The Solo 401(k)

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A solo 401(k) — the brokerages call it an individual 401(k), an Individual(k), a one-participant 401(k), a self-employed 401(k) — is an ordinary 401(k) plan whose only participants are a business owner and, if the business employs one, the owner’s spouse. Because there are no other employees, it skips the testing and most of the paperwork that make a company 401(k) expensive, and because the owner is both employee and employer, the owner contributes twice: an employee deferral of up to $24,500 for 2026, and an employer contribution of up to 25% of pay, together up to $72,000, more with the catch-ups. Every dollar is deductible, or Roth if you choose. For a self-employed person with no employees who wants to put away more than an IRA allows, it is usually the best plan there is.

This page covers who qualifies, how the two contributions are figured (the self-employed arithmetic is the part everyone gets wrong), the 2026 limits, the Roth and after-tax options, loans, the one form the IRS wants when the account gets big, the deadlines, and how it compares to the SEP and the SIMPLE. The calculator at the bottom does the arithmetic for a Schedule C business or an S corporation.

Who Qualifies

The IRS calls it: a one-participant plan

Three requirements. Self-employment income: a Schedule C business, a single-member LLC, a partnership interest with earned income, farm income on Schedule F, or wages from your own S corporation or C corporation. A side business counts even if you also have a job with its own 401(k) — the limits coordinate, below. No employees other than you and your spouse. Part-time workers who never reach 1,000 hours in a year (and, since 2025, never reach 500 hours in two consecutive years) can be excluded by the plan document; the day a real employee becomes eligible, the plan stops being a solo plan and has to cover them and pass the tests, which usually means switching to a SEP, a SIMPLE or a real 401(k). Earned income: the contribution is based on what the business actually earns, so a business with a loss contributes nothing that year.

Any business form works: sole proprietor, LLC, partnership, S corporation, C corporation. What changes is the number the contribution is based on — net earnings from self-employment for the unincorporated, W-2 wages for the corporation. A spouse who genuinely works in the business and is paid can have her own participant account with her own limits, which doubles everything for a couple.

Who should look elsewhere: a business with employees (SEP or SIMPLE or a company plan); a partner whose partnership has employees (the partnership, not the partner, sponsors the plan, and it covers everyone); someone who already defers the full $24,500 at a day job and has modest side income (the deferral is used up; only the employer side is left, and a SEP gets the same employer amount with less paperwork).

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The Two Contributions

The IRS calls it: elective deferrals (§402(g)) and employer contributions (§404)

As the employee, you defer part of your pay into the plan, exactly as an employee at a large company does: up to $24,500 for 2026, or 100% of your compensation if less, plus the catch-up if you are 50 or older. This is the piece a SEP cannot do, and it is why a solo 401(k) lets a $40,000 side business put away $24,500 while a SEP on the same income allows about $7,400. The deferral can be traditional (deducted now) or Roth (taxed now, tax-free later), if the plan document offers Roth.

As the employer, the business makes a profit-sharing contribution: up to 25% of W-2 compensation for a corporation, or 20% of net self-employment earnings for a sole proprietor or partner (the same 25%, measured after the contribution and after half the self-employment tax — the arithmetic is below). The employer contribution is always deductible by the business and is never subject to Social Security or Medicare tax. It is not required every year, and the percentage can change every year; nothing has to be contributed in a bad year.

Together the two are capped at the §415(c) limit, $72,000 for 2026 (the catch-up sits on top of that), and at 100% of compensation. The deferral is per person across all plans, so $10,000 deferred at a day job leaves $14,500 for the solo plan; the $72,000 is per employer, so an unrelated day-job plan does not reduce it.

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The 2026 Limits

The IRS calls it: Notice 2025-67

Limit	2026	2025
Employee deferral (§402(g)), traditional and Roth combined, all plans	$24,500	$23,500
Catch-up, age 50–59 and 64 or older	$8,000	$7,500
Catch-up, ages 60–63 (“super catch-up”)	$11,250	$11,250
Employer contribution	25% of wages / 20% of net SE earnings	same
Total employee + employer (§415(c)), before catch-up	$72,000	$70,000
Total with age-50 catch-up / with the 60–63 catch-up	$80,000 / $83,250	$77,500 / $81,250
Compensation that can be counted (§401(a)(17))	$360,000	$350,000
Social Security wage base (for the SE tax arithmetic)	$184,500	$176,100

Two 2026 wrinkles from SECURE 2.0. The ages 60–63 catch-up replaced the ordinary catch-up for those four years starting in 2025. And starting in 2026, a participant whose prior-year FICA wages from the employer exceeded $150,000 (indexed) may make catch-up contributions only as Roth — which for a solo plan means an S corporation owner with 2025 W-2 wages over that figure needs a Roth feature in the plan to make any catch-up at all; a sole proprietor has no FICA wages and is not affected (verify).

