Self-employed people do not have an employer offering a retirement plan, but they have access to one of the most powerful savings tools available: the solo 401(k). Also called an individual or one-participant 401(k), it lets a business owner with no employees, other than a spouse, contribute in two roles, as employee and as employer. That combination can allow far larger contributions than an IRA. This guide explains how a solo 401(k) works, how to calculate contributions, and what paperwork it requires.
Who can open a solo 401(k)
A solo 401(k) is designed for business owners with no common-law employees other than the owner and the owner’s spouse. Eligible businesses include sole proprietorships, single-member LLCs, partnerships, S corporations, and C corporations. Freelancers and independent contractors with self-employment income qualify, even if they also have a W-2 job elsewhere.
If the business hires employees who meet the plan’s eligibility rules, the owner generally must convert to a standard 401(k) with coverage and testing requirements, or choose another plan. Employees under certain hour thresholds may be excluded, but rules for long-term part-time workers now require coverage after a period of service, so check the current rules before hiring.
The two types of contributions
Employee elective deferrals
As the “employee,” you can defer up to the annual elective deferral limit, as long as you have enough net self-employment income. For 2026, the IRS limit is $24,500. Owners age 50 and older can add a catch-up contribution of $8,000, and those aged 60 through 63 can use a higher super catch-up of $11,250 if the plan allows it.
The elective deferral limit is per person, not per plan. If you also contribute to a 401(k) at a day job, your combined deferrals across both plans cannot exceed the annual limit.
Employer profit-sharing contributions
As the “employer,” the business can make a profit-sharing contribution of up to:
- 25% of W-2 compensation for owners of corporations, including S corporations.
- About 20% of net self-employment earnings for sole proprietors and single-member LLCs taxed as sole proprietorships, after subtracting half of self-employment tax.
Combined limit
Employee and employer contributions together cannot exceed the annual additions limit, which is $72,000 for 2026, not counting catch-up contributions. The employer limit is separate for each unrelated employer, so a W-2 job’s 401(k) does not reduce your solo 401(k) employer contributions, though elective deferrals are shared.
Always confirm the current-year figures on IRS.gov, since limits are adjusted for inflation.
How to calculate a sole proprietor’s contribution
The employer contribution for self-employed individuals uses a specific formula:
- Start with net profit from Schedule C.
- Subtract the deductible half of self-employment tax.
- Multiply by 20% to estimate the maximum employer contribution.
Example
Suppose a 45-year-old freelancer has $100,000 in Schedule C net profit. Self-employment tax is about $14,130, and half of that, roughly $7,065, is deductible, leaving about $92,935. The employer contribution could be about 20% of that, or about $18,587. The freelancer can also defer up to $24,500 as an employee. Total possible contribution: roughly $43,087.
Precise figures depend on the full tax calculation, so tax software or IRS Publication 560 worksheets should be used for the final number.
Traditional vs Roth contributions
Many solo 401(k) plans offer a Roth option for employee deferrals. Roth contributions are made with after-tax dollars, and qualified withdrawals in retirement are tax-free. Traditional contributions reduce taxable income now but are taxed when withdrawn.
Under SECURE 2.0, plans may also allow employer contributions to be designated as Roth. These are included in the owner’s income for the year. Not all providers offer this option.
Choosing between them
- If you expect a higher tax rate in retirement, Roth may be attractive.
- If you are in a high bracket now and expect lower income later, traditional deferrals may save more.
- Many owners split contributions to diversify their future tax exposure.
Deadlines
- Plan establishment. Under the SECURE Act, a new 401(k) can generally be established after year-end, up to the business’s tax filing deadline, and still receive employer contributions for that year. SECURE 2.0 added that a sole proprietor or single-member LLC owner can also make first-year elective deferrals up to the original due date of the return, not including extensions.
- Elective deferrals. Owners typically make a deferral election by year-end for that year’s compensation, then fund it according to plan rules.
- Employer contributions. Generally due by the business’s tax filing deadline, including extensions.
Provider rules vary, so set up the plan well before year-end if you want maximum flexibility.
