Self-Employed 401k: Solo 401k Guide for Entrepreneurs

Key Takeaways

• A solo 401k lets the self-employed contribute as both employee and employer — up to $72,000 in 2026.
• Establish the plan by December 31; make contributions up to the tax-filing deadline.
• Solo 401k plans can include a Roth account and accept rollovers from old 401k plans.

What a Solo 401k Is

A solo 401k (also called an individual 401k) is a retirement plan for a business with no employees other than the owner and their spouse. It works like a regular 401k but with a twist: you wear both hats. As an employee, you make elective deferrals up to $24,500 for 2026 (plus $8,000 catch-up at 50+, or $11,250 at 60-63). As the employer, you can add a profit-sharing contribution of up to 25% of your compensation — for a sole proprietor, 20% of net self-employment earnings after the deduction for half of self-employment tax. The two combined are capped at $72,000 for 2026 ($80,000 with the age-50 catch-up). For a solo founder earning $150,000 net, that means roughly $24,500 + $30,000 = $54,500 of tax-deferred space in one account.

Deadlines That Matter

Two dates rule the solo 401k. The plan document must be adopted by December 31 of the tax year to make contributions for that year. Contributions themselves can be made later: the employee deferral by the end of the calendar year, and the employer profit-share up to your tax-filing deadline including extensions (typically April 15, or October 15 with an extension). This flexibility is a real advantage — you can wait until you know your final profit before deciding how much to contribute. Note that SECURE 2.0's automatic-enrollment mandate for new 401k plans does not apply to solo 401k plans covering only the owner and spouse.

Solo 401k vs SEP IRA vs SIMPLE IRA

• Solo 401k: highest limits, Roth option, loan option, and rollover acceptance — best for most solo owners.
• SEP IRA: up to 25% of compensation, capped at $70,000 for 2026 — simpler paperwork but no catch-ups, no Roth, and it counts as an IRA for pro-rata purposes (blocking the backdoor Roth).
• SIMPLE IRA: for businesses with up to 100 employees; 2026 limit $17,000 plus $4,000 catch-up — low limits, not ideal for high earners.

Action Steps

1. Open a solo 401k at a low-cost provider before December 31 of the year you want to fund.
2. Set your employee deferral election in writing (the deadline is December 31).
3. Calculate the employer profit-share after your tax year ends, using 20% of net earnings for sole proprietors.
4. Consider a Roth sub-account if you are in a low bracket, and roll over old 401k balances to consolidate.
5. File Form 5500-EZ annually once the plan holds more than $250,000.

Roth Solo 401k and Conversions

A solo 401k can be structured with three sub-accounts: pre-tax employee deferrals, pre-tax employer profit-share, and Roth employee deferrals. The Roth election works like a Roth 401k — after-tax dollars, tax-free growth, and no RMDs on the Roth balance from 2024 — and the 2026 limits apply to the combined plan ($24,500 elective across both buckets, $72,000 total with profit-share). Solo 401k plans also accept rollovers from old 401k plans and IRAs, which makes them a favorite consolidation vehicle for the self-employed — but think twice before rolling pre-tax IRA money in if you use the backdoor Roth, since moving IRA money into the solo 401k actually cleans up your pro-rata problem (qualified plan balances do not count toward the pro-rata calculation). One caution: solo 401k plans with balances over $250,000 must file Form 5500-EZ annually — a small compliance cost that many owners forget.

Solo 401k vs SEP-IRA vs SIMPLE IRA

For a self-employed person, the solo 401k usually wins on contribution limits. In 2026 you can contribute up to $24,500 as an employee deferral plus up to 25% of net self-employment earnings as an employer contribution, capped by the overall $72,000 limit — a sole proprietor earning $150,000 can typically shelter $50,000-60,000. A SEP-IRA allows up to 25% of compensation (about $61,000 at the 2026 limit) but only employer-style contributions, with no catch-up, and it counts against the pro-rata rule for backdoor Roth IRAs. The SIMPLE IRA caps at $16,600 in 2026 ($20,600 at 50+), much lower. The solo 401k's extra advantages: Roth contributions, loan provisions, and no pro-rata interference with a backdoor Roth. The paperwork cost is modest — you must file Form 5500-EZ once assets exceed $250,000 — and most low-cost brokerages offer free solo 401k plans. Set up the plan before December 31 to make contributions for the tax year.