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The Self-Employed Arithmetic

The IRS calls it: Publication 560, the Deduction Worksheet for Self-Employed

For an S corporation owner the employer contribution is simple: 25% of the W-2 wages the corporation paid, and the deferral comes out of those same wages. A $100,000 salary supports a $24,500 deferral and a $25,000 employer contribution, $49,500 in all. (The temptation to pay a small salary to save payroll tax runs straight into this: a $40,000 salary supports only $10,000 of employer contribution. Reasonable compensation cuts both ways.)

For a sole proprietor or partner, “compensation” is net earnings from self-employment: the Schedule C profit (or the K-1 self-employment earnings), less one-half of the self-employment tax, less the employer contribution itself. Because the contribution reduces the base it is measured against, 25% of the reduced base works out to 20% of profit after half the SE tax. The sequence: (1) profit; (2) SE tax = 92.35% of profit × 15.3% up to the wage base, 2.9% above it; (3) half of that; (4) profit minus (3) = the base; (5) employer contribution = 20% of the base; (6) deferral = up to $24,500, limited to the base less the employer piece; (7) total not over $72,000 plus catch-up, and not over the base.

Two things the arithmetic does not change: the self-employment tax is figured on the full profit, before any contribution — the solo 401(k) saves income tax, not SE tax (the S corporation saves SE tax by paying a salary, and loses some contribution room doing it); and the deduction for the contribution reduces QBI for the 20% §199A deduction, so the net saving on the employer piece is a little less than the marginal rate suggests.

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Roth, After-Tax, and Loans

The IRS calls it: designated Roth contributions (§402A), after-tax contributions, plan loans (§72(p))

• Roth deferrals. The employee deferral can go in as Roth: no deduction now, tax-free withdrawals after five years and age 59½, and since 2024 no required minimum distributions from the Roth side. There is no income limit on a Roth 401(k), which is how a high earner shut out of a Roth IRA gets $24,500 a year of Roth money anyway. Employer contributions can also be designated Roth under SECURE 2.0 if the plan document allows (few of the free brokerage documents do yet); they are then taxable to you in the year made.
• After-tax contributions and the “mega backdoor.” A plan document that allows voluntary after-tax (non-Roth) contributions lets you fill the gap between the deferral plus employer contribution and the $72,000 total with after-tax dollars, then convert them to Roth inside the plan or roll them to a Roth IRA. The free brokerage plans do not allow it; a custom document from a third-party administrator does, for a few hundred dollars a year. Worth it for someone with the cash flow to put away $72,000.
• Loans. A 401(k) can lend you the lesser of $50,000 or half your vested balance, repaid with interest over five years (longer for a home purchase), with no tax if repaid on schedule. A SEP or SIMPLE cannot. Again the plan document decides; many brokerage documents do not permit loans.
• Rollovers in. Old 401(k)s, SEP and traditional IRAs, SIMPLE IRAs after two years, 403(b)s and 457(b)s can be rolled into the solo plan. A Roth IRA cannot. Rolling the traditional IRAs in clears the way for a clean backdoor Roth IRA every year, since the pro-rata rule looks only at IRAs, not at 401(k) balances. The Roth IRA guide covers that.
• Investments. Whatever the custodian offers; a self-directed plan with a trust account can hold real estate and private investments, and unlike a self-directed IRA a 401(k) is exempt from the unrelated debt-financed income tax on leveraged real estate (§514(c)(9)) — but a solo plan that buys a rental is a plan that needs an administrator, a valuation every year, and a trustee who understands prohibited transactions.
• Withdrawals and RMDs. The same rules as any 401(k): 10% additional tax before 59½ with the usual exceptions (separation from service at 55 and later, the $1,000 emergency distribution, and the rest); required minimum distributions from the traditional side at 73 — and, unlike an IRA, there is no “still working” exception for a 5% owner, so the owner takes RMDs from a solo plan at 73 whether or not the business continues.

