Understanding the Solo 401(k)

Important Note

This information is for educational purposes only. Our firm does not provide legal, tax, or accounting advice. This guide should not be considered legal, tax, or accounting advice. Please consult with qualified professionals about your specific situation before making retirement planning decisions.

What Is a Solo 401(k)?

A Solo 401(k), also called an Individual 401(k) or One-Participant 401(k), is a retirement savings plan designed specifically for self-employed individuals and business owners with no full-time employees. It offers the same tax advantages as a traditional employer 401(k) but with higher contribution potential and more control.

Think of it as having your own personal 401(k) plan where you play both roles—you’re both the employee making salary deferrals and the employer making profit-sharing contributions. This dual role allows you to save significantly more than with other retirement plans.

Who Can Have a Solo 401(k)?

You qualify for a Solo 401(k) if you:

• Are self-employed with no full-time employees
• Own a business (any structure: sole proprietorship, LLC, S-Corp, C-Corp)
• Have self-employment income from freelancing or consulting
• Are an independent contractor or gig worker

You can have a Solo 401(k) even if you:

• Have a full-time job elsewhere with a 401(k)
• Only have part-time or seasonal help (working less than 1,000 hours per year, or 500 hours for two consecutive years starting in 2026)
• Include your spouse as the only other participant

The Double Contribution Advantage

The Solo 401(k)’s superpower is allowing contributions in two ways:

As an Employee (Salary Deferrals)

You can defer salary up to:

• $24,500 in 2026 (up from $23,500 in 2025)
• Plus $8,000 catch-up if 50-59 or 64+ (total: $32,500)
• Plus $11,250 “super catch-up” if 60-63 (total: $35,750)

As an Employer (Profit-Sharing)

You can contribute profit-sharing up to:

• 25% of compensation (if incorporated)
• 20% of self-employment income (if sole proprietor/single-member LLC)
• Maximum compensation limit: $360,000 for 2026

Combined Maximum for 2026

Total contributions cannot exceed:

• $72,000 (up from $70,000 in 2025)
• $80,000 if 50-59 or 64+
• $83,250 if 60-63
• Or 100% of compensation, whichever is less

Solo 401(k) vs. Other Retirement Plans

Compared to SEP IRA

Solo 401(k) advantages:

• Higher contribution potential at lower income levels
• Employee deferrals available
• Roth option possible
• Loan feature available
• Better for Backdoor Roth strategy

SEP IRA advantages:

• Simpler to set up and maintain
• No annual filing requirements under $250,000
• Can have employees (though you must contribute for them)

Compared to SIMPLE IRA

Solo 401(k) advantages:

• Much higher contribution limits
• No employer match required
• More investment flexibility
• Can have alongside another 401(k)

SIMPLE IRA advantages:

• Can have up to 100 employees
• Less complex administration
• Lower setup costs

Compared to Traditional IRA

Solo 401(k) advantages:

• Dramatically higher contribution limits
• No income limits for deductibility
• Stronger creditor protection
• Loan option available

Traditional IRA advantages:

• Simpler to open and maintain
• Available at more institutions
• No business required

Contribution Examples for 2026

Let’s see how powerful the Solo 401(k) can be:

Example 1: Freelance Consultant

• Self-employment income: $100,000
• Employee deferral: $24,500
• Employer contribution (20% of $100,000): $20,000
• Total contribution: $43,500

Example 2: S-Corp Owner

• W-2 wages: $60,000
• Employee deferral: $24,500
• Employer contribution (25% of $60,000): $15,000
• Total contribution: $38,500

Example 3: Side Business

• Full-time job with maxed 401(k): $24,500
• Side business profit: $30,000
• Can’t make employee deferrals (already maxed)
• Employer contribution (20% of $30,000): $6,000
• Additional retirement savings: $6,000

Example 4: High Earner Over 60

• Self-employment income: $200,000
• Employee deferral: $24,500 + $11,250 super catch-up = $34,750
• Employer contribution: $40,000
• Total contribution: $74,750

Traditional vs. Roth Solo 401(k)

Many Solo 401(k) plans offer both options:

Traditional Solo 401(k)

• Pre-tax contributions reduce current taxes
• Tax-deferred growth
• Taxable withdrawals in retirement
• Required distributions starting at age 73

Roth Solo 401(k)

• After-tax contributions (no current tax break)
• Tax-free growth
• Tax-free withdrawals in retirement
• No required distributions starting in 2024 (major change!)

