Is a Solo 401(k) a Qualified Plan? – Avoid This Mistake + FAQs

Lana Dolyna, EA, CTC

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Yes, a Solo 401(k) is a qualified retirement plan. It falls under the same IRS rules as any other 401(k) plan.

This means a Solo 401(k) enjoys the tax benefits of “qualified” status – pre-tax contributions (and/or Roth contributions if allowed), tax-deferred investment growth, and protected retirement funds.

It’s simply a 401(k) plan designed for a business owner with no employees (other than possibly a spouse). Because it meets the IRS qualifications under Internal Revenue Code §401, a Solo 401(k) is treated as a qualified plan for tax purposes.

Being a qualified plan, a Solo 401(k) must follow many of the standard 401(k) requirements (contribution limits, distribution rules, etc.). However, since it covers only the owner (and spouse) and no other employees, it’s exempt from certain complex regulations that apply to larger company plans.

For example, a Solo 401(k) is not subject to ERISA’s nondiscrimination testing rules because there are no rank-and-file employees to protect. This makes it simpler to administer while still retaining all the key advantages of a tax-qualified plan. In summary, as long as you set up and operate your Solo 401(k) properly, it is a qualified plan in the eyes of the IRS, giving you the same tax-deferred perks as a traditional employer 401(k).

Avoid These Solo 401(k) Pitfalls That Could Jeopardize Your Plan

Even though a Solo 401(k) is relatively easy to manage, there are critical mistakes to avoid. Missteps can jeopardize the plan’s qualified status or trigger penalties. Watch out for these common pitfalls:

Exceeding Contribution Limits: Make sure you don’t contribute over IRS limits. Remember, the annual cap (for 2023) is $66,000 in total contributions (employee + employer) if you’re under 50, or $73,500 including catch-up if 50+. If you also have another 401(k) through a day job, your $22,500 employee deferral limit is shared across all plans – you can’t double dip. Over-contributing can lead to tax penalties and required correction filings.
Missing Establishment Deadlines: A Solo 401(k) generally must be established by December 31 of the year for which you want to make salary deferral contributions. If you wait until the tax filing deadline (like you can with a SEP-IRA), you’ll miss the window for employee deferrals. Plan ahead and set up the Solo 401(k) before year-end to maximize contributions. (Employer profit-sharing contributions can still be made by your tax filing date, but the plan must exist by year-end for deferrals.)
Failure to File Form 5500-EZ: Once your Solo 401(k) plan assets exceed $250,000 at year-end (or if you terminate the plan with any assets), the IRS requires a simple annual filing (Form 5500-EZ). Forgetting to file Form 5500-EZ can result in hefty late penalties. Keep track of your account value and file on time if needed. (Solo plans under $250k are exempt from annual 5500 filings, but you must still file if you close out the plan.)
Hiring Employees Without Converting the Plan: A Solo 401(k) is meant for an owner-only business. If you hire any full-time employees who become eligible for the plan, you can no longer maintain it as a “solo.” You’d need to either include the employee(s) in a broader 401(k) plan with proper nondiscrimination testing, or cease contributions and potentially terminate the Solo 401(k). Failing to cover a new eligible employee is a serious error that could disqualify your plan. Plan ahead: if your business grows, be ready to amend the plan or switch to a standard 401(k).
Prohibited Transactions: Just like any qualified plan or IRA, a Solo 401(k) must not engage in prohibited transactions. This means you (as the fiduciary) cannot use the 401(k) assets for personal benefit outside the plan. For example, don’t loan yourself money from the plan beyond the allowed loan rules, don’t invest plan funds in your own business, and don’t purchase collectibles or a vacation home for personal use with plan funds. Such actions violate IRS rules and can disqualify the entire plan (making all assets taxable). Always keep your retirement funds separate from personal or business use, except through approved loans or distributions.
Not Updating Plan Documents: Ensure you have a proper written plan document for your Solo 401(k) and keep it updated. The IRS requires that qualified plans operate according to a written plan. If tax laws change (which they do periodically), you may need to update or restate your plan documents. Using a prototype plan from a provider or an IRS pre-approved document is wise. Don’t simply open a bank account and start contributing without formal plan paperwork – that could invalidate your plan’s qualified status.

