The rules for a Solo 401(k) come down to four things: you must have self-employment income and no non-spouse employees working 1,000-plus hours, you can contribute up to $72,000 in 2026 (or $83,250 at ages 60 through 63) by combining an employee deferral with an employer profit-sharing contribution, you must operate the plan at arm’s length from yourself and close family, and you generally must file Form 5500-EZ once the plan’s assets pass $250,000. Everything else is mechanics around those four points.
Who Can Have One
A Solo 401(k) is a one-participant 401(k). It’s built for a business where the only people covered are the owner, or the owner and a spouse.1Internal Revenue Service. One-Participant 401k Plans The income has to come from an active business — sole proprietorship, partnership, S-Corp, or C-Corp — not from passive investments.
Bring in an employee other than your spouse who works more than 1,000 hours in a year and the plan loses its solo status. It has to be converted to a standard 401(k), which brings nondiscrimination testing and heavier administration. Part-time workers who stay under 1,000 hours can generally be excluded without breaking the solo structure.
The spouse carve-out is worth knowing. A spouse who genuinely works in the business participates as a separate employee with a separate deferral and separate employer allocation, which effectively doubles the household’s contribution room.
2026 Contribution Limits
A Solo 401(k) contribution has two parts, and the total of both is capped by the Section 415 annual addition limit of $72,000 for 2026.2Internal Revenue Service. IRS Notice 2025-67 – 2026 Amounts Relating to Retirement Plans and IRAs Catch-up contributions sit on top of that ceiling for older participants.
The Employee Deferral
This is what you contribute in your role as a worker in the business. For 2026, the base cap is $24,500.3Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500 The limit is per person across every 401(k) you participate in, so a side business Solo 401(k) shares the cap with any day-job 401(k) you also defer into.4Internal Revenue Service. How Much Salary Can You Defer if You’re Eligible for More Than One Retirement Plan
Catch-up amounts stack on top:
- At age 50 through 59, or 64 and older: an extra $8,000, for a maximum deferral of $32,500.
- At ages 60 through 63: an enhanced catch-up of $11,250 introduced by SECURE 2.0 and taking effect in 2026, for a maximum deferral of $35,750.3Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500
Whether you can make Roth deferrals in addition to pre-tax depends on what your plan document allows.
The Employer Profit-Sharing Contribution
The business also contributes on your behalf, and the deduction is capped at 25% of compensation under Code Section 404.5Office of the Law Revision Counsel. 26 USC 404 – Deduction for Contributions of an Employer to an Employees Trust or Annuity Plan What “compensation” means depends on your entity.
If you’re an S-Corp or C-Corp owner, compensation is your W-2 wages, and the math is a clean 25% of that number.
If you’re a sole proprietor or single-member LLC taxed as a disregarded entity, compensation is net self-employment income 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 being calculated on, the arithmetic is circular, and the effective rate lands around 20% of net self-employment earnings rather than 25%.
S-Corp owner-employees have to take reasonable compensation before non-wage distributions.6Internal Revenue Service. S Corporation Compensation and Medical Insurance Issues Setting the W-2 low to shrink payroll tax while inflating distributions is a known audit trigger; the reasonable compensation test looks at training, time spent, duties, and pay at comparable businesses.
How the Two Parts Combine
The employee deferral and employer contribution together can’t exceed $72,000 in 2026, plus any catch-up you’re entitled to:
- Under 50: $72,000.
- Age 50 through 59, or 64+: $80,000.
- Ages 60 through 63: $83,250.
The deferral has to be made by December 31 of the tax year. The employer profit-sharing piece has more room and can be funded up to the business’s tax return due date including extensions, which is useful if you want to wait for final profit numbers before committing.
Setting the Plan Up in Time
A Solo 401(k) needs a written plan document that meets Code Section 401(a).7Office of the Law Revision Counsel. 26 USC 401 – Qualified Pension, Profit-Sharing, and Stock Bonus Plans For a calendar-year business, the traditional adoption deadline is December 31 of the year you want to contribute for.