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Setting It Up, Deadlines, Form 5500-EZ

The IRS calls it: a written plan document, a trust, and an annual return above $250,000

• Setting up. A plan document (the brokerage’s prototype is free and adequate for most; a third-party administrator’s document costs $200–$500 a year and adds loans, after-tax and Roth employer features), an adoption agreement you sign, a separate EIN for the plan trust (free, Form SS-4, “trust” — not your business EIN and not your Social Security number), and the account at the custodian. Every major brokerage offers one. Both the traditional and Roth sides live in one plan with two accounts.
• Deadline to adopt. Since the SECURE Act, the plan can be adopted as late as the due date of the business return including extensions and still receive the employer contribution for the prior year. The employee deferral is the exception: a sole proprietor with no employees may make the first year’s deferral up to the unextended due date if the plan was adopted after year-end (SECURE 2.0 §317); in later years the deferral election must be made by December 31 and the money deposited within a reasonable time after. An S corporation owner’s deferral has to be withheld from wages paid during the year, so it must be elected and run through payroll by December 31, and it shows in Box 12 of the W-2 (code D, or AA for Roth); the employer contribution can wait until the extended due date of the 1120-S.
• Where it is deducted. Sole proprietor and partner: both pieces on Schedule 1, line 16 (not on Schedule C — the contribution does not reduce SE tax). S corporation: the deferral reduces Box 1 of the owner’s W-2; the employer contribution is a deduction on the 1120-S.
• Form 5500-EZ. Nothing is filed while total plan assets are $250,000 or less at the end of the year. Over $250,000 (all of the owner’s and spouse’s accounts in the plan combined), Form 5500-EZ is due July 31 each year, electronically through EFAST2 or on paper; and a final 5500-EZ is due when the plan terminates regardless of size. The penalty for missing it is $250 a day up to $150,000 per return; the IRS has a penalty-relief program (Rev. Proc. 2015-32, $500 per return) for late filers who come in before they are caught. This is the one piece of paperwork solo plans actually miss.
• Keeping it a solo plan. Review once a year: did anyone other than you and your spouse work 1,000 hours, or 500 hours for a second consecutive year? Did you acquire another business (controlled-group rules count its employees)? Is the plan document’s restatement current (the IRS requires prototype plans to be restated on a six-year cycle; the custodian sends the paper)? Did the balance cross $250,000?

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Solo 401(k) vs. SEP vs. SIMPLE

The IRS calls it: §401(k), §408(k), §408(p)

	Solo 401(k)	SEP IRA	SIMPLE IRA
Employee deferral	$24,500 + catch-up	None	$17,000 + $4,000 catch-up
Employer contribution	25% of wages / 20% of SE earnings	Same	3% match (or 2% nonelective)
Maximum, age 45, 2026	$72,000	$72,000 (needs $360,000 of pay)	$17,000 + 3%
Maximum on a $120,000 Schedule C	$46,804	$22,304	$20,346
Roth option	Yes	Yes since 2023, if the custodian offers it	Yes since 2023, if offered
Loans	Yes, if the document allows	No	No
Can be set up after year-end	Yes for the employer piece; deferral rules above	Yes, through the extended due date	No — by October 1
Annual filing	5500-EZ over $250,000	None	None
With employees	Becomes a full 401(k)	Same % for every eligible employee	Match for everyone; up to 100 employees
Protects against creditors	ERISA-level in most states	State IRA rules	State IRA rules

The short version: with no employees and more than a token profit, the solo 401(k) wins on contribution room, and the SEP wins only on simplicity. A SEP is the right answer for someone who discovers in March that last year’s profit was large and wants a deduction with no paperwork, or who already defers the full amount at a day job. A SIMPLE is for a business with employees. And a business that is going to hire should start with the plan it can keep.

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The Calculator

The IRS calls it: the Pub. 560 worksheet, and §415(c)

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Colorado

The IRS calls it: nothing; Colorado follows federal

Colorado taxes what the federal return taxes, so the deduction carries through at 4.40% and a Roth withdrawal is tax-free in Colorado too; distributions in retirement qualify for the Colorado pension and annuity subtraction (up to $24,000 at 65, with the Social Security changes for 2025 and after). Colorado SecureSavings, the state’s mandatory auto-IRA, applies to employers with five or more employees who offer no plan; a business with no employees has nothing to register, and a business that later hires can satisfy the mandate with its own 401(k). See Colorado for retirees for the subtraction.

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Questions we get

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What to bring

• The business’s profit for the year, or the owner’s W-2 from the S corporation
• The plan’s adoption agreement and the trust EIN, if the plan already exists
• Statements showing what was contributed during the year, and whether it went in as employee or employer, traditional or Roth
• W-2s from any other job, for the deferral already used
• The year-end plan balance, for the $250,000 test
• Hours for anyone else who worked in the business

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Figures reflect the 2026 tax year as currently published and are rounded for readability. Items marked (verify) are to be confirmed against IRS or Colorado DOR sources before the figures freeze in December. Written October 26, 2026.