How does a Solo 401(k) work?
Last updated August 2026
Short answer
The advantage over a SEP comes entirely from the employee deferral, which is a flat amount rather than a percentage of profit.
Two contributions, one person
The employee deferral is yours to make from earned income, up to $24,500 in 2026, in pre-tax or Roth form.
The employer contribution is a percentage of compensation, up to 25%, calculated on the same adjusted basis a SEP uses for a self-employed person.
Together they cannot exceed $72,000, or 100% of compensation if that is lower. Catch-ups are additional to that ceiling.
Why it beats a SEP at lower income
A SEP contribution is only ever a percentage, so $60,000 of net self-employment income supports roughly $11,000.
A Solo 401(k) at the same income allows a $24,500 deferral first, plus the employer percentage on top.
The two converge at high income, because both are bounded by the same $72,000 annual additions limit.
Who can have one
Sole proprietors, single-member LLCs, partnerships and corporations with no employees other than the owner and a spouse.
A spouse working in the business can also defer and receive an employer contribution, which nearly doubles the household capacity.
Hiring an employee who meets the plan's eligibility conditions generally ends solo status and turns it into an ordinary 401(k) with testing and filing obligations.
Try it in Walnut
Walnut connects to your brokerage, including a Solo 401(k) held at a mainstream custodian, and reads it alongside your other accounts.
The admin, honestly
A plan document is required at the outset, which most brokerages provide free with the account.
Form 5500-EZ becomes due once plan assets exceed $250,000, and on termination regardless of size.
That is more than a SEP requires and far less than a conventional 401(k), which is the reason the plan type exists at all.
Alongside a day job
Your employee deferral limit is shared across every plan you participate in, so a 401(k) at work uses the same $24,500.
The employer contribution from your own business is separate and unaffected by the day job.
A consultant already deferring the maximum at work can therefore still make an employer contribution from side income, which is the most common way this plan gets used well.
Rolling other accounts in
Most Solo 401(k) plan documents accept incoming rollovers from former employer plans and from traditional IRAs.
That is the standard route for clearing pre-tax IRA balances out of the pro-rata calculation before a backdoor Roth.
Not every provider's document permits it, so it is worth confirming before opening the account if that is the reason you want one.
Sources
The 2026 deferral, catch-up, $72,000 annual additions and $360,000 compensation figures are from IRS Notice 2025-67. One-participant plan rules and the Form 5500-EZ threshold are published by the IRS at One-participant 401(k) plans, with contribution calculations in Publication 560. Walnut is informational and is not an investment adviser. This guide is educational and not personalized tax advice.
FAQ
How does a Solo 401(k) work?
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It is a 401(k) for a business with no employees other than the owner and a spouse. You contribute as the employee, up to $24,500 in 2026, and again as the employer, with both together capped at $72,000 excluding catch-up.
Who is eligible?
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Self-employed people and owner-only businesses, including sole proprietors, partnerships and corporations. A spouse working in the business can also participate. Hiring an eligible non-spouse employee generally ends the plan's solo status.
How much can I contribute in 2026?
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$24,500 as employee deferral, plus an employer contribution of up to 25% of compensation, with the combined total capped at $72,000. Catch-up contributions of $8,000 from age 50, or $11,250 at ages 60 to 63, sit above that cap.
Why does it beat a SEP at moderate income?
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Because the employee deferral does not depend on profit. Someone earning $60,000 can defer $24,500 outright and then add the employer percentage, while a SEP is limited to the percentage alone.
Is there a Roth option?
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Yes for the employee deferral in most providers' plan documents, and SECURE 2.0 also permits Roth employer contributions where the plan supports them. It is one of the few ways to get large amounts into Roth treatment.
What paperwork does it involve?
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A plan document at the outset, and Form 5500-EZ once plan assets exceed $250,000 or when the plan terminates. That filing requirement is the main administrative difference from a SEP.
When are the deadlines?
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The plan generally must be established by the business tax filing deadline including extensions, and SECURE 2.0 allows a sole proprietor to make employee deferrals for the prior year up to that deadline for the first plan year.
Can I have one alongside a job with a 401(k)?
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Yes. The employee deferral limit is shared across both plans, but the employer contribution from your own business is separate, which is why consultants with a day job still find the plan useful.
Can I roll an old IRA into it?
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Most plan documents accept incoming rollovers from former employer plans and traditional IRAs, which is the standard way to clear pre-tax IRA balances before a backdoor Roth. Not every provider permits it, so confirm before opening the account.
What happens to the plan if I stop self-employment?
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The plan can generally remain in place while it holds assets, though no further contributions can be made without earned income. On termination, Form 5500-EZ is due regardless of the balance, and the assets are usually rolled to an IRA.