1. Who Qualifies

Any self-employed individual or business owner with no employees other than a spouse can generally open a Solo 401(k). This can include sole proprietors, single-member LLCs, partnerships, and S-corporations, provided the business does not have other common-law employees who meet the applicable eligibility requirements.

The plan is commonly called a Solo 401(k), but the IRS generally treats it as a one-participant 401(k) plan. The key eligibility issue is not simply whether the business has an owner other than the individual; it is whether the business has employees who must be covered under the plan.

2. The Two Contribution Buckets

As the employee, you can defer up to $24,500 of compensation for 2026 under IRC Section 402(g). If you are age 50 or older, you can add a catch-up contribution of $8,000, bringing your personal deferral to $32,500. Under a SECURE 2.0 provision, owners who turn 60, 61, 62, or 63 during 2026 get an enhanced catch-up of $11,250 instead of the $8,000, bringing their deferral to $35,750. The enhanced catch-up replaces the standard catch-up for that age band; it does not stack on top of it. As the employer, the business can contribute up to 25% of compensation, or roughly 20% of net self-employment income for a sole proprietor.
The two buckets together are capped by IRC Section 415(c) at $72,000 for 2026, not counting catch-up contributions. With the age-50 catch-up the personal ceiling becomes $80,000, and with the enhanced 60 to 63 catch-up it becomes $83,250. Compensation counted for these calculations is capped at $360,000 for 2026. One rule high earners should note: if your prior-year FICA wages from the sponsoring employer exceeded $150,000, your catch-up contributions must be made on a Roth basis.

3. Worked Example

A consultant operating as a sole proprietor nets $250,000 in self-employment income for 2026 and is under age 50.
As the employee, she defers the full $24,500. As the employer, her business contributes roughly 20% of net earnings after the deduction for one half of self-employment tax, which works out to approximately $43,000. Her total contribution is roughly $67,500, comfortably under the $72,000 Section 415(c) ceiling.
At a 35% marginal rate, that shelters roughly $23,600 in current-year federal tax. Compare that to a SEP IRA in the same scenario. A SEP allows only the employer-side contribution, so the $24,500 employee deferral is left entirely on the table. Same income, same business, roughly $8,500 more in tax paid for choosing the wrong plan.

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4. Solo 401(k) vs. SEP IRA vs. Traditional IRA
 

5. Roth Solo 401(k) Option

Many Solo 401(k) providers allow the employee-deferral portion to be designated as Roth (after-tax, tax-free growth), which can make sense for business owners who expect to be in a similar or higher bracket in retirement, or who want to diversify between pre-tax and tax-free retirement income.

6. Step-by-Step Setup Checklist

• Confirm no common-law employees other than a spouse
• Choose a Solo 401(k) provider (brokerage-based plans are common and low-cost)
• Establish the plan before the business's tax year-end (employer contributions can sometimes be made up until the filing deadline, but the plan itself generally must exist by year-end)
• Decide on traditional vs. Roth treatment for the employee deferral portion
• Calculate maximum employee and employer contribution amounts
• File Form 5500-EZ once plan assets exceed the IRS filing threshold

7. Most Common Mistakes

Setting up the plan too late. Many providers require a Solo 401(k) to be established by December 31 for the applicable tax year, even though certain contributions may be made after year-end. Waiting until tax filing season can eliminate or complicate the opportunity to make contributions for the prior year.

Forgetting the employer contribution. Some business owners maximize only the employee salary-deferral portion and overlook the additional employer contribution. Depending on income and plan limits, that employer contribution can represent a significant additional retirement savings opportunity.

Hiring an employee without reviewing plan eligibility. A Solo 401(k) is intended for a business with no employees other than certain spouses. Once a non-spouse employee meets the applicable eligibility requirements, the business may need to include that employee in the retirement plan and comply with broader 401(k) rules.

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8. Frequently Asked Questions

Can my spouse also contribute if they work in the business? Yes. A spouse who earns eligible compensation from the business can generally participate in the Solo 401(k) and make their own employee and employer contributions, potentially increasing the household's total retirement contributions.

Is a Solo 401(k) better than a SEP IRA? For many business owners, a Solo 401(k) can be more flexible because it allows both an employee salary-deferral contribution and an employer contribution, while a SEP IRA generally provides an employer contribution only. The better option depends on the owner's income, age, business structure, and retirement objectives.

Can I take a loan from my Solo 401(k)? Many Solo 401(k) plans permit participant loans, subject to the plan document and applicable IRS rules. This can provide a flexibility that traditional IRAs generally do not offer. Not every Solo 401(k) provider offers loans, so this feature should be confirmed before opening the plan.