By avoiding these pitfalls, you keep your Solo 401(k) in good standing. Compliance is key – a properly managed Solo 401(k) retains its tax advantages and remains an incredibly powerful savings vehicle for the self-employed.

Decoding the Jargon: Key Solo 401(k) Terms You Must Know

Understanding a Solo 401(k) means getting familiar with some financial and legal terminology. Here are key terms you’ll encounter, explained in plain English:

Solo 401(k) (Individual 401(k)): A 401(k) retirement plan designed for a business owner with no employees besides themselves (and potentially a spouse). It lets you contribute in two roles – employee and employer – allowing higher total contributions than many other plans. Also called a one-participant 401(k) or self-employed 401(k).
Qualified Retirement Plan: In general, a retirement plan that meets IRS requirements under the tax code (such as §401(a)). Qualified plans get special tax benefits (like tax-deductible contributions and tax-deferred growth). 401(k) plans, pension plans, and profit-sharing plans are all qualified plans. A Solo 401(k) is a type of qualified plan. (By contrast, IRAs are tax-advantaged but not “qualified plans” in the ERISA sense.)
ERISA: The Employee Retirement Income Security Act of 1974, a federal law governing private employer retirement plans. ERISA sets standards to protect participants (e.g., nondiscrimination, fiduciary duties, reporting). However, owner-only plans (like most Solo 401(k)s) are generally not subject to ERISA’s Title I rules because there are no non-owner employees. This means Solo 401(k)s avoid burdens like annual discrimination testing and certain filings, although they still must follow IRS rules for qualified plans.
Elective Deferral (Employee Contribution): The portion of your income you choose to contribute to the 401(k) as the employee. In a Solo 401(k), you can defer up to $22,500 of your compensation in 2023 ($23,000 in 2024). If you’re age 50 or older, you can contribute an additional $7,500 “catch-up” amount. This deferral can be pre-tax (traditional 401(k) contributions, reducing your taxable income) or Roth (after-tax contributions, for tax-free withdrawals later) if your plan allows Roth subaccounts.
Employer Nonelective Contribution (Profit-Sharing): The contribution made by the business (employer) into the plan. In a Solo 401(k), you as the business owner can contribute up to 25% of compensation (if you’re incorporated and take a W-2 salary) or ~20% of net self-employment income (if you’re a sole proprietor/LLC). These are often called profit-sharing contributions. Together with your elective deferrals, these employer contributions allow very high total savings (subject to the annual limit).
Annual Contribution Limit (Overall 415 Limit): The IRS caps the total amount contributed to your account each year. For 2023, the annual addition limit is $66,000 (or $73,500 if age 50+ including catch-up). This includes both your employee and employer contributions (Roth or pre-tax combined) but excludes the age catch-up amount (catch-up is allowed on top of the $66k base limit). This cap is per person, per employer. A Solo 401(k) is one plan covering one employer (your business). If you have multiple self-employed businesses with separate plans, special controlled group rules usually treat them as one employer for the limit.
Form 5500-EZ: A short information return that certain one-participant plans must file with the IRS annually. If your Solo 401(k)’s assets exceed $250,000 at year’s end, or if you terminate the plan, you need to file Form 5500-EZ. It’s a simplified two-page form (unlike the long Form 5500 for larger plans). Filing is typically due by July 31. Plans under $250k in assets are exempt from filing each year, but you still file a final 5500-EZ when the plan is closed out, regardless of balance.
Rollover: Moving funds from one retirement account to another. You can roll over money into a Solo 401(k) from other qualified plans or traditional IRAs (as long as it’s pre-tax money). This can consolidate your retirement assets under one plan. Likewise, if you ever shut down the Solo 401(k), you can roll its assets into an IRA or possibly a new employer’s 401(k). Rollovers must be done carefully to avoid taxes – typically via direct trustee-to-trustee transfer is best.
Required Minimum Distribution (RMD): The mandatory withdrawal that must start at a certain age from tax-deferred retirement accounts. Solo 401(k)s follow the same RMD rules as other 401(k)s. Under current law, RMDs begin at age 73 (for those reaching 72 after 2022, thanks to recent updates), and will move to 75 in a decade. One important note: In employer 401(k)s, if you keep working past RMD age and don’t own >5% of the company, you can delay RMDs. But in a Solo 401(k), you are by definition the owner (100% >5%), so you cannot use the still-working exception – you’ll have to start RMDs at 73 even if you’re still running your business.

