Solo 401(k)

The IRS describes a one-participant 401(k) as an ordinary 401(k) that covers only a business owner, or the owner and a spouse, rather than a new type of plan. Sole proprietors, partners and owners of an incorporated business can all use one, as long as the business has no common-law employees who would have to be covered.

With no other employees, the plan needs no nondiscrimination testing, which keeps it simple to run. That advantage ends if you hire someone who meets the plan’s eligibility rules: you must let them in, and their deferrals are tested unless the plan uses a safe harbor design.

Inside the plan you can make traditional or Roth 401(k) deferrals, and the plan can allow loans and hardship withdrawals. Money comes out under ordinary 401(k) rules: taxed as income, with a 10% additional tax before 59½ unless an exception applies, and required minimum distributions later on.

You contribute in two roles, and the limits stack. As the employee, you can defer up to 100% of compensation, capped at $24,500 for 2026, plus an $8,000 catch-up from age 50 or $11,250 in the years you turn 60 to 63. As the employer, the business can add a nonelective contribution of up to 25% of compensation. Employee and employer money together cannot exceed $72,000, or 100% of compensation if less. Catch-ups sit on top, for $80,000 from age 50 and $83,250 at ages 60–63.

What counts as compensation depends on the business. For an S or C corporation owner it is W-2 salary, so the employer share is 25% of wages. For a sole proprietor or partner it is net earnings from self-employment after subtracting half of self-employment tax and the contribution itself. That circular definition works out to 20% of net earnings after the half-SE-tax deduction, the rate the IRS rate table gives for a 25% plan.

At modest profits the IRS deduction worksheet can trim the employer share further, so total contributions never exceed what you earned. Compensation above $360,000 is ignored.

A Solo 401(k), a SEP IRA and a SIMPLE IRA all suit the self-employed, and they differ mainly on the employee side. A SEP IRA takes only employer contributions, the same 25% of compensation, or 20% for a sole proprietor, under the same $72,000 cap, so at a given profit it shelters roughly the employer half of a Solo 401(k). A SIMPLE IRA allows employee deferrals, but only $17,000 for 2026 in most plans, plus a 3% match or a 2% nonelective contribution. The Solo 401(k) combines the full $24,500 deferral with the employer share, so its edge is largest at low and middle profits; at very high profits both converge on the $72,000 cap.

The SEP’s advantage is simplicity: a one-page form sets it up, and it can be opened as late as the due date of your tax return, including extensions. Since 2023, SEP and SIMPLE plans may also accept Roth contributions, which removes one of the Solo 401(k)’s old advantages.

Since 2023, a sole proprietor with no employees can adopt a new Solo 401(k) after the year ends, as long as it is in place by the tax-filing deadline without extensions; for that first year, elective deferrals must also be paid in by that date. Employer contributions can wait until the return’s due date including extensions. Once plan assets exceed $250,000 at the end of a year, you generally must also file a short annual return, Form 5500-EZ; the IRS runs a reduced-fee relief program for late filers.

If you also hold a job with its own 401(k), a 403(b) or the Thrift Savings Plan, the $24,500 deferral limit is personal, so deferrals at work reduce what you can defer to the Solo 401(k). The $72,000 total-additions limit, however, applies to each unrelated employer’s plan separately. Someone who maxes out the workplace plan can still make an employer contribution to the Solo 401(k), within the 20% calculation and a separate $72,000 cap. That makes the plan a natural home for side-hustle profits.