FAQ

What is a Solo 401(k)?

A Solo 401(k), also known as an Individual 401(k) or One-Participant 401(k), is a retirement savings plan designed for self-employed individuals and business owners with no employees other than a spouse. It allows you to make contributions as both the employee and the employer, potentially enabling higher annual contribution limits compared to other retirement plan options like SEP IRAs or traditional IRAs.

Who qualifies for a Solo 401(k)?

To qualify for a Solo 401(k), you must meet these requirements:

You must be self-employed or own a business

You cannot have any full-time employees (except a spouse who can participate)

Part-time or seasonal employees working under 1,000 hours per year generally don't affect eligibility

You can have other W-2 employment, but contribution limits must be coordinated across all plans

Common business structures include sole proprietorships, LLCs, S corporations, C corporations, and partnerships where all partners are owners.

What are the contribution limits?

For 2024, Solo 401(k) contribution limits are:
‍Employee Deferrals: Up to $23,000 (or $30,500 if age 50 or older with catch-up contributions)
‍Employer Profit-Sharing: Up to 25% of compensation (for S-corps/C-corps) or 20% of net self-employment income (for sole proprietors/LLCs)
‍Total Combined Limit: $69,000 for 2024 ($76,500 if age 50+)
These limits are subject to annual IRS adjustments. The specific amount you can contribute depends on your income, business structure, and whether you participate in other retirement plans. Consult with a tax professional for personalized calculations.

What is Form 5500-EZ?

Form 5500-EZ is an annual information return required for Solo 401(k) plans once the plan's assets exceed $250,000 at the end of the plan year. This form must be filed with the IRS and provides information about the plan's financial condition, investments, and operations. If your plan assets remain below $250,000, you generally don't have a filing requirement. The form is due by the last day of the seventh month after the plan year ends (July 31 for calendar-year plans), though extensions are available.

Can Solo 401(k) plans offer loans?

Yes, if your plan document includes loan provisions, you may be able to borrow from your Solo 401(k). Participant loans are generally limited to the lesser of $50,000 or 50% of your vested account balance. Loans must be repaid with interest (at a reasonable rate) over a period typically not exceeding 5 years, though longer terms may be allowed for loans used to purchase a primary residence. Repayments must be made at least quarterly. Defaulting on a plan loan can result in the outstanding balance being treated as a taxable distribution, potentially subject to income tax and early withdrawal penalties.

How does a Solo 401(k) compare to a SEP IRA?

Key differences include:
‍Contributions: Solo 401(k) allows both employee and employer contributions, while SEP IRA only allows employer contributions. This often enables higher total contributions with a Solo 401(k).
‍Roth Option: Solo 401(k) can include Roth contributions; SEP IRA cannot.
‍Loans: Solo 401(k) can permit participant loans; SEP IRA cannot.
‍Complexity: SEP IRA is simpler to establish and maintain; Solo 401(k) has slightly more administrative requirements.
‍Filing: SEP IRA has no annual filing requirement; Solo 401(k) requires Form 5500-EZ when assets exceed $250,000.

What is a Mega Backdoor Roth?

The Mega Backdoor Roth is an advanced strategy that allows individuals with Solo 401(k) plans to contribute significantly more to Roth accounts than standard Roth contribution limits allow. It involves making after-tax (non-Roth) contributions to your 401(k) up to the overall annual limit, then converting those after-tax amounts to Roth through in-plan conversions or in-service distributions to a Roth IRA. This strategy requires that your plan document specifically permits after-tax contributions and either in-plan Roth conversions or in-service distributions. When executed properly, it can enable tens of thousands of dollars in additional annual Roth savings with tax-free growth potential.

Can spouses participate?

Yes, a spouse who works in the business can participate in the Solo 401(k) plan. The spouse must receive W-2 wages from the business (if structured as an S-corp or C-corp) or be a partner/owner. Each spouse can make their own employee deferrals up to the annual limit ($23,000 or $30,500 if age 50+), and the employer can make profit-sharing contributions on behalf of each spouse based on their respective compensation. This can potentially double the household's retirement savings compared to a single participant. However, hiring a spouse may create additional payroll and tax considerations that should be discussed with your tax advisor.

What investments are allowed?

True Portfolio Diversification

Traditional:

Stocks

Bonds

Mutual funds

Alternative:

Real estate

Precious metals

Private placements

Traditional:

Cryptocurrencies

Mineral rights

And more

Note: Prohibited investments include life insurance (with limited exceptions), collectibles (art, antiques, gems, etc.), and S-corporation stock. Always consult with qualified advisors before making alternative investments in your Solo 401(k).

When must contributions be made?

Employee Deferrals: Must be made by December 31 of the tax year for which you're making the contribution. These should be deposited as soon as administratively feasible after compensation is earned.
‍Employer Profit-Sharing Contributions: Can be made up until your business tax filing deadline, including extensions. For example, if you file your business tax return on April 15, you have until that date to make employer contributions for the prior year. If you file for an extension to October 15, you have until then.
This deadline flexibility for employer contributions allows for year-end and even post-year-end tax planning with your CPA or tax advisor.

Do Solo 401(k) plans require administration?

Yes, Solo 401(k) plans have ongoing administrative requirements, though they're generally more streamlined than plans with multiple employees. Required administration includes maintaining a written plan document (and updating it when regulations change), tracking contributions to ensure compliance with annual limits, filing Form 5500-EZ when assets exceed $250,000, maintaining proper records of all plan transactions, and ensuring distributions comply with applicable rules. Many Solo 401(k) sponsors work with third-party administrators or service providers to handle these requirements efficiently. While administration is required, it's typically manageable and well worth the effort given the significant tax and retirement savings benefits.

Who should consider this plan?

Solo 401(k) plans are often well-suited for:

Self-employed professionals with substantial income who want to maximize tax-deferred retirement savings

Business owners who have no employees other than a spouse and want higher contribution limits than a SEP IRA offers

Individuals age 50+ who want to take advantage of catch-up contributions

Those interested in building Roth retirement assets through Roth 401(k) contributions or Mega Backdoor Roth strategies

Self-employed individuals who value the option to take participant loans from their retirement plan

Professionals with side businesses or consulting income in addition to W-2 employment

It's important to work with qualified tax and financial professionals to determine if a Solo 401(k) is the best retirement plan option for your specific situation.

Solo 401(k) FAQ

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