want to be sure that if you get a rewards card, you’ll still be able to make on-time payments on all of your other bills, as this is another crucial component of a healthy credit score.

Redeeming Your Bonus Reward Points

Depending on your credit card, you may have a variety of options to redeem your rewards. For example, if you sign up for a card with a co-branded retailer, you may receive a coupon or rebate for a purchase at the store. Meanwhile, airline or hotel points may need to be redeemed by booking flights on certain airlines or rooms at certain hotel chains.

Cash back rewards could be received as a credit card refund by having your rewards applied to your credit card balance, transferred to a bank account, mailed to you as a check, or converted into rewards points.

Check your card’s terms and conditions to find out rules for redeeming your points so you can start to put them to use.

The Takeaway

Sign-up bonuses can offer credit card users a lot of value. However, it’s important that you do your research before jumping on an offer. Make sure the bonus is actually something you’ll use and that you have the means to meet eligibility requirements without damaging your overall financial health and credit score. Read all terms and conditions carefully before you sign up.

Looking for a new credit card? Consider credit card options that can make your money work for you. See if you're prequalified for a SoFi Credit Card.

FAQ

When do you get a credit card sign-up bonus?

If you sign up for a bonus rewards card, you’ll receive your bonus when you meet the card’s eligibility requirements. This could mean making a purchase, or you may need to spend a certain amount over a set period of time. The card might also require you to spend money with a particular merchant.

Are sign-up bonuses taxable on credit cards?

It depends. If sign-up bonuses are earned by spending money, such as making a purchase or spending a certain amount, they are generally considered rebates and are not taxable. But a sign-up bonus that rewards you for simply opening an account and doesn’t require making purchases could be considered taxable income. And if those rewards are more than $600 for tax year 2025 (and more than $2,000 for tax year 2026), you may owe taxes on them. In that case, the credit card issuer will typically send you a 1099-MISC form so that you can report the rewards on your tax return.

Can you open multiple cards to get more sign-up bonuses?

Technically, you can open multiple different cards to receive more sign-up bonuses, but there are limitations. For example, you eventually may get automatically declined if a card company sees that you’ve opened several recent accounts. Opening several accounts also may not be a good idea, as hard inquiries when you apply for credit generally have a negative impact on your credit score.

Photo credit: iStock/nuchao

SoFi Credit Cards are issued by SoFi Bank, N.A. pursuant to license by Mastercard® International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

SOCC-Q126-055

Being self-employed offers many perks, including freedom and flexibility. What it doesn’t offer is an employer-sponsored retirement plan. But when you don’t have access to a 401(k) at work, opening a solo 401(k) can make it easier to stay on track with retirement planning.

Before you establish a solo 401(k) for yourself, it’s important to understand how these plans work and the pros and cons involved.

What Is a Solo 401(k)?

A solo 401(k) is a type of 401(k) that’s designed specifically with self-employed individuals in mind. This retirement savings option follows many of the same rules as workplace 401(k) plans in terms of annual contribution limits, tax treatment, and withdrawals. But it’s tailored to individuals who run a business solo or only employ their spouses.

It’s one of several self-employed retirement options you might consider when planning a long-term financial strategy.

Definition and Overview

A solo 401(k) is a tax-advantaged retirement account that’s for self-employed individuals and business owners who have zero employees, or no employees other than their spouse. This type of 401(k) plan is also known by a few other names:

•   Solo-k

•   Uni-k

•   One-participant plan

Traditional solo 401(k) contributions are made using pre-tax dollars. However, it’s possible to open a Roth solo 401(k) instead. In the case of a Roth solo 401(k), you’d make contributions using after-tax dollars and be able to withdraw the money tax-free in retirement.

A self-employed 401(k) plan works much the same as a regular 401(k). For instance, you may be able to take loans from your savings if needed. Catch-up contributions are also allowed. The biggest difference is that there is no matching contribution from an outside employer.

You can start investing in a solo 401(k) for yourself through an online brokerage. There’s some paperwork you’ll need to fill out to get the process started, but once your account is open you can make contributions year-round.

At the end of the year, the IRS requires solo 401(k) plan owners to file a Form 5500-EZ if the account has $250,000 or more in assets.


💡 Quick Tip: Look for an online brokerage with low trading commissions as well as no account minimum. Higher fees can cut into investment returns over time.

Contribution Limits in Solo 401(k) Plans

Much like workplace 401(k)s, there are annual contribution limits that apply to solo 401(k) plans.

The IRS caps total contributions to a solo 401(k) account at $70,000 for 2025 and $72,000 for 2026 That doesn’t include catch-up contributions for those age 50 and over.

As both the employee and employer of your own business, you can contribute both elective salary deferrals and employer nonelective contributions (you are both the employer and the employee in this scenario). Each has different contribution caps.