Important change: As of 2024, Roth portions of Solo 401(k)s are no longer subject to Required Minimum Distributions, aligning them with Roth IRAs. This makes the Roth option much more attractive for estate planning.

Note: Employer profit-sharing contributions can now be designated as Roth contributions (starting 2024), though they become taxable income when made.

Setting Up a Solo 401(k)

Where to Open

Solo 401(k)s are available at:

• Major brokerages (Fidelity, Schwab, Vanguard, E*TRADE)
• Banks and credit unions
• Specialized Solo 401(k) providers
• Through financial advisors

What to Consider

• Investment options: Some offer full brokerage, others limited funds
• Fees: Annual fees, per-transaction costs, asset-based fees
• Roth option: Not all providers offer it
• Loan feature: If you want to borrow from it
• Ease of setup: Some have simple online setup
• Self-directed options: For alternative investments like real estate

Setup Timeline

• Must establish by December 31 to make employee deferrals for that year
• Can establish up to tax filing deadline for employer contributions only
• Once established, can make prior-year contributions until tax deadline

The Loan Feature

Many Solo 401(k)s allow loans:

• Borrow up to 50% of balance or $50,000, whichever is less
• Must repay within 5 years (longer for home purchase)
• Interest paid goes back into your account
• Not taxable if repaid on schedule

This can provide emergency access to funds, though it’s generally better to leave retirement money invested.

Investment Flexibility

Solo 401(k) investment options vary by provider:

Basic Plans

• Limited menu of mutual funds
• Target-date funds
• Similar to employer 401(k)s

Full Brokerage Plans

• Individual stocks and bonds
• ETFs and mutual funds
• REITs and commodities
• Some allow alternative investments

Self-Directed Plans

• Real estate investments
• Private lending
• Precious metals
• Cryptocurrency (where allowed)
• Maximum control and flexibility

Choose based on your investment approach and desire for control.

Tax Benefits

Current Year Tax Savings

Contributions reduce taxable income:

• Lower federal income tax
• Lower state income tax (in most states)
• Potentially qualify for other tax benefits tied to income

Tax-Deferred Growth

Like other 401(k)s:

• No annual tax on gains
• No tax on dividends or interest
• Compound growth without tax drag

Business Deduction

Employer contributions are business expenses:

• Reduce business income
• Lower self-employment tax base
• Additional tax savings beyond personal deduction

Special Strategies

The Mega Backdoor Roth

Some Solo 401(k) plans allow:

1. After-tax contributions beyond normal limits (up to $72,000 total)
2. In-service conversions to Roth
3. Potential for massive Roth savings

This requires specific plan provisions—ask providers about this feature.

Rolling In Old 401(k)s and IRAs

Solo 401(k)s can accept rollovers:

• Consolidate old employer 401(k)s
• Roll in Traditional IRAs
• Clears IRAs for Backdoor Roth strategy
• Simplifies account management

Spousal Participation

If your spouse works in the business:

• They get their own contribution limits
• Doubles the saving potential (up to $140,000+ for couple under 50)
• Must receive actual wages if incorporated
• Powerful for couple-owned businesses

Employer Roth Contributions (New in 2024)

Starting in 2024, you can designate employer profit-sharing contributions as Roth:

• Become taxable income when made
• Grow and withdraw tax-free thereafter
• Eliminates need for in-plan Roth conversions

New Withdrawal Options

Emergency Distributions (Starting 2024)

• Up to $1,000 annually for unforeseeable emergencies
• No 10% early withdrawal penalty
• Must repay within 3 years or wait 3 years for next emergency distribution

