The solo 401(k): a retirement plan for a company of one (and possibly a spouse)

By Tom, CPA · Updated October 25, 2026

TL;DR: A solo (one-participant) 401(k) lets a self-employed person with no employees other than a spouse contribute twice: as the employee (up to $24,500 in 2026, plus catch-up) and as the employer (about 20% of net self-employment earnings after the SE tax deduction), up to a $72,000 total.

Educational only, not tax, legal, or investment advice. Examples are illustrations, not predictions. Rules and limits change; verify current figures and talk to a qualified professional about your situation.

Self-employment comes with a lot of glamorous perks: deciding your own hours, wearing sweatpants to meetings, and paying both halves of Social Security tax. Among the less glamorous but more lucrative perks is the solo 401(k), a retirement plan sized for a business with exactly one employee: you. (And, optionally, a spouse who works in the business.)

The IRS calls it a one-participant 401(k). It has the same contribution limits as a big-company 401(k), but because you are both the employee and the employer, you can contribute in both roles. For side hustlers and early retirees with consulting income, it can shelter a remarkable share of earnings.

CPA Warning Label: Your employee deferral limit is per person, not per plan. If you already max out a 401(k) at a day job, the solo plan's employee side is mostly spoken for.

Who can use one

The IRS describes a one-participant 401(k) as covering a business owner with no employees, or that person and their spouse. The key condition is no other eligible employees. If you hire a part-time assistant who becomes eligible under the plan's terms, the plan may need to cover them, which changes everything (and generally means it's no longer a "solo" plan).

It works for sole proprietors, single-member LLCs, partnerships of spouses, and S corporations or C corporations owned by one person. The type of entity changes how "compensation" is measured: W-2 wages for a corporation, net self-employment earnings for a sole proprietor.

The two contribution roles

Per the IRS one-participant 401(k) page, the owner can contribute:

• Elective deferrals (the employee side) up to 100% of compensation, up to the annual limit: $24,500 in 2026, plus $8,000 catch-up at 50+ or $11,250 at ages 60–63.
• Employer nonelective contributions up to 25% of compensation as defined by the plan. For self-employed individuals, a special calculation applies (below).

Total contributions to your account, not counting catch-ups, can't exceed the 2026 overall limit of $72,000. Compensation counted is capped at $360,000 in 2026.

The self-employed math (the 20% thing)

For a sole proprietor, the employer contribution isn't simply 25% of profit. Compensation is "earned income," which IRS Publication 560 defines as net earnings from self-employment minus the deduction for half of self-employment tax and minus the plan contribution itself. That circular definition works out to an effective rate of 20% when the plan rate is 25% (Publication 560's rate table converts a 25% plan rate to 0.20).

Illustration (assumptions): Fran is a sole proprietor, 44, with $100,000 of net profit on Schedule C in 2026, no other job and no other retirement plan. Using the standard self-employment tax computation (15.3% on 92.35% of profit, below the Social Security wage base):

1. SE tax: $100,000 × 92.35% × 15.3% = $14,130 (rounded)
2. Half of SE tax deduction: $7,065
3. Net earnings after that deduction: $92,935
4. Employer contribution at 20%: about $18,587
5. Employee deferral: $24,500
6. Total: about $43,087, well under the $72,000 cap

For comparison, a SEP IRA for Fran would allow only the employer-side piece, about $18,587. The employee deferral is what makes the solo 401(k) bigger at modest incomes. See SEP IRA vs solo 401(k).

If you also have a day job

The elective deferral limit applies per person across all plans. The IRS warns that a business owner who also participates in another employer's 401(k) "must consider the limit for all elective deferrals he makes during a year." So if you defer $24,500 at your day job, your solo 401(k) employee side for 2026 is $0.

The employer contribution is different: the overall $72,000 limit generally applies per unrelated employer's plan. A day-job employee who maxes deferrals can still make the 20% employer contribution from side-business earnings to a solo 401(k). Illustration: $60,000 of side-business profit yields about $11,152 of employer contribution using the same formula.

Roth options and the mega backdoor

• Roth deferrals. Many solo 401(k) providers allow Roth elective deferrals. That's the same as a Roth 401(k): no deduction now, potentially tax-free later.
• Roth employer contributions. SECURE 2.0 allowed plans to let participants designate employer contributions as Roth (taxable now). Availability depends on the provider's plan document.
• After-tax contributions. Some customized solo plans allow after-tax contributions and in-plan conversions, a self-employed mega backdoor. Off-the-shelf plans often don't.
• Roll-ins for backdoor cleanup. Many solo plans accept roll-ins of pre-tax IRA money, which can clear the way for a clean backdoor Roth IRA.

Deadlines and setup

• Plan establishment. SECURE Act changes allow a new plan to be adopted after year end (by the business's tax return due date, including extensions) for employer contributions. Under SECURE 2.0, sole proprietors can generally make employee deferrals for the plan's first year up to the return due date (without extensions). Because these rules are new and providers differ, open the plan well before year end if you want deferrals.
• Deferral elections. For deferrals in later years, an election is generally made by year end.
• Contribution deposits. Employer contributions can generally be made up to the business's tax filing deadline, including extensions.

Form 5500-EZ and other paperwork

Once a one-participant plan has more than $250,000 in assets at the end of a plan year, a one-participant plan generally must file Form 5500-EZ annually (also required in the final plan year). Late filing penalties can be steep, though the IRS offers a penalty relief program for late filers. Put the filing deadline (generally the last day of the seventh month after the plan year ends) on the calendar the moment your balance gets close.

Also keep the plan document current. Providers restate pre-approved plans periodically, and an outdated document is a compliance problem waiting for a bored afternoon.

Common solo 401(k) mistakes

• Using gross revenue instead of net profit. The employer contribution is based on net earnings from self-employment after expenses and the half-SE-tax deduction, not on what clients paid you. Contributing 20% of revenue can create an excess contribution.
• Double-dipping the deferral limit. Deferring $24,500 at a day job and another $24,500 in the solo plan exceeds the per-person limit. The excess has to be corrected, generally by April 15 of the following year, to avoid being taxed twice.
• Hiring without checking eligibility. Adding a regular employee can make the plan subject to coverage and testing rules. Plan terms and hours matter.
• Treating it like a checking account. Plan loans may be available if the document allows them, but early distributions are generally subject to tax and the 10% additional tax unless an exception applies.

Illustration: Larry had $80,000 of consulting revenue and $30,000 of expenses. His net profit is $50,000, not $80,000. Using the same 20% formula as above, his employer contribution limit is roughly $9,293, not the $16,000 he first calculated from revenue. A good reminder that the tax code is always interested in the bottom line.

Why solo 401(k)s matter for FIRE

Many early retirees keep some consulting or freelance income. A solo 401(k) lets that income keep feeding tax-advantaged accounts while the household lives on other money, and its Roth side can be a cleaner home for savings in low-bracket years. It also gives a place to park pre-tax IRA money so Roth conversions or backdoors stay clean. Remember that solo 401(k) money is still plan money: early withdrawals face the usual early-access rules.