Annual Contribution Limits

As an employee, you can contribute up to 100% of your earned income up to the annual contribution limit: $23,500 in 2025 and $24,500 in 2026, plus an additional $7,500 for those age 50+ in elective salary deferrals in 2025 and $8,000 in 2026. In 2025 and 2026, those aged 60 to 63 may contribute an additional $11,250, instead of $7,500 and $8,000 respectively.

Under a new law that went into effect on January 1, 2026 as part of SECURE 2.0, individuals aged 50 and older who earned more than $150,000 in FICA wages in 2025 are required to put their catch-up contributions into a Roth solo 401(k) account. With Roths, individuals pay taxes on contributions upfront, but can make qualified withdrawals tax-free in retirement.

In addition, you can make employer nonelective contributions. These come directly from the “employer” (aka you) and are not deducted from the employee’s (your) salary. As an employer, you can contribute up to 25% of your self-employment income (business income – ½ self-employment tax and elective salary deferrals), in pre-tax dollars.

Setting Up a Solo 401(k) Plan

If you’re interested in setting up a solo 401(k) for yourself, you can do so through an online brokerage. Here’s a step-by-step guide for how to open a solo 401(k).

Steps to Establish Your Plan

1. Choose a Plan Administrator

A plan administrator is the person responsible for managing your solo 401(k). It’s their job to make sure the plan is meeting reporting and other requirements established by the IRS. If you’re self-employed, you can act as your own plan administrator or you could choose your accountant instead.

2. Choose a Brokerage

Once you know who’s going to manage the plan, the next step is deciding where to open it. A number of brokerages offer solo 401(k) plans so you may want to spend some time comparing things like:

•   Account setup process

•   Investment options

•   Fees

You may be able to start the solo 401(k) account setup process online, though some brokerages require you to call and speak to a representative first. And you may need to finalize your account opening by mailing or faxing in any supporting documents the brokerage needs to complete the application.

3. Fill Out a Solo 401(k) Application

Before you can start a 401(k) account for yourself, you’ll need to give your brokerage some information about your business. A typical solo 401(k) application may ask for your:

•   First and last name

•   Employer Identification Number (EIN)

•   Plan administrator’s name and contact information

•   Social Security number

•   Mailing address

•   Citizenship status

•   Income information

You’ll also need to disclose any professional associations or affiliations that might result in a conflict of interest with the brokerage. In completing the application, you’ll be asked to name one or more beneficiaries. You may also be asked to provide bank account information that will be used to make your initial contribution to the plan.

4. Choose Your Investments

Once you’ve returned your solo 401(k) account application and it’s been approved, you can choose your investments. The type of investments offered can depend on the brokerage and the plan. But typically, you may be able to choose from:

•   Target-date funds

•   Index funds

•   Actively managed funds

•   Exchange-traded funds (ETFs)

Whether you have access to individual stocks, bonds, CDs, or alternative investments such as commodities can depend on the platform that’s offering the plan.

5. Decide How Much to Contribute

You may choose to schedule automatic investments or make them manually according to a schedule that works for you.

Choosing Between Traditional and Roth Solo 401(k)s

You can opt for a traditional solo 401(k), which is made with pre-tax dollars, or a Roth solo 401(k), which is made with after-tax dollars. Which plan is better for you may depend on what you expect your income to be in retirement.

If you believe your income will be higher in retirement than it is now, in general, a Roth could be a better choice since you can take the distributions tax-free at that time. But if you think your income may be less in retirement than it is now, you might be better off with a traditional solo 401(k), which allows you to take the tax deduction now and have your distributions taxed in retirement.

Advantages and Disadvantages of Solo 401(k) Plans

When considering retirement account options, it can be helpful to look at the pros and cons to determine what works best for your personal situation.

Benefits of Having a Solo 401(k)

There are different reasons why opening a 401(k) for self employed individuals could make sense.

•   Bigger contributions. Compared to other types of self-employed retirement plans, such as a SEP IRA or SIMPLE IRA, solo 401(k) contribution limits tend to be more generous. Neither a SEP IRA or SIMPLE IRA, for instance, allows for catch-up contributions.

•   Roth contributions. You also have the option to open a Roth solo 401(k). If you anticipate being in a higher tax bracket when you retire, you may prefer being able to withdraw contributions tax-free with a Roth.

•   Flexible withdrawal rules. A solo 401(k) can also offer more flexibility with regard to early withdrawals than a SEP IRA, SIMPLE IRA, traditional IRA, or Roth IRA. If your solo 401(k) plan allows it, you could take out a loan in place of an early withdrawal. This could help you to avoid early withdrawal penalties and taxes. An IRA-based plan wouldn’t allow for loans.

Considerations and Potential Drawbacks

There are also a few potential downsides of investing in a solo 401(k).