These terms cover the fundamentals you need to know. With these concepts in hand, you’ll better understand how your Solo 401(k) operates and remains a qualified plan.

3 Real-World Solo 401(k) Scenarios (with Numbers)

To illustrate how Solo 401(k)s work in practice, let’s look at three real-world scenarios. These examples show different situations self-employed individuals might face, and how the Solo 401(k) rules apply in each case. Real numbers are included to demonstrate contribution limits and strategies.

Scenario 1: Maximizing Solo 401(k) Contributions on a Six-Figure Income

John is a 45-year-old consultant who runs his own incorporated business (no other employees). He pays himself a W-2 salary of $100,000. John wants to maximize his retirement savings using a Solo 401(k). Here’s how much he can contribute:

Item	Amount
W-2 Salary (self-employed income)	$100,000
Employee 401(k) deferral (2023 limit)	$22,500
Employer 401(k) contribution (25% of salary)	$25,000
Total contribution to Solo 401(k)	$47,500

How it works: John contributes the maximum $22,500 as an employee. Additionally, as his own employer, his company contributes $25,000 (which is 25% of his $100k salary). In total, John saves $47,500 in his Solo 401(k) for the year. This is well within the $66,000 limit. Note that if John were older (50+), he could also add a $7,500 catch-up to his employee deferral, bringing his total to $55,000.

Why Solo 401(k)? With a Solo 401(k), John can shelter a large portion of his income. For comparison, if he used a SEP-IRA instead, he’d be limited to 25% of salary ($25k). The Solo 401(k) lets him contribute an extra $22,500 via the employee deferral – a huge advantage for high earners.

Scenario 2: Side Hustle with a Day Job – Coordinating Two 401(k) Plans

Alice is 40 and works full-time for a company that offers a 401(k). She also has a side consulting business as a sole proprietor, earning about $50,000 a year from it. She wants to contribute to a Solo 401(k) for her side income, but she’s already contributing to her employer’s 401(k) at work.

At her day job, Alice earns $120,000 salary and maxes out her 401(k) employee contributions (she put in $22,500 this year, the IRS limit).
Her side business net self-employment income is $50,000 for the year.

What can Alice do with a Solo 401(k)? Even though she’s used up her $22,500 elective deferral at work, she can still make an employer contribution from her self-employed earnings:

Item	Amount
Employee deferral used in day job 401(k)	$22,500 (maxed at work)
Remaining employee deferral for Solo 401(k)	$0 (none left)
Side business net income (sole prop)	$50,000
Employer contribution (≈20% of $50k net)	~$10,000
Total Solo 401(k) contribution (side business)	$10,000

Explanation: Alice cannot contribute another salary deferral to the Solo 401(k) because she’s already reached the annual $22,500 limit at her day job. However, her side business can contribute about 20% of her $50k in profit as an employer contribution. Roughly, that comes out to $10,000 (in practice, the exact calculation for a sole prop would consider one-half of self-employment tax, but ~20% is a good estimate). So Alice puts $10k of her side income into the Solo 401(k) pre-tax, on top of the $22.5k she deferred at work.

This way, Alice boosts her retirement savings using her side hustle without violating IRS limits. The key point is that the employee contribution limit is per person, but the employer contribution is separate for each unrelated employer. She successfully coordinates two plans: maximizing the 401(k) at her job and using the Solo 401(k) to save more from her business earnings.

Scenario 3: Husband-and-Wife Business Doubles Their Solo 401(k) Savings

Mark and Lisa are a married couple who co-own a small business with no other employees. They qualify for a Solo 401(k) covering both of them (owner and spouse can both participate). Each spouse draws a salary of $50,000 from the S-Corp they run. They are both 48 years old and want to maximize contributions.

	Mark (Owner)	Lisa (Spouse)
W-2 Salary	$50,000	$50,000
Employee 401(k) deferral	$22,500	$22,500
Employer 401(k) contribution (25% of salary)	$12,500	$12,500
Total per person	$35,000	$35,000

Together, Mark and Lisa contribute $70,000 in their Solo 401(k) plan for the year. Mark defers $22,500 of his salary and Lisa defers $22,500 of hers, utilizing the full employee limit each. The company (which they own) also makes a 25% employer contribution for each of them – that’s an extra $12,500 to each account. Each spouse ends up with $35,000 added to their 401(k) for the year.

