The rules for a Solo 401k let a self-employed person with no full-time employees contribute from both sides of the paycheck — as the employee deferring wages and as the employer making a profit-sharing contribution — up to a combined $72,000 in 2026, or as much as $83,250 with the highest catch-up. The plan operates like any employer-sponsored 401k, with specific eligibility, contribution, distribution, and reporting rules built around the fact that you are both the worker and the business.
Who Qualifies
Two conditions control eligibility: you need self-employment income, and you cannot have full-time employees other than yourself and your spouse.1Internal Revenue Service. One-Participant 401(k) Plans Income must come from personal services in a trade or business. That covers sole proprietors, single-member LLCs, partnerships, and S or C corporations. Passive income such as rental revenue or investment dividends does not qualify.
The employee restriction runs off the Internal Revenue Code’s plan participation rules. Anyone who works 1,000 or more hours in a 12-month period counts as an eligible employee who would need to be covered.2Office of the Law Revision Counsel. 26 U.S. Code 410 – Minimum Participation Standards Once even one person crosses that line, the plan can no longer run as a one-participant plan. Part-time help staying under 1,000 hours per year will not disqualify you.
Your spouse can participate if they earn income from the business. Both of you then make the full employee deferral and receive employer contributions, effectively doubling the household’s tax-advantaged savings. The spouse must perform real work and receive reasonable compensation for it.
How Much You Can Contribute in 2026
Because you wear two hats, the plan has two contribution buckets that stack.
On the employee side, you can defer up to $24,500 of earned income for 2026.3Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500 Deferrals can be traditional or Roth, depending on how the plan is written.
On the employer side, you can add a profit-sharing contribution. For sole proprietors and single-member LLCs, the maximum employer contribution is 20% of net self-employment income after subtracting half of the self-employment tax. For an S corporation, the limit is 25% of the W-2 wages the corporation pays you.4Internal Revenue Service. Publication 560 – Retirement Plans for Small Business
The combined total of both buckets cannot exceed $72,000 for 2026, and the calculation uses only the first $360,000 of compensation.5Internal Revenue Service. COLA Increases for Dollar Limitations on Benefits and Contributions A business owner earning $500,000 therefore gets no more employer-side room than one earning $360,000.
Catch-Up Contributions at 50 and Older
If you are 50 or older, extra contributions are available on top of the standard limits. The amount depends on your age:
- Ages 50 to 59, or 64 and older: an additional $8,000, for a maximum total of $80,000.
- Ages 60 to 63: an additional $11,250 under the SECURE 2.0 enhanced catch-up rule, for a maximum total of $83,250.6Internal Revenue Service. Retirement Topics – 401(k) and Profit-Sharing Plan Contribution Limits
The age 60–63 window creates a four-year period where you can shelter significantly more income.
Traditional and Roth Rules
Most Solo 401k providers let you split employee deferrals between traditional and Roth accounts, but the plan document must specifically allow Roth contributions.7Internal Revenue Service. Retirement Topics – Designated Roth Account Traditional deferrals reduce taxable income now and get taxed on withdrawal. Roth deferrals go in after-tax, and qualified distributions come out tax-free.
A Roth distribution is tax-free only if you have held the Roth account for at least five tax years (counting the year of your first Roth contribution) and the distribution occurs after age 59½, disability, or death.8Office of the Law Revision Counsel. 26 U.S. Code 402A – Optional Treatment of Elective Deferrals as Roth Contributions
SECURE 2.0 changed the Roth landscape in two ways. Employer profit-sharing contributions can now be designated as Roth, letting you place both sides of your contribution in a Roth account.9Internal Revenue Service. SECURE 2.0 Act Changes Affect How Businesses Complete Forms W-2 You owe income tax on those employer Roth contributions in the year they are made, then the money grows and distributes tax-free. Separately, if your FICA-taxable wages from the prior year exceed $145,000 (as adjusted), any catch-up contributions you make must go into a Roth account.10Internal Revenue Service. Treasury, IRS Issue Final Regulations on New Roth Catch-Up Rule, Other SECURE 2.0 Act Provisions This mandatory Roth catch-up rule matters most for S corporation owners whose W-2 income crosses that threshold. Sole proprietors without W-2 wages are generally not affected.
Opening the Plan and Meeting Deadlines
The plan must be formally adopted by December 31 of the year you want to begin making employee deferrals. Miss that date and you lose the ability to make elective deferrals for the entire year. Employer profit-sharing contributions are more flexible; you can make those up to the due date of your business tax return, including extensions. For a sole proprietor on a calendar year, that is typically October 15 of the following year with an extension filed.