Filing requirements
When plan assets exceed $250,000 at the end of the plan year, the owner generally must file Form 5500-EZ with the IRS, or Form 5500-SF electronically if permitted. A final return is required when the plan is terminated, regardless of asset size. Late filing penalties can be steep, though the IRS has a penalty relief program for late filers.
Solo 401(k) vs other self-employed plans
| Feature | Solo 401(k) | SIMPLE IRA | Traditional IRA |
|---|---|---|---|
| Employees allowed | Owner and spouse only | Up to 100 | Individual |
| Employee deferral | Yes | Yes, lower limit | No |
| Employer contribution | Yes | Required match or nonelective | No |
| Roth option | Often | Allowed under SECURE 2.0 | Separate Roth IRA |
| Loans | Possibly | No | No |
| Annual filing | 5500-EZ above $250,000 | None | None |
The solo 401(k) typically allows the highest contribution at lower income levels because of the employee deferral. For high earners, another popular option allows only employer contributions, so it reaches the same overall cap only at higher income.
Spouses in the business
If your spouse earns income from the business, they can also participate in the solo 401(k), making their own elective deferrals and receiving employer contributions. This can roughly double the household’s potential contributions. The spouse must be paid reasonable compensation for actual work performed.
Investments and loans
Solo 401(k) plans from brokerage firms typically allow stocks, bonds, mutual funds, and ETFs. Some plans permit loans to the participant, generally up to the lesser of $50,000 or 50% of the vested balance, repaid within five years. Loans are a plan feature, not a right, so check your plan documents.
Withdrawals and rollovers
Solo 401(k) money follows the same distribution rules as other 401(k) plans. Withdrawals before age 59½ are generally subject to income tax and a 10% additional tax unless an exception applies. Required minimum distributions generally begin at age 73 for traditional balances, while Roth 401(k) balances are no longer subject to lifetime RMDs starting in 2024.
You can usually roll eligible balances from a former employer’s 401(k) or a traditional IRA into a solo 401(k), if the plan accepts rollovers. Consolidating accounts can simplify recordkeeping and may help when using backdoor Roth strategies, since 401(k) balances are not counted in the IRA pro-rata calculation. If you close the business, you can roll the solo 401(k) into an IRA, and you should file a final Form 5500-EZ.
Setting up a solo 401(k)
- Obtain an Employer Identification Number for the business from the IRS, which most providers require.
- Choose a provider and compare fees, investment options, Roth availability, and loan features.
- Sign the plan adoption agreement, which serves as the formal plan document.
- Open the plan account and make your deferral election.
- Track contributions separately as employee deferrals and employer contributions, since they are reported differently on your tax return.
Common mistakes
- Exceeding the elective deferral limit across a day job’s 401(k) and a solo 401(k).
- Miscalculating the employer contribution by using gross revenue instead of net earnings.
- Forgetting Form 5500-EZ once assets top $250,000.
- Keeping the solo plan after hiring eligible employees.
Related reading: Backdoor Roth IRA: Step-by-Step Rules, the Pro-Rata Trap, and Reporting on Form 8606 and SEP IRA Guide: Contribution Limits, Eligibility, and Setup for the Self-Employed.
Frequently Asked Questions
What is the solo 401k contribution limit for 2026?
The employee deferral limit is $24,500, plus catch-up contributions for those 50 and older. Total employee and employer contributions cannot exceed $72,000 before catch-ups, subject to your earned income.
Can I have a solo 401k if I also have a 401k at work?
Yes, if you have self-employment income. Your employee deferrals are shared across both plans, but the employer profit-sharing limit applies separately to each unrelated employer.
Can my spouse contribute to my solo 401k?
Yes, if your spouse earns compensation from the business. They can make their own deferrals and receive employer contributions.
When do I need to file Form 5500-EZ?
Generally when plan assets exceed $250,000 at the end of the plan year, and in the final year when the plan is closed.
Does a solo 401k have a Roth option?
Many providers offer Roth employee deferrals, and SECURE 2.0 permits Roth employer contributions if the plan allows them.
This article is for general informational purposes only and is not legal, medical, tax, or financial advice. Rules vary by state and change over time; confirm details with the relevant agency or a licensed professional.