Why this matters: A Solo 401(k) allows a spouse employed in the business to participate just like the owner, effectively doubling the family’s retirement contribution potential. They each have their own $66,000 limit (in 2023), so the plan can build retirement savings for both simultaneously. The couple enjoys large tax deductions through their business by contributing pre-tax, and they’re rapidly building their nest egg together. If they were 50 or older, each could add an extra $7,500 catch-up, potentially contributing $42,500 each (which would be $85,000 combined!). No other employees are in the plan, so it remains a Solo 401(k) with minimal paperwork, even with two participants (owner and spouse).

These scenarios show the flexibility and power of a Solo 401(k). Whether you have high income, multiple jobs, or a spouse in the business, the Solo 401(k) adapts to help maximize your retirement contributions – all within the qualified plan rules.

IRS Requirements: Why a Solo 401(k) Qualifies as a Retirement Plan

How do we know a Solo 401(k) is truly a “qualified” plan? Let’s break down the IRS requirements that Solo 401(k) plans must meet. Essentially, the Solo 401(k) is a traditional 401(k) plan in all respects, except that it covers only one participant (or one plus spouse). Here’s the evidence that it qualifies:

Established by an Eligible Employer: To have a Solo 401(k), you must have a legitimate business (even a sole proprietorship or side gig counts) and no full-time employees other than the owner and spouse. The IRS considers the owner’s business as the plan sponsor. As long as your business exists and has self-employment income, you can set up a 401(k) for yourself. (If you later hire employees, the plan must evolve – see pitfalls above.)
Formal Plan Documentation: A Solo 401(k) must be created via a written plan document that complies with IRS rules. Just like any qualified plan, you need an adoption agreement and plan provisions in place. Many brokerage firms or financial institutions provide pre-approved Solo 401(k) plan documents, which simplifies this requirement. The plan document spells out the rules – who’s covered, how contributions work, Roth option, loan provisions, etc. Using an IRS-approved prototype plan ensures your Solo 401(k) aligns with the qualification requirements of section 401(a).
Contribution and Benefit Limits: Solo 401(k)s adhere to the same contribution limits as other 401(k)s. The IRS sets a limit on elective deferrals (§402(g) limit) and an overall annual addition limit (§415). In practice, this means your Solo 401(k) cannot receive more than the allowed maximum each year (as detailed in scenarios above). The plan must also respect compensation limits (for 2023, only the first $330,000 of compensation can be considered for contributions). By following these limits, the plan stays within IRS rules for qualified status.
Vesting and Withdrawals: In a Solo 401(k), by default, all contributions are 100% vested immediately (since you’re the owner, there’s no reason to delay vesting). The plan must also enforce the standard 401(k) withdrawal rules – generally, you can’t take out money before age 59½ without a penalty (except for specific exceptions or loans), and required minimum distributions apply at retirement age as described. These are part of the qualification conditions to ensure the plan is for retirement, not a short-term piggy bank.
Nondiscrimination and Coverage Rules: Qualified plans usually must cover a broad group of employees and not discriminate in favor of owners or highly-paid individuals. One-participant plans get a pass on these tests. The IRS and Department of Labor recognize that if only the owner (and spouse) are in the plan, there are no rank-and-file employees to worry about. Thus, complicated tests like the ADP/ACP discrimination tests, coverage tests, and top-heavy requirements do not apply to Solo 401(k)s. This is a legal carve-out (since under ERISA, a plan with only owners isn’t treated as an “employee benefit plan”). Essentially, your plan automatically meets coverage requirements by covering 100% of eligible employees (you!), and there’s no discrimination issue when one person is the only class of participant.
Compliance and Reporting: To remain qualified, the plan has to be operated in accordance with its terms and IRS rules. This includes depositing contributions timely, not exceeding limits, filing any required tax forms (like 5500-EZ), and following loan and distribution rules. Fortunately, administrative burdens are low for a Solo 401(k) – no annual testing, and no annual 5500 filing until the account grows large. But you still need to maintain records and operate the plan correctly. The IRS can audit retirement plans (including solo plans), and if a plan is found to be out of compliance, it could lose its qualified status. The IRS has correction programs (EPCRS) to fix mistakes; it’s wise to use them if you discover an error.
No Common-Law Employees: This is a defining requirement. The moment your plan covers an employee who is not an owner or spouse, it is no longer a Solo 401(k). The IRS and DOL would then view it as a regular 401(k) plan, which must satisfy all the usual requirements (ERISA, nondiscrimination, etc.). Therefore, keeping the plan truly one-participant is crucial for it to enjoy the relaxed compliance regime. If you have a controlled group of businesses, you can’t dodge this by employing someone in another business – all related businesses count together for coverage rules.