You will need a federal Employer Identification Number for the plan itself, separate from any EIN or Social Security number you use for the business.1Internal Revenue Service. One-Participant 401(k) Plans The central document is a Plan Adoption Agreement, which sets the effective date, the compensation definition, whether Roth contributions are allowed, whether loans are permitted, and whether the plan accepts rollovers. Most providers supply a pre-approved prototype plan, so you do not have to draft one from scratch. If Roth employer contributions or participant loans matter to you, confirm the provider’s plan document supports them; not every prototype includes every optional feature.
Employee deferrals should generally be deposited as soon as administratively feasible after the income is earned.
Loans and Early Withdrawals
If your plan document permits loans, you can borrow up to 50% of your vested balance or $50,000, whichever is less.11Internal Revenue Service. Retirement Topics – Loans Repayment must happen within five years through at least quarterly payments, though the five-year clock does not apply if the loan is for buying your primary residence. Interest you pay goes back into your own account. If you default, the outstanding balance becomes a taxable distribution and may trigger the 10% early withdrawal penalty.
Distributions taken before age 59½ are generally subject to income tax plus a 10% additional tax.12Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions Several exceptions eliminate the 10% penalty:
- Total and permanent disability, or distributions to beneficiaries after the participant’s death.
- A series of substantially equal periodic payments calculated under IRS-approved methods.
- Unreimbursed medical expenses exceeding 7.5% of adjusted gross income.
- Qualified birth or adoption expenses, up to $5,000 per child.
- Economic losses from federally declared disasters, up to $22,000.
- Distributions after a physician certifies a terminal illness.
Even when the 10% penalty is waived, the distribution is still ordinary income unless it comes from a qualified Roth account.
Required Minimum Distributions
Starting in the year you turn 73, you must begin taking required minimum distributions. As a business owner who likely owns more than 5% of the company, you cannot delay RMDs until retirement the way regular employees sometimes can. A shortfall carries a 25% excise tax, which drops to 10% if you correct it within two years.13Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs
Prohibited Transactions and Investment Limits
The IRS draws hard lines around what you can do with plan funds. Prohibited transactions include lending money between yourself and the plan, using plan assets for personal benefit, and buying or selling property between the plan and any “disqualified person” — a category that covers you, your spouse, your business, and entities you control.14Office of the Law Revision Counsel. 26 U.S. Code 4975 – Tax on Prohibited Transactions
The initial penalty is 15% of the amount involved, assessed for each year the violation is not corrected. If you do not fix it within the taxable period, the penalty jumps to 100% of the amount involved.14Office of the Law Revision Counsel. 26 U.S. Code 4975 – Tax on Prohibited Transactions Self-directed Solo 401k plans invested in real estate or private business interests are where these issues most often arise, since the owner is also the plan fiduciary.
On investments, Solo 401k plans cannot hold collectibles such as art, antiques, gems, or alcoholic beverages.15Internal Revenue Service. Retirement Plan Investments FAQs Most coins are also off limits, though certain government-issued precious metal coins and bullion meeting fineness requirements are permitted. Otherwise the allowable investment range is broad: stocks, bonds, mutual funds, real estate, private equity, and other alternatives are all available if your plan document and custodian support them.
Annual Reporting
A Solo 401k with total assets exceeding $250,000 at the end of the plan year must file Form 5500-EZ with the IRS.16Internal Revenue Service. Financial Advisors Are Assets in Your Clients One-Participant Plans More Than $250,000 The deadline is the last day of the seventh month after the plan year ends, which is July 31 for calendar-year plans. You can get an automatic extension to your business tax return’s extended due date if your plan year matches your tax year, or file Form 5558 for a separate 2½-month extension.17Internal Revenue Service. 2025 Instructions for Form 5500-EZ
Missing the filing deadline triggers a penalty of $250 per day, capped at $150,000.16Internal Revenue Service. Financial Advisors Are Assets in Your Clients One-Participant Plans More Than $250,000 Plans with less than $250,000 in assets do not file the form, but you should still keep records of contributions, distributions, and the plan document. A final Form 5500-EZ is required in the year you terminate the plan, regardless of asset level.
If You Hire a Full-Time Employee
If your business grows and you bring on someone who works 1,000 or more hours in a year, the Solo 401k can no longer run as a one-participant plan. Two options follow: convert the plan to a standard 401k with nondiscrimination testing and coverage for the new employee, or terminate the plan.
Terminating involves amending the plan document to set a termination date, distributing all assets to participants, and filing a final Form 5500-EZ. All account balances must become 100% vested as of the termination date.18Internal Revenue Service. 401(k) Plan Termination Funds can roll into an IRA or a new employer plan to avoid a taxable distribution. Distribution should happen as soon as administratively feasible. Delay too long and the IRS considers the plan ongoing, keeping compliance requirements in force.