Traditional Withdrawal Rules

• Contributions and earnings are taxable when withdrawn
• 10% penalty if under 59½ (unless exception applies)
• Required distributions start at age 73 for Traditional portions
• No RMDs for Roth portions (starting 2024)

Common Mistakes to Avoid

Having Employees

Once you have full-time employees (1,000+ hours, or 500+ hours for two consecutive years starting 2025):

• Solo 401(k) no longer allowed
• Must convert to regular 401(k) with automatic enrollment (for new plans)
• Complex testing and requirements
• Consider alternatives before hiring

Wrong Business Structure

Your business structure affects contributions:

• Sole proprietors use net self-employment income
• S-Corps use W-2 wages only
• Calculations differ significantly
• May want to adjust structure

Missing Deadlines

• December 31 for new plan establishment (for employee deferrals)
• Tax filing deadline for contributions
• December 31 for Roth conversions
• Form 5500-EZ when required

Calculation Errors

Contribution calculations can be complex:

• Self-employment tax adjustments
• Different formulas for different entities
• Coordination with other plans
• Consider professional help

Compliance Requirements

Form 5500-EZ

Must file when plan assets exceed $250,000:

• Due by July 31 (or tax return due date with extensions)
• Simple one-page form
• No filing needed under $250,000
• Per plan, not per participant

Plan Documents

Must maintain:

• Adoption agreement
• Plan document
• Summary plan description
• Investment policy (recommended)

Record Keeping

Track:

• Contributions by type and year
• Rollovers and transfers
• Loans if applicable
• Investment transactions

High Earner Changes Starting 2026

Important for planning: Beginning in 2026, if you earned more than $150,000 from your business in 2026, all catch-up contributions (both regular $8,000 and super $11,250) must be made to a Roth account. This means high earners won’t be able to make pre-tax catch-up contributions.

This change affects:

• Regular catch-up contributions ($8,000)
• Super catch-up contributions ($11,250 for ages 60-63)
• Forces Roth treatment for high earners
• Plan accordingly for 2026 and beyond

When to Consider a Solo 401(k)

Ideal Candidates

Solo 401(k)s work best for:

• High-earning self-employed individuals
• Business owners wanting maximum retirement savings
• Consultants and freelancers with steady income
• Those with side businesses supplementing W-2 income
• Couples running a business together
• Real estate investors wanting self-directed options

When Other Options Might Be Better

Consider alternatives if:

• Income is very low (IRA might suffice)
• You plan to hire employees soon
• Simplicity is paramount (SEP IRA)
• Business income is unpredictable

Coordinating with Other Retirement Plans

If You Have a Day Job with 401(k)

You can have both, but:

• Employee deferrals are combined across all 401(k)s ($24,500 total)
• Catch-up contributions are also combined
• Employer contributions are per plan
• Can still make profit-sharing contributions to Solo 401(k)

Multiple Businesses

If you own multiple businesses:

• Related businesses may be treated as one
• Unrelated businesses can each have plans
• Complex rules about control and ownership
• Seek professional guidance

Winding Down a Solo 401(k)

If You Hire Employees

Options include:

• Convert to regular 401(k) (must include automatic enrollment for new plans)
• Terminate plan and roll to IRA
• Keep plan but stop contributions

If You Close the Business

• Can keep plan open with existing assets
• Can roll to IRA or new employer’s plan
• Must stop contributions without business income

Plan Termination

Process involves:

• Formal plan termination
• Distribution of assets
• Final Form 5500-EZ if required
• Notification requirements

Recent Changes from SECURE 2.0

Effective 2024:

• RMDs eliminated for Roth portions: No required distributions from Roth Solo 401(k) accounts during your lifetime
• Emergency distributions: Up to $1,000 annually for unforeseeable emergencies without 10% penalty
• Employer Roth contributions: Can designate profit-sharing contributions as Roth (but they become taxable income)

Now in Effect (2025-2026):

