IRS Solo 401(k) Rules: Contribution Limits, Loans, and Form 5500-EZ

The IRS Solo 401(k) rules let a self-employed owner with no non-spouse employees contribute up to $72,000 in 2026, or as much as $83,250 with the enhanced catch-up for ages 60 through 63, by stacking an employee deferral and an employer profit-sharing contribution into one account.¹ The rules that matter most to a solo plan sponsor fall into a handful of buckets: who qualifies, how much you can put in, what you can do with the money, what counts as a prohibited transaction, and what you have to file each year.

Who Qualifies

A Solo 401(k) is built for a business with one participant, or two if your spouse works in the business. The owner needs active self-employment income. Sole proprietorships, partnerships, and S-Corps or C-Corps where you are the owner-operator all work, as long as the income comes from actual business activity rather than passive investments.²

The structure breaks the moment you hire a non-spouse employee who works more than 1,000 hours in a year. At that point the plan has to be converted into a standard 401(k), with nondiscrimination testing and the administrative overhead that comes with it. Part-time workers who stay below 1,000 hours in a year can generally be excluded without losing the one-participant status.

A working spouse is treated as a separate participant. Each spouse gets a full employee deferral and a full employer profit-sharing allocation, which can roughly double the household’s annual contribution capacity.

2026 Contribution Limits

A Solo 401(k) contribution has two parts, and the combined total of both cannot exceed the Section 415 annual addition limit of $72,000 for 2026.¹ Catch-up amounts for older participants sit on top of that ceiling.

Employee Deferral

The employee deferral is what you contribute in your capacity as a worker in the business. The 2026 cap is $24,500.³ That limit is personal and applies across every 401(k) you participate in. If you also defer salary into an unrelated employer’s 401(k), the combined deferrals across both plans still can’t exceed $24,500.⁴

Catch-ups layer on top of the base deferral:

Age 50 and older: an additional $8,000, for a total deferral of up to $32,500.³
Ages 60 through 63: a higher catch-up of $11,250 instead of $8,000, for a total deferral of up to $35,750. This enhanced bracket was introduced by SECURE 2.0 and takes effect in 2026.³

Deferrals can be pre-tax, Roth, or both, depending on what your plan document allows. Pre-tax deferrals reduce taxable income now and get taxed at withdrawal. Roth deferrals use after-tax dollars and come out tax-free in qualified distributions.

Employer Profit-Sharing Contribution

The employer piece is a percentage of your compensation and is deductible by the business. The deduction is capped at 25% of compensation under Section 404.⁵ What counts as “compensation” depends on your entity.

For S-Corp and C-Corp owners, compensation is W-2 wages. The math is clean: 25% of whatever salary the corporation pays you. A $200,000 W-2 supports a $50,000 employer contribution.

For sole proprietors and single-member LLCs taxed as disregarded entities, compensation starts with net self-employment income and is reduced by half of your self-employment tax and by the employer contribution itself. Because the contribution is a deduction from the income it’s calculated on, the math is circular. The practical effective rate lands near 20% of net self-employment earnings after the half-SE-tax deduction, not the flat 25% that S-Corp owners get on W-2 wages.

One rule constrains S-Corp owners specifically: the IRS requires owner-employees to take “reasonable compensation” before non-wage distributions.⁶ Driving W-2 salary artificially low to minimize payroll tax while inflating distributions is a well-known audit trigger. The IRS looks at training, time devoted to the business, duties performed, and what comparable businesses pay for similar work.

Combined Caps by Age

Add the two components together and the ceiling in 2026 looks like this:

Under 50: $72,000
Age 50 to 59, or 64 and older: $80,000 ($72,000 plus the $8,000 catch-up)
Ages 60 to 63: $83,250 ($72,000 plus the $11,250 enhanced catch-up)

Deadlines

The employee deferral has to be made by December 31 of the tax year. The employer profit-sharing contribution can be funded up through the business tax return due date, including extensions. A sole proprietor filing Form 1040 on extension has until October 15 to fund the employer piece.

Setup has its own clock. The traditional deadline to adopt the written plan document for a calendar-year business is December 31. Section 401(b)(2) allows an employer to adopt a plan after year-end but before the tax return filing deadline and treat it as adopted on the last day of the prior year.⁷ Originally that retroactive window applied only to employer contributions, but SECURE 2.0 extended it so sole proprietors can also make retroactive employee deferrals, giving a calendar-year sole proprietor until April 15 to set up a plan and fund both contribution types for the prior year.

Loans and Withdrawals

Plan Loans

If your plan document includes a loan feature, you can borrow the lesser of $50,000 or 50% of your vested balance without triggering tax or penalty.⁸ Repayment runs on at least quarterly installments of principal and interest over five years. Loans used to buy a primary residence can run longer.

The interest rate must be commercially reasonable, and the loan needs a signed promissory note. Miss payments and the outstanding balance becomes a deemed distribution, which pulls in ordinary income tax plus the 10% early withdrawal penalty if you’re under 59½.⁸

Hardship Withdrawals

Hardship withdrawals cover an immediate and heavy financial need that you can’t meet from other resources. They come only from the employee deferral portion of the account and don’t include earnings on those contributions. The withdrawn amount is taxed as ordinary income, and the 10% penalty applies if you’re under 59½. The old six-month contribution suspension after a hardship withdrawal was eliminated effective January 1, 2020, so you can start contributing again right away.⁹

In-Service Distributions After 59½

Once you reach 59½, your plan can allow unrestricted in-service distributions with no hardship requirement. They’re taxed as ordinary income but escape the 10% penalty.

