Learn how a Solo 401(k) combines owner deferrals and employer contributions, its 2026 limits, filing duties, and California treatment.
A Solo 401(k) is a one-participant 401(k) plan for a business owner with no eligible common-law employees other than the owner's spouse. It is also called an individual 401(k) or owner-only 401(k). The same person can contribute in two roles: as an employee through elective deferrals and as the employer through nonelective or profit-sharing contributions.
"Solo 401(k)" is an industry label, not a separate Internal Revenue Code plan type. The plan follows 401(k) qualification, documentation, contribution, reporting, and correction rules.
A sole proprietor, partnership, LLC, S corporation, or C corporation can sponsor a one-participant plan if it has eligible earned income and no employees who must be covered. A spouse who works in the business can participate. Related businesses and controlled groups must be considered together; opening separate entities does not necessarily avoid employee coverage.
Hiring an eligible employee does not automatically destroy the plan's qualified status, but the arrangement is no longer owner-only and may face nondiscrimination testing, broader participation, notices, and more complex filings. Long-term part-time employee rules also require attention.
The business must adopt a written plan by the applicable deadline and make elections and deposits on time. A brokerage account labeled "individual 401(k)" is not enough if the plan document and operations do not support the contribution.
For 2026, the basic employee elective-deferral limit is $24,500 across the participant's 401(k), 403(b), SIMPLE, and similar plans subject to the shared limit. A participant age 50 or older may generally defer another $8,000. A participant who turns age 60 through 63 during 2026 may qualify for an $11,250 higher catch-up instead, subject to the plan and Roth catch-up rules.
The business can also make an employer contribution — generally up to 25% of eligible W-2 compensation for a corporation or under a reduced-rate calculation for a self-employed owner. Total annual additions for one participant, excluding catch-up contributions, cannot exceed the lesser of 100% of compensation or $72,000 for 2026. Catch-up contributions can raise the total to $80,000, or potentially $83,250 for an eligible age-60-to-63 participant.
The $360,000 annual compensation cap for 2026 also applies where relevant. Limits must be coordinated with plans sponsored by related employers.
Assume Jordan, age 45, owns an S corporation and receives $100,000 of W-2 wages. Jordan elects a $24,500 employee deferral for 2026. If the plan permits a 25% employer contribution, the corporation contributes $25,000. The total is $49,500 — below the $72,000 annual-additions limit.
If Jordan were a sole proprietor, the employer portion would not simply be 25% of Schedule C profit. Net earnings are adjusted for the deductible part of self-employment tax and the contribution itself. Publication 560's worksheet is needed.
The employee limit follows the individual across employers. If Jordan also deferred $10,000 into an unrelated employer's 401(k), only $14,500 of the ordinary 2026 employee-deferral limit would remain for the Solo 401(k), although separate employer contribution limits require a more detailed analysis.
Traditional elective deferrals generally reduce current federal taxable income. A plan may permit designated Roth deferrals, which are currently taxable but can produce tax-free qualified distributions. Beginning in 2026, certain participants whose prior-year FICA wages from the sponsoring employer exceed the indexed threshold must make catch-up contributions as Roth contributions when the rule applies.
Some plan documents allow voluntary after-tax contributions and in-plan Roth conversions. These features are not automatic and require careful testing, reporting, and plan administration.
Employee-deferral elections generally must be made by the applicable year-end or plan deadline before compensation is treated as deferred. Deposit timing differs by business type and contribution role. Employer contributions may generally be funded by the business return's due date, including extensions, subject to plan and deduction rules.
A one-participant plan generally must file Form 5500-EZ when total plan assets exceed $250,000 at year-end. A final return is generally required when the plan terminates even if assets do not exceed that threshold. Late filings can create substantial penalties, so owners should track plan assets and closure dates.
A Solo 401(k) can use employee deferrals plus employer funding, which can produce a larger contribution than a SEP at moderate compensation. A SEP is often simpler and permits flexible employer-only contributions, but the same contribution percentage generally applies to eligible employees. A SIMPLE IRA supports employee deferrals and requires employer funding, generally with lower limits and fewer design choices.
A Solo 401(k) may permit participant loans; IRAs do not. Loans must follow plan terms and statutory limits, and a failed loan can become a taxable distribution.
California generally follows federal treatment for qualified-plan contributions and distributions, although federal and California basis or sourcing differences can arise. California taxes taxable distributions as ordinary income and does not provide a separate lower retirement-income rate.
Heath Income Tax can help owner-only businesses coordinate compensation, contribution calculations, entity deductions, and retirement-plan reporting.
Can I open a Solo 401(k) if I have a full-time job?
Potentially yes, if you also have a separate owner-only business. Employee deferrals must be coordinated across plans, while employer contributions and related-employer rules require separate analysis.
Can my spouse participate?
Yes, if the spouse performs bona fide work and receives eligible compensation from the business. Compensation and payroll records must support the contribution.
Does a Solo 401(k) allow a loan?
It can if the written plan permits loans. The loan must satisfy amount, repayment, and documentation rules; otherwise it may be treated as a taxable distribution.
The definitions and examples on this page are for informational purposes only and do not constitute tax advice. Tax laws change frequently and individual circumstances vary. Consult a qualified tax professional before making decisions based on this content.
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