Solo 401(k)

The Solo 401(k), also called an individual 401(k) or one-participant 401(k), is designed for self-employed individuals with no employees other than a spouse. It follows the same rules, contribution limits, and tax treatment as any other 401(k) plan.

Sole proprietors, single-member LLC owners, and partners in a partnership all qualify, so long as the business employs nobody beyond the owners and their spouses.

If a spouse works in and is compensated by the business, the Internal Revenue Code still treats the plan as a one-participant plan, and the spouse can be a second participant in the same Solo 401(k). The spouse makes their own employee deferral and receives their own employer profit-sharing contribution, up to their own 20%-of-net-self-employment-income cap.

Each spouse has an independent annual additions limit, so a two-spouse household's combined tax-advantaged capacity effectively doubles.

What Happens If the Business Hires an Employee?

• Hiring a non-spouse employee who meets the plan's eligibility conditions ends the one-participant status. The business is no longer running a Solo 401(k)
• The plan does not simply stop. The employer must either convert it into a standard 401(k) that covers eligible employees, or replace it with a plan built for a small staff such as a SEP IRA or SIMPLE IRA
• Part-time staff below the plan's own eligibility thresholds do not trigger this, which is why the plan document's eligibility terms matter as much as the headcount

What Are the 2026 Solo 401(k) Contribution Limits?

• Employee deferral limit (2026): $24,500 (under age 50). The Internal Revenue Code applies this limit per individual, not per plan: if the same person also defers into an unrelated employer's 401(k) or 403(b) in the same year, both plans draw against the same combined ceiling. Only the employer profit-sharing portion and the overall annual additions limit are measured separately per unrelated plan.
• Employer contribution: Up to 20% of net self-employment income (after the self-employment tax deduction), computed on income capped at the IRS annual compensation limit ($360,000 for 2026); income above that cap is disregarded for the employer-contribution calculation
• Total combined limit (2026): $72,000 (employee + employer, excluding catch-up)
• Can designate contributions as Traditional (pre-tax) or Roth (after-tax)
• Roth Solo 401(k) contributions grow tax-free; qualified distributions are tax-free
• Loans permitted, on the same terms as any 401(k): the lesser of $50,000 or the greater of 50% of the vested balance or $10,000, so a small account can still support a $10,000 loan

How Do Contributions Vest?

• Employee deferrals are always 100% vested, in every 401(k). The Internal Revenue Code makes a participant's rights in benefits derived from their own contributions nonforfeitable, with no schedule permitted
• Employer contributions are normally vested immediately too, though for a different reason. The Code lets a defined contribution plan vest employer money over as long as 3 years (cliff) or 6 years (graded), but those are limits on how slowly a plan may vest, not a requirement to use a schedule
• A vesting schedule exists to recapture employer money from employees who leave early. A plan whose only participants are the owner and their spouse has nobody to recapture from, so the schedule is normally set to immediate

What Are the Catch-Up Contribution Provisions?

• Roth catch-up mandate (2026): Employees earning over $150,000 in Federal Insurance Contributions Act (FICA) wages in the prior year must make catch-up contributions on a Roth (after-tax) basis only
• Those earning $150,000 or less may choose pre-tax or Roth catch-up

Exam Tip: Gotchas

• The "super catch-up" applies ONLY at ages 60-63. It does NOT apply at age 64 or above; the catch-up reverts to the standard amount. The exam may test the specific age window.
• Why 20%, not 25%. A plan document can state a 25% profit-sharing rate, but that rate is written for common-law employees paid W-2 wages. A sole proprietor's own net self-employment income and their own contribution are circular: the contribution itself reduces the income it is based on.
• How the 20% figure is derived. The IRS solves the circularity with a reduced rate: 20% applied to net self-employment income after the self-employment tax deduction produces the same result as 25% would under the W-2 formula. The 20% rate applies specifically to the owner's own net self-employment income, not to any W-2 wages the plan might otherwise measure against.

Does a Solo 401(k) Have to File an Annual Return?

• A one-participant plan files Form 5500-EZ each year once the plan's assets pass a threshold. Below it, no return is due
• The threshold is $250,000, measured on the combined assets of every one-participant plan the same employer maintains at the end of the plan year
• Once that combined total is over $250,000, a return is due for each of the employer's one-participant plans, including any that individually hold less than $250,000
• The plan's final year always requires a filing, whatever the balance

Exam Tip: Gotchas

• A SEP IRA never files Form 5500; a Solo 401(k) does once it grows past $250,000. This is the tested contrast between the two plans a self-employed person is choosing between. The SEP's paperwork advantage is real but it is not the whole comparison.
• The $250,000 test aggregates plans, and the filing requirement then applies to all of them. An owner with two small one-participant plans totaling $300,000 files for both, even though neither reaches the threshold alone.

What Should You Check on Exam Day?

• A Solo 401(k) is for self-employed individuals (including partners in a partnership) with no employees other than a spouse; it follows regular 401(k) rules
• Hiring a non-spouse employee who meets the plan's eligibility conditions ends one-participant status, and the plan must be converted to a standard 401(k) or replaced with a SEP or SIMPLE IRA
• Employee deferrals are always 100% vested by law; employer contributions are normally immediate as well, because a vesting schedule exists to recapture money from departing employees and there are none
• Form 5500-EZ is due once the combined assets of all the employer's one-participant plans exceed $250,000 at year end, and then for every such plan, including any holding less; the final plan year always requires a filing. A SEP IRA never files at all
• 2026 employee deferral limit is $24,500 (under 50), with age-based catch-up on top
• Employer contributions are capped at 20% of net self-employment income, not the 25% W-2 rate
• The combined 2026 limit (employee + employer, excluding catch-up) is $72,000
• Both Traditional and Roth designations are available; Roth grows tax-free with tax-free qualified distributions
• The age 60-63 super catch-up ($11,250 in 2026) reverts to the standard catch-up amount at 64+
• Employees earning over $150,000 in prior-year FICA wages must make catch-up contributions on a Roth-only basis
• Loans are capped at the lesser of $50,000 or the greater of 50% of the vested balance or $10,000, so a $15,000 vested balance still supports a $10,000 loan, not $7,500