In summary, a Solo 401(k) qualifies as a retirement plan because it ticks all the IRS boxes: proper employer sponsorship, plan document, adherence to limits, and compliance with the retirement plan norms. The IRS even refers to these as “One-Participant 401(k) Plans” and affirms that “these plans have the same rules and requirements as any other 401(k) plan” (with the notable exception of being exempt from certain testing due to lack of other employees). As long as you play by the rules, your solo-plan is every bit as legitimate and qualified as a Fortune 500 company’s 401(k) – just a whole lot simpler.

Solo 401(k) vs. SEP-IRA vs. Traditional 401(k): Side-by-Side Comparison

How does a Solo 401(k) stack up against other popular retirement plans for the self-employed or small businesses? Below is a comparison of a Solo 401(k) with a SEP-IRA and a standard full 401(k) plan:

Feature	Solo 401(k) (One-Participant)	SEP-IRA (Simplified Employee Pension)	Traditional 401(k) (Employer Plan with Employees)
Eligibility	Self-employed individuals or business owners with no employees (apart from spouse).	Any business (self-employed or company) can set up a SEP; must include all eligible employees, if any.	Employers of any size. Must include all eligible employees per plan terms (with possible age/service requirements).
Plan Type	Qualified plan (401(k)) – subject to IRS 401(a) rules, but not subject to ERISA Title I if only owner/spouse.	IRA-based plan – contributions go into individual IRAs for each participant. Not a 401(a) qualified plan, but a tax-advantaged arrangement under IRC 408(k).	Qualified plan (401(k)) – subject to full ERISA and IRS rules. Requires plan documents and adherence to testing, fiduciary standards, etc.
Employee Contributions	Yes – you can make elective deferrals up to $22,500 (2023 limit) plus $7,500 catch-up if age 50+. This ability to defer salary is a major benefit of Solo 401(k).	No – SEP-IRA contributions are employer-only. Employees cannot defer salary into a SEP. (You as the business owner contribute for yourself and any workers, up to limit.)	Yes – employees can defer from their pay up to the IRS limit ($22,500 + catch-up if 50+). However, deferrals by highly-paid employees may be restricted if plan fails nondiscrimination tests (unless it’s a Safe Harbor plan).
Employer Contributions	Yes – as employer, you can contribute up to 25% of compensation (or 20% of net self-employed income) for yourself. Both employee and employer contributions together cannot exceed $66k (under 50) or $73.5k (50+).	Yes – employer contributes up to 25% of each eligible employee’s compensation (20% for self-employed). The max contribution per person is the same $66k (2023). All contributions are employer-funded (usually fully deductible to business).	Yes – employers may match employee deferrals or contribute profit-sharing. Combined employer + employee contributions per person are capped at similar limits ($66k, or $73.5k with catch-up, for 2023). In practice, many companies contribute a match (e.g., 4%) or a set profit-sharing percentage.
Roth Option	Available if adopted in plan document. You can designate all or part of your employee deferrals as Roth (after-tax). Employer contributions are always pre-tax. Solo 401(k) plans from many brokers allow a Roth sub-account.	Not available. SEP-IRA contributions are pre-tax to a traditional IRA. (However, one could do a Roth conversion of SEP funds separately, but no direct Roth SEP contributions.)	Available in many modern 401(k) plans. Employees can choose Roth 401(k) contributions if the employer’s plan includes that feature. Employer contributions remain pre-tax.
