Solo 401(k)

Now that you understand how individuals save through IRAs, the next step is the Solo 401(k), a plan designed specifically for self-employed individuals who want to save more than IRA limits allow.

What Is a Solo 401(k)?

A Solo 401(k) (also called an individual 401(k) or one-participant 401(k)) is a retirement plan for self-employed individuals and business owners with no employees other than a spouse.

Why it exists: IRAs cap contributions at $7,500/$8,600 per year. Self-employed individuals often need to save much more. The Solo 401(k) solves this by allowing both employee deferrals and employer profit-sharing contributions.

How Much Can You Contribute to a Solo 401(k)?

The Solo 401(k) has two contribution buckets:

• Employee elective deferrals: Up to $24,500 in 2026 ($32,500 if age 50+, or $35,750 if age 60-63 under the SECURE 2.0 Act enhanced catch-up)
• Employer profit-sharing contributions: Up to 20% of net self-employment income (after the self-employment tax deduction)
• Total combined limit: $72,000 in 2026 ($80,000 if age 50+, or $83,250 if age 60-63)

This dual structure is the key advantage over IRAs and SEP IRAs for many self-employed individuals.

Exam Tip: Gotchas

• Ages 60-63 get a higher catch-up limit. The enhanced catch-up ($11,250 in 2026 vs. $8,000 standard) is a newer SECURE 2.0 Act provision that the exam may test.
• Why 20%, not 25%. Plan documents 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 reduces the income it is based on), so the IRS uses a reduced rate: 20% of net self-employment income after the self-employment tax deduction produces the same result 25% would under the W-2 formula. The 20% rate applies to the owner's self-employment income specifically; an owner who also receives W-2 compensation from the business can use the 25% rate on that W-2 pay.

Traditional or Roth: How Are Solo 401(k) Contributions Taxed?

The plan participant can split deferrals between traditional and Roth, or use one type exclusively.

Exam Tip: Gotchas

• Roth Solo 401(k) accounts no longer require RMDs. The SECURE 2.0 Act eliminated RMDs for Roth employer plan accounts, aligning them with Roth IRAs.

What Other Rules Apply to a Solo 401(k)?

• Loans: Participants can borrow from the plan (unlike IRAs, which do not permit loans)
• Required Minimum Distributions (RMDs): Traditional Solo 401(k) accounts are subject to RMDs beginning at age 73 (age 75 for those born in 1960 or later)
• Roth Solo 401(k) RMDs: Roth accounts in employer plans (including Solo 401(k)) are no longer subject to RMDs during the participant's lifetime, thanks to the SECURE 2.0 Act. This aligns Roth employer accounts with Roth IRAs.
• Early withdrawal penalty: 10% on distributions before age 59 1/2 (same as Traditional IRAs and 401(k) plans)

Exam Tip: Gotchas

• Solo 401(k) allows plan loans, but IRAs do not. If a question asks about borrowing from a retirement account, the plan type matters.

What Should You Check on Exam Day?

• Employee elective deferral: $24,500 in 2026 ($32,500 age 50+, $35,750 age 60-63)
• Employer profit-sharing: up to 20% of net self-employment income
• Total combined 2026 cap: $72,000 ($80,000 age 50+, $83,250 age 60-63)
• Loans are permitted, unlike IRAs
• Traditional Solo 401(k) RMDs begin at age 73 (75 for those born 1960+); Roth Solo 401(k) has no RMDs (SECURE 2.0)
• 10% early withdrawal penalty applies before age 59 1/2, same as Traditional IRAs and 401(k) plans