Section 401(b)(2) lets an employer adopt a plan after year-end but before the tax filing deadline and treat it as adopted on the last day of the prior year. Originally that only reached back for employer contributions. SECURE 2.0 extended it so a sole proprietor can also make retroactive employee deferrals, which gives a calendar-year sole proprietor until April 15 to set up a plan and fund both contribution types for the previous year.
The plan trust needs its own EIN, separate from the business tax ID. That separation matters for IRS reporting and for keeping plan assets legally distinct from operating funds.
Getting Money Out
Loans
If your plan document permits loans, you can borrow the lesser of $50,000 or 50% of your vested balance without triggering tax.8Internal Revenue Service. Retirement Topics – Loans Repayment runs at least quarterly over five years, with a longer window allowed for a primary residence purchase. Interest has to be commercially reasonable and documented in a signed promissory note. Miss payments and the outstanding balance becomes a deemed distribution — taxable income plus a 10% early withdrawal penalty if you’re under 59½.
Hardship Withdrawals
Hardship withdrawals cover an immediate and heavy financial need you can’t otherwise meet. They’re limited to your employee deferrals (not earnings on them), taxed as ordinary income, and hit with the 10% penalty if you’re under 59½. The old six-month contribution suspension after a hardship withdrawal was eliminated as of January 1, 2020, so you can keep contributing right away.9Internal Revenue Service. Retirement Plans FAQs Regarding Hardship Distributions
After 59½
Once you hit 59½, the plan document can allow in-service withdrawals with no hardship required. The distribution is taxed as ordinary income but the 10% penalty is gone.
Required Minimum Distributions
Starting at age 73, RMDs apply to the pre-tax balance.10Internal Revenue Service. Retirement Topics – Required Minimum Distributions (RMDs) The amount is the prior December 31 balance divided by a life expectancy factor from the IRS Uniform Lifetime Table. The first RMD is due by April 1 of the year after you turn 73; each one after that is due December 31.
Miss an RMD and the penalty is 25% of the shortfall, dropping to 10% if you correct it within two years. Roth Solo 401(k) balances are exempt from RMDs during the owner’s lifetime, made permanent by SECURE 2.0.
Prohibited Transactions
This is where the biggest, most avoidable penalties live. The plan has to operate at arm’s length from you and from “disqualified persons,” which includes your spouse, ancestors, and lineal descendants.11Internal Revenue Service. Retirement Topics – Prohibited Transactions Off-limits transactions include:
- Selling or leasing property between you and the plan — for example, buying a rental property from your own Solo 401(k).
- Lending or extending credit between the plan and a disqualified person outside the formal loan rules.
- 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 initial excise tax is 15% of the amount involved for each year the transaction stays uncorrected. If you don’t unwind it within the taxable period, an additional tax of 100% of the amount involved applies.12Office of the Law Revision Counsel. 26 USC 4975 – Tax on Prohibited Transactions Self-directed plans holding real estate, private companies, or other alternative assets carry the highest exposure because every investment decision has to be tested for whether a disqualified person is benefiting directly or indirectly.
Form 5500-EZ and Keeping the Plan Current
A Solo 401(k) has to file Form 5500-EZ for any plan year in which the total assets of all one-participant plans the employer maintains exceed $250,000 as of the last day of the plan year.13Internal Revenue Service. 2025 Instructions for Form 5500-EZ Stay at or below that threshold at year-end and you’re generally exempt. The test runs annually on the year-end balance.
The filing deadline is the last day of the seventh month after the plan year ends — July 31 for calendar-year plans. Form 5558 gets you an automatic 2½-month extension to October 15 if filed on time. Late-filing penalties are $250 per day, capped at $150,000 per plan year, so this is not a form to forget.
Plan documents also have to be kept current with tax law. A full restatement typically happens every six years, with interim amendments when legislation like SECURE 2.0 introduces new provisions. Prototype plans from brokerage firms usually get restated by the sponsoring institution; an individually designed plan puts that burden on you. Missing a required amendment deadline can put the plan’s qualified status at risk.
When a plan ends — because the business closes, an employee arrives who breaks the solo status, or you just wind it down — all assets have to be distributed and a final Form 5500-EZ filed, regardless of the asset level. Balances can roll over to an IRA, another 401(k), or a new Solo 401(k); Roth balances go to a Roth IRA.