•   Eligibility restrictions. If you run a small business and you have at least one employee other than a spouse, you won’t be able to open a solo 401(k) at all.

•   Complicated reporting. Calculating contributions and filing can be more complicated with a solo 401(k) vs. a SEP IRA or SIMPLE IRA. If your plan has more than $250,000 in assets you’ll need to file Form 5500-EZ with the IRS each year.

•   Administrative costs. Depending on where you open a solo 401(k) plan, the cost of maintaining it year to year may be higher compared to other self employed retirement plans. And an early 401(k) withdrawal can trigger taxes and penalties.

It’s important to consider the range of investment options offered through a solo 401(k). What you can invest in at one brokerage may be very different from another. The individual cost of those investments can also vary if some mutual funds or exchange-traded funds offered come with higher expense ratios than others.


💡 Quick Tip: Did you know that you must choose the investments in your IRA? Once you open a new IRA and start saving, you get to decide which mutual funds, ETFs, or other investments you want — it’s totally up to you.

Withdrawals and Loan Provisions

There are certain requirements for withdrawals and/or loans from a solo 401(k).

Rules for Withdrawing Funds

You can make withdrawals from a solo 401(k) without penalty at age 59 ½ or older. Distributions may be allowed before that time in the case of certain “triggering events,” such as a disability, but you may owe a 10% penalty as well as income taxes on the withdrawal.

Loan Options and Conditions

Some solo 401(k) plans may be set up to allow loans. If yours does, you could take out a loan in place of an early withdrawal. This could help you to avoid early withdrawal penalties and taxes. Just be sure to find out the loan terms and conditions, which can vary by plan.

Testing and Compliance for Solo 401(k)s

Unlike workplace 401(k)s, solo 401(k)s have no testing compliance requirements involved.

Alternatives to Solo 401(k) Plans

Instead of a solo 401(k), self employed individuals can consider another type of retirement account. Here’s how different options stack up.

Comparing a Solo 401(k) to a SEP IRA and Other Retirement Options

A SEP IRA is designed for small businesses. However, unlike a solo 401(k), a SEP IRA allows no catch-up contributions and there is no Roth version of the plan.

A SIMPLE IRA is for businesses with no more than 100 employees. It has much lower contribution limits than a solo 401(k) and once again, there is no Roth option.

Pros and Cons of a Solo 401(k)

A solo 401(k) has advantages and disadvantages. Here’s a side-by-side comparison of the benefits and drawbacks.

The Takeaway

A solo 401(k) can be a worthwhile investment vehicle for self-employed people who want to save for retirement. It has more generous contribution limits than some other retirement options. In addition, there is a Roth version of the plan, and a solo 401(k) plan may also offer flexibility in terms of early withdrawals. For individuals who are self-employed, opening a solo 401(k) is one potential way to start saving for their golden years.

Prepare for your retirement with an individual retirement account (IRA). It’s easy to get started when you open a traditional or Roth IRA with SoFi. Whether you prefer a hands-on self-directed IRA through SoFi Securities or an automated robo IRA with SoFi Wealth, you can build a portfolio to help support your long-term goals while gaining access to tax-advantaged savings strategies.

FAQ

Can I contribute 100% of my salary to a solo 401(k)?

As an employee, you can contribute up to 100% of your earned income to a solo 401(k) up to the annual contribution limit, which is $23,500 in 2025, and $24,500 in 2026 plus, for those 50 and up, an additional $7,500 in 2025 and $8,000 in 2026 in elective salary deferrals. For both 2025 and 2026, those aged 60 to 63 may contribute an additional $11,250, instead of $7,500 and $8,000 respectively. Be aware that as of January 1, 2026, however, individuals aged 50 and older whose FICA wages exceeded $150,000 in 2025 are required to put their catch-up contributions into a Roth solo 401(k) account.

Is a solo 401(k) taxable income?

You will pay taxes with a solo 401(k), but the type of plan you open determines when you’ll pay those taxes. If you have a traditional 401(k), your contributions are tax-deferred, and they reduce your taxable income for the year in which you make them. However, you will pay taxes on distributions when you take them in retirement. If you have a Roth 401(k), you pay taxes on your contributions when you make them, but your distributions in retirement are tax-free.

What is the average return on a solo 401(k)?

The return on a solo 401(k) depends on the investments in your portfolio. However, in general, a solo 401(k) invested in a mix of bonds, stocks, and cash assets can have an average rate of return ranging between 3% and 8%. But again, it depends on what your investments are, and how much you allocate to those different assets. You may want to compare your plan’s performance to plans with similar funds to get a general sense of what the average return might be.

Who qualifies for a solo 401(k)?

To be eligible for a solo 401(k), you must be self-employed or a small business owner with no employees other than a spouse. To open a solo 401(k) you will need an Employee Identification Number (EIN), which is available from the IRS.

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About the author

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.