The Solo 401(k): How a One-Participant 401(k) Plan Works for Business Owners
In Short
A Solo 401(k), also called a one-participant 401(k), is a 401(k) plan that covers a business owner with no employees, or the owner and a spouse. It is commonly used by self-employed people and owner-only companies that want to contribute both as the employee and as the employer.
TL;DR
- The plan covers a business owner with no employees, or that person and his or her spouse [1].
- The owner can contribute as an employee (elective deferrals) and as the employer (nonelective contributions of up to 25% of compensation as the plan defines it) [1].
- For 2025 the elective deferral limit is $23,500, and total additions to the account are capped at $70,000, not counting catch-up contributions [2][3].
- Deferrals can be made as designated Roth contributions if the plan allows it [4].
- A Form 5500-EZ is generally required once plan assets reach $250,000 or more at year end [1].
Quick Facts
| Legal Reference | IRC §401(k), §402(g), §415(c) |
|---|---|
| Complexity | Medium |
| Audit Risk | Low |
| Setup Cost | Low — plan document and account setup, often through a financial institution |
| Time to Implement | A few days to a few weeks to adopt a plan and open accounts |
| Illustrative Example | Illustrative example, not a projection. A 45-year-old sole proprietor with $100,000 of net self-employment earnings defers $23,500 as the employee for 2025 and also makes an employer contribution figured with the Publication 560 worksheet for the self-employed. The deferral lowers taxable income in 2025 if it is pre-tax, or is taxed now and may come out tax-free later if it is Roth. Actual results depend on the facts, the plan terms and the tax rates involved. |
Key Numbers & Limits
| Item | Limit or Rule | Notes |
|---|---|---|
| Elective Deferral Limit (2025) | $23,500 | Combined limit for pre-tax and Roth deferrals [2][4]. |
| Catch-Up, Age 50 or Older (2025) | $7,500 | Added on top of the deferral limit [2]. |
| Catch-Up, Ages 60–63 (2025) | $11,250 | Applies in place of the $7,500 catch-up for those ages [2]. |
| Total Annual Additions (2025) | $70,000 | Defined contribution limit under §415(c), not counting catch-up contributions [3]. |
| Compensation Considered (2025) | $350,000 | Annual compensation limit [3]. |
| Form 5500-EZ Threshold | $250,000 or more in plan assets at year end | Filing generally required at or above this level [1]. |
What Is a Solo 401(k)?
A Solo 401(k) is a regular 401(k) plan set up by a business with no employees other than the owner, or the owner and a spouse [1]. The IRS calls it a one-participant 401(k) plan. It is a qualified retirement plan, and contributions and distributions follow the general 401(k) rules [1][5].
The owner wears two hats. As the employee, the owner can make elective deferrals of up to 100% of compensation, up to the annual deferral limit. As the employer, the business can make nonelective contributions of up to 25% of compensation as defined by the plan [1].
For a self-employed person, compensation means earned income: net earnings from self-employment after deducting one-half of self-employment tax and the contributions made for yourself [1]. IRS Publication 560 has the rate table and worksheets used to figure the employer contribution for the self-employed [5].
How Does a Solo 401(k) Work?
- The business adopts a written 401(k) plan, often a pre-approved plan offered by a bank, brokerage or plan provider, and opens a plan account [1][5].
- During the year, the owner elects how much to defer as the employee, up to $23,500 for 2025 plus any catch-up contribution for which the owner qualifies [2].
- The business decides on an employer nonelective contribution, figured from compensation using the plan formula and, for the self-employed, the Publication 560 worksheets [1][5].
- Total contributions for the year stay within the §415(c) limit of $70,000 for 2025, plus catch-up contributions [3].
- Each year, the plan checks whether its assets at year end reach $250,000, which generally triggers a Form 5500-EZ filing [1].
The Good: What Are the Benefits of a Solo 401(k)?
- Two kinds of contributions — employee deferrals and employer contributions — can allow more to be saved than an IRA alone [1][2].
- Pre-tax deferrals and employer contributions reduce current taxable income, and growth is tax-deferred until distribution [1].
- A designated Roth option lets deferrals be taxed now, with qualified distributions, including earnings, generally tax-free later [4].