Catch-Up Contributions (50+)	Yes – $7,500 extra deferral allowed if age 50 or above, on top of the $22,500. This is solely for employee elective deferrals. (Total with catch-up can exceed the $66k base limit, up to $73.5k.)	No special catch-up – since SEP has no employee deferral, there’s no catch-up provision. The limit is the same $66k for older owners; they don’t get to contribute more to SEP than a younger person solely by virtue of age.	Yes – $7,500 extra for 50+ can be deferred by employees. Older business owners can also utilize catch-up in their own deferrals. (All still subject to testing limits if applicable.)
Loans	Yes, possibly. Solo 401(k) plans can permit loans to yourself, up to $50,000 or 50% of your account balance (whichever is less), repaid with interest to your own account. Not all solo plan providers support loans, but many do.	No. Loans are not allowed from IRAs by law. Since a SEP is just a collection of IRAs, you cannot borrow from a SEP-IRA account.	Yes, if plan allows. Most traditional 401(k) plans offer loans to participants, subject to the same $50k or 50% rules.
Setup Complexity	Moderate. Requires adopting a 401(k) plan document and setting up an account for the plan. Many financial institutions offer turnkey Solo 401(k) setups. You’ll need an EIN for your business. Initial setup paperwork is more involved than a SEP but still quite manageable.	Easy. Establishing a SEP-IRA often just means filling out IRS Form 5305-SEP (or using a broker’s form) and then opening SEP-IRA accounts. No formal plan document beyond the simple form. Very low bureaucracy.	High. Setting up a traditional 401(k) for a business involves selecting a plan provider, customizing a plan document, possibly hiring a Third Party Administrator (TPA), and handling employee enrollment materials. More time and cost required.
Ongoing Administration	Low. No annual testing or complicated administration as long as no employees are in the plan. Just remember to file Form 5500-EZ annually once assets ≥ $250k. Keep records of contributions and follow plan rules.	Low. No annual filings for SEP and no testing. Just contribute to each employee’s IRA per the formula. Administration is minimal (just inform employees of contributions made).	High. Must perform annual nondiscrimination tests (ADP/ACP, etc.) unless plan is safe harbor. Must file Form 5500 every year regardless of asset size. Need to provide employee notices, maintain fiduciary oversight on investments, possibly an annual audit for very large plans (>100 participants).
Best For	Self-employed individuals or small family businesses with no employees who want the maximum retirement contribution and flexibility. Ideal for those who can save a lot or want a Roth 401(k) option or loan feature while keeping things simplified for one/two participants.	Small business owners (including sole proprietors) who want simplicity, especially if they have a few employees. Good for moderate contribution levels without the paperwork – but no Roth or employee deferrals. Often chosen if you have employees but don’t want a full 401(k).	Businesses with employees (or those planning to add employees) that want to offer a robust retirement plan. Necessary if you have non-owner staff and want to allow salary deferrals. Can be tailored with matching, profit sharing, etc., but comes with more compliance responsibility.