Required Minimum Distributions

At age 73, you have to start taking required minimum distributions from the pre-tax balance.¹⁰ The amount equals the prior December 31 balance divided by a life expectancy factor from the IRS Uniform Lifetime Table. Your first RMD is due by April 1 of the year after you turn 73, and each later one by December 31.

Miss an RMD and the penalty is 25% of the shortfall, dropping to 10% if you correct it within two years.¹⁰ Roth Solo 401(k) balances are exempt from RMDs during the original owner’s lifetime, a change SECURE 2.0 made permanent.

Prohibited Transactions

A Solo 401(k) has to operate at arm’s length from the plan owner and from certain related parties the IRS calls “disqualified persons,” which includes your spouse, ancestors, and lineal descendants.¹¹ Transactions between the plan and any disqualified person are prohibited, including:

Selling or leasing property between yourself and the plan, such as buying a rental property from your own Solo 401(k)
Lending money or extending credit between the plan and a disqualified person outside the formal plan loan provisions
Using plan assets for personal benefit, such as living in a property the plan owns
Receiving personal compensation from a transaction involving plan assets

The excise tax starts at 15% of the amount involved for each year the transaction remains uncorrected. If the problem isn’t fixed within the taxable period, an additional tax of 100% of the amount involved applies.¹² An owner who uses $80,000 of plan funds to renovate a personal property faces $12,000 in first-year excise taxes and the full $80,000 if the deal isn’t unwound.

Self-directed plans that hold real estate, private company stakes, or other alternative assets carry the highest risk, because every investment decision has to be screened for whether any disqualified person benefits directly or indirectly.

Form 5500-EZ and Plan Compliance

A Solo 401(k) has to file Form 5500-EZ for any plan year in which total assets of all one-participant plans the employer maintains exceed $250,000 as of the last day of the plan year.¹³ Stay at or below $250,000 at year-end and you’re generally exempt. The test is applied each year on the year-end balance, so a plan can be above the threshold one year and below it the next.

The form reports financial condition, asset values, and investment breakdown to the IRS and Department of Labor. It’s due the last day of the seventh month after the plan year ends, which is July 31 for calendar-year plans. Filing Form 5558 before the original due date gets you an automatic 2½-month extension to October 15.¹³

Late filing runs $250 per day, capped at $150,000 per plan year.¹³ Those penalties can exceed the plan balance quickly on a small account, so it’s worth confirming your year-end number each December even if you think you’re under the threshold.

The plan document itself has to stay current with tax law. Full restatements typically run on a six-year cycle, but interim amendments can be required sooner when major legislation like SECURE 2.0 adds new provisions. Prototype plans from a brokerage usually get restated by the sponsoring institution. Individually designed plans put that work on the plan sponsor. Letting an amendment deadline slip can jeopardize the plan’s tax-qualified status.

Fixing Mistakes

The IRS Employee Plans Compliance Resolution System gives sponsors a path to correct errors without losing qualified status. The self-correction track handles many operational errors with no IRS filing and no fee. Minor operational errors can be self-corrected at any time. Significant operational errors in a 401(k) plan can still be self-corrected if you act before the end of the third plan year after the failure occurred.¹⁴ The most common Solo 401(k) errors are excess contributions, missed RMDs, and outdated plan documents. Catching any of them early is far cheaper than discovering them during an audit.

Closing the Plan

If you shut down the business, hire employees who disqualify the solo structure, or decide to wind the plan down, you have to distribute all plan assets and file a final Form 5500-EZ. The final return is required regardless of asset level, even if the balance was below $250,000.¹³ The final plan year is the year all assets are fully distributed, and the same seventh-month-after-year-end deadline applies.

Pre-tax balances can roll to a traditional IRA, another employer’s 401(k), or a new Solo 401(k) at a different business. Roth balances roll to a Roth IRA. Skipping the final return leaves the plan open in the IRS system and exposes it to the same late-filing penalties as an active plan.

1
Internal Revenue Service. IRS Notice 2025-67 – 2026 Amounts Relating to Retirement Plans and IRAs
2
Internal Revenue Service. One-Participant 401k Plans
3
Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500
4
Internal Revenue Service. How Much Salary Can You Defer if You’re Eligible for More Than One Retirement Plan
5
Office of the Law Revision Counsel. 26 USC 404 – Deduction for Contributions of an Employer to an Employees Trust or Annuity Plan
6
Internal Revenue Service. S Corporation Compensation and Medical Insurance Issues
7
Office of the Law Revision Counsel. 26 USC 401 – Qualified Pension, Profit-Sharing, and Stock Bonus Plans
8
Internal Revenue Service. Retirement Topics – Loans
9
Internal Revenue Service. Retirement Plans FAQs Regarding Hardship Distributions
10
Internal Revenue Service. Retirement Topics – Required Minimum Distributions (RMDs)
11
Internal Revenue Service. Retirement Topics – Prohibited Transactions
12
Office of the Law Revision Counsel. 26 USC 4975 – Tax on Prohibited Transactions
13
Internal Revenue Service. 2025 Instructions for Form 5500-EZ
14
Internal Revenue Service. Correcting Plan Errors – Self-Correction Program (SCP) General Description