- With only the owner (and possibly a spouse) covered, there are no other employees' accounts, notices or contributions to administer [1].
- Small plans below the $250,000 asset level generally do not file an annual Form 5500-EZ [1].
The Bad: What Are the Drawbacks of a Solo 401(k)?
- The plan is only for owner-only businesses; hiring eligible employees changes the plan's coverage and testing rules [1].
- The employee deferral limit is per person, not per plan, so deferrals to an employer's 401(k) elsewhere count toward the same $23,500 limit [4].
- The employer contribution for the self-employed uses a reduced rate and a worksheet, which is easy to get wrong [5].
- Money in the plan is generally meant for retirement; early distributions can bring tax and an additional tax.
The Ugly: What Are the Serious Risks of a Solo 401(k)?
- Missing a required Form 5500-EZ can bring a penalty of $250 per day, up to $150,000 per return, unless the failure is due to reasonable cause [1][6].
- Contributions above the deferral or §415(c) limits that are not corrected in time can be taxed more than once and can put the plan's tax status at risk [3].
- A plan that leaves out employees who become eligible — for example, after the business hires staff — can fail the qualification rules that apply to plans with employees, which can require costly corrections [5].
Who Uses a Solo 401(k)?
Who It's Commonly Used By
Who It's Generally Not Suited For
- Businesses with eligible employees other than the owners and their spouses [1].
- Owners who already defer the full $23,500 through an employer's 401(k) elsewhere and have little self-employment income [2][4].
- Owners who are not prepared to track contributions and the Form 5500-EZ asset threshold each year.
What Are the Key Rules & Requirements for a Solo 401(k)?
- The plan covers only a business owner with no employees, or that person and a spouse [1].
- Elective deferrals are limited to $23,500 for 2025, with a $7,500 catch-up at age 50 or older and an $11,250 catch-up at ages 60 to 63 [2].
- Employer nonelective contributions are limited to 25% of compensation as defined by the plan [1].
- Total annual additions are limited to $70,000 for 2025, not counting catch-up contributions [3].
- For the self-employed, compensation is net earnings from self-employment after one-half of self-employment tax and the owner's own contributions [1].
- Designated Roth deferrals share the same deferral limit as pre-tax deferrals [4].
- Form 5500-EZ is generally required when plan assets are $250,000 or more at the end of the year [1].
What Are Common Mistakes & Red Flags With a Solo 401(k)?
- Figuring the self-employed employer contribution as 25% of net profit instead of using the reduced rate and worksheet in Publication 560 [5].
- Deferring the full limit in two plans in the same year, which exceeds the per-person deferral limit [4].
- Continuing the plan as a one-participant plan after hiring eligible employees [1].
- Not tracking plan assets, and missing the Form 5500-EZ once assets reach $250,000 [1].
- Mixing plan money with business or personal accounts.
Frequently Asked Questions
How Much Can I Contribute to a Solo 401(k) in 2025?
For 2025, the employee deferral limit is $23,500, plus a $7,500 catch-up at age 50 or older or an $11,250 catch-up at ages 60 to 63 [2]. Employer contributions are added on top, but total additions are capped at $70,000, not counting catch-up contributions [3]. The actual amount depends on compensation [1].
Can My Spouse Participate in My Solo 401(k)?
Yes. The IRS describes a one-participant 401(k) plan as covering a business owner with no employees, or that person and his or her spouse [1]. A spouse who works in the business can make deferrals and receive employer contributions based on his or her own compensation.
Sources
- One-Participant 401(k) Plans — Internal Revenue Service
- 401(k) Limit Increases to $23,500 for 2025, IRA Limit Remains $7,000 (IR-2024-285) — Internal Revenue Service
- COLA Increases for Dollar Limitations on Benefits and Contributions — Internal Revenue Service
- Retirement Plans FAQs on Designated Roth Accounts — Internal Revenue Service
- Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans) — Internal Revenue Service
- 26 U.S. Code §6652 — Failure to File Certain Information Returns, Registration Statements, Etc. — Legal Information Institute, Cornell Law School
Primary sources only: the Internal Revenue Code, Treasury regulations and official agency guidance. Read how Zentavos researches these reports.