• Super catch-up contributions: Ages 60-63 can contribute $11,250 instead of $8,000
• Higher contribution limits: Base limit increased to $24,500, total to $72,000
• Automatic enrollment for new plans: If you hire employees, new plans must auto-enroll them
• Part-time employee rules: Must include employees working 500+ hours for two consecutive years (reduced from three)

Now in Effect (2026):

• Roth-only catch-ups for high earners: Those earning over $150,000 must make catch-up contributions on a Roth basis

Making the Most of Your Solo 401(k)

To maximize benefits:

1. Contribute early and often – Front-load contributions when cash flow allows
2. Understand your limits – Calculate carefully based on business structure
3. Use both contribution types – Employee and employer for maximum savings
4. Take advantage of super catch-up if eligible – Ages 60-63 can save an extra $3,250 annually
5. Consider Roth options – Especially given no RMDs starting 2024
6. Invest appropriately – Diversified portfolio aligned with goals
7. Keep good records – Track contributions and comply with requirements
8. Take advantage of 2026 features – High earners prepare for mandatory Roth catch-ups

Enhanced 2026 Contribution Strategies

Maximize Your Age-Based Benefits

• Under 50: Up to $72,000 annually
• Ages 50-59 or 64+: Up to $80,000 annually
• Ages 60-63: Up to $83,250 annually (new super catch-up)

Roth vs. Traditional Strategy

Given that Roth portions no longer have RMDs:

• Consider more Roth contributions for long-term growth
• Use Traditional for immediate tax relief
• Mix both for tax diversification
• Remember: employer contributions can now be Roth too

Income Planning for 2026

If you expect to earn over $150,000:

• Maximize traditional catch-up contributions in 2026
• Prepare for mandatory Roth catch-ups starting 2026
• Consider income timing strategies
• Evaluate Roth conversions now

Tax Credit Opportunities

Auto-Enrollment Credit

Some Solo 401(k) plans may qualify for a $500 annual tax credit for three years (total $1,500) by including automatic enrollment features, even though they’re not used.

Startup Credits

Small businesses may qualify for:

• Up to $5,000 annually for startup costs (first three years)
• Enhanced credits for employers contributing to employee accounts

Advanced Strategies

The Mega Backdoor Roth Enhanced

With new rules allowing Roth employer contributions:

1. Make after-tax employee contributions up to $72,000
2. Designate employer contributions as Roth
3. Convert or rollover to Roth IRA
4. Build substantial tax-free retirement wealth

Real Estate Investment Benefits

Solo 401(k)s remain excellent for real estate:

• No UBTI tax on non-recourse financing
• Direct property ownership possible
• Higher contribution limits fund larger investments
• Self-directed options available

Coordinated Roth Strategy

Combine multiple Roth vehicles:

• Roth Solo 401(k) (no RMDs starting 2024)
• Roth IRA conversions
• 529-to-Roth rollovers for children
• Create substantial tax-free income streams

The Bottom Line

The Solo 401(k) has become even more powerful in 2026 with increased contribution limits, elimination of RMDs for Roth portions, and new super catch-up contributions for those aged 60-63. Recent law changes have enhanced its flexibility while maintaining its core advantage: the ability to contribute as both employee and employer.

For self-employed individuals and business owners without employees, the Solo 401(k) offers unmatched retirement savings potential. The combination of high contribution limits, Roth options without RMDs, and investment flexibility makes it an essential tool for building substantial retirement wealth.

With the upcoming requirement for high earners to make Roth catch-up contributions starting in 2026, now is an excellent time to maximize traditional contributions and develop a long-term Roth strategy. Whether you’re just starting out or approaching retirement, the Solo 401(k) provides the tools and flexibility to build the retirement you want on your own terms.

This guide provides general educational information about Solo 401(k) plans as of 2026. Individual circumstances and business structures vary significantly. Consult with qualified tax and financial professionals for advice specific to your situation. Tax laws are subject to change, and the SECURE 2.0 provisions continue to be implemented with ongoing IRS guidance.