In short, a Solo 401(k) shines for owner-only situations by combining the best of both worlds: high contribution limits and flexibility like a 401(k), with administrative ease closer to a SEP. A SEP-IRA is super simple and works well for small businesses, but especially for a self-employed person making high income, the Solo 401(k) usually allows much bigger contributions. A traditional 401(k) is the go-to for businesses with multiple employees, but it’s overkill (or not even permitted) if you’re on your own. The Solo 401(k> stands out as the premier choice if you qualify for it, delivering outstanding tax-deferred saving opportunities for solo entrepreneurs.

Pros and Cons: Is a Solo 401(k) Right for You?

Every retirement plan has advantages and drawbacks. Here are the key pros and cons of a Solo 401(k) to consider:

Pros of Solo 401(k)	Cons of Solo 401(k)
Higher Contribution Limits: Allows very large contributions (combining employee and employer portions) – often more than other plans (e.g., SEP or SIMPLE) at the same income level. This helps you turbocharge your retirement savings.	Administrative Responsibility: You’re in charge of setup and maintenance. That means handling paperwork, ensuring compliance, and eventually filing a Form 5500-EZ when assets grow. There’s a bit more effort than an IRA.
Tax Advantages: Contributions are tax-deductible (for traditional contributions), reducing current taxable income. Alternatively, Roth contributions grow tax-free. Investment earnings accrue tax-deferred, which can significantly boost long-term growth.	Must Have Self-Employment Income: You need business or self-employment activity to contribute. No self-employed earnings = no contributions. This plan doesn’t help if you don’t have income from a trade or business.
Flexible Contributions: You have the freedom to contribute as little or as much (up to limits) as you want each year. In lean years, you can contribute less; in profitable years, you can max it out. There are no fixed required contributions.	No Employees Allowed: It’s only for solo operations. If you intend to hire staff (other than your spouse), the Solo 401(k) is a short-term solution – you’ll have to convert to a standard 401(k) or terminate the plan once an employee becomes eligible.
Roth & Loan Features: Unlike a SEP-IRA, you can include a Roth 401(k) option for after-tax contributions. You may also allow loans to yourself from the plan. This provides more financial planning flexibility (e.g., ability to borrow for an emergency and pay yourself back with interest).	Complexity If Not Careful: While simpler than a full 401(k), it’s still a qualified plan. Mistakes (like over-contributing or engaging in prohibited transactions) can be costly. You have to stay educated about the rules or hire someone who is.
Spousal Participation: If your spouse earns income from your business, you two can double the contributions under one plan – a huge benefit for married couples. Both of you get separate contribution limits, potentially doubling the family’s retirement savings each year.	Potential Setup Costs: Some financial institutions charge setup or maintenance fees for Solo 401(k)s, especially if you want certain features (like a Roth or self-directed investments). While many low-cost options exist, a bit of shopping around is required.

Weighing these pros and cons is important. If you’re self-employed with no employees and want to save aggressively for retirement, the Solo 401(k) offers unmatched benefits. Just be prepared to handle a bit of paperwork and follow the rules. For many, the tax savings and high contribution limits far outweigh the modest administrative duties.

Solo 401(k)s in Court: What Legal Precedents Reveal

Solo 401(k) plans have occasionally been the subject of legal scrutiny, offering lessons for diligent owners. While they don’t have the extensive litigation history of large corporate plans (since fewer people are involved), there are still important legal precedents and rulings to note:

Owner-Only Plans and ERISA: The Department of Labor and courts have established that a plan covering only business owners (and spouses) is not subject to ERISA’s Title I provisions. In other words, a Solo 401(k) is exempt from many ERISA requirements (like certain reporting and fiduciary provisions) precisely because there are no non-owner employees. This legal interpretation was codified in regulations – ensuring that your Solo 401(k) won’t be treated as an ERISA employee plan until you have common-law employees. One implication is in the realm of creditor protection: ERISA plans generally have strong protection from creditors, but since a Solo 401(k) is technically not under ERISA, some courts have debated how protected solo-plan assets are in lawsuits or bankruptcy. Fortunately, federal bankruptcy law typically protects tax-qualified retirement funds (ERISA or not), and most states also shield retirement assets – so your Solo 401(k) savings remain protected in almost all scenarios, though perhaps via different legal mechanisms.
Prohibited Transactions Enforcement: Tax courts have shown little leniency for owners who misuse their 401(k) plan assets. In cases analogous to IRA rulings (like Peek v. Commissioner involving self-directed retirement funds), if an owner causes their Solo 401(k) to engage in a prohibited transaction – for example, using plan money to invest in their own company or guaranteeing a personal loan with plan assets – the IRS can disqualify the plan. That means the entire 401(k) balance could become taxable and subject to penalties. A key case precedent reinforces that the benefits of a qualified plan come with strict boundaries: you can’t treat the 401(k) as your personal checkbook. Any self-dealing or conflict of interest with plan investments is off-limits. The legal takeaway: follow the rules religiously. If unsure whether an investment or action is allowed, seek professional advice before doing it.
Contribution Limits and Tax Court: The IRS keeps an eye on contribution limits, and there have been audits and cases where business owners were called out for exceeding the legal limits or deducting too much. For instance, if an S-corp owner tries to contribute 25% of an inflated “salary” that wasn’t actually taken, or a sole proprietor miscalculates their allowable profit-sharing contribution, the IRS can reclassify those as excess contributions. In a few tax court decisions, owners had to pay taxes and penalties on the excess amounts. The courts upheld that the formulas in the tax code (for calculating contributions) must be followed precisely – you cannot contribute more than allowed just because you have high income. This underscores the importance of understanding the calculation (or working with a tax professional) to ensure you’re within bounds. The evidence requirement for deductions is also crucial: maintain records of how you arrived at your contribution figures in case you ever need to defend them.
Plan Document Amendments: A lesser-known legal requirement is that qualified plans must be updated to stay in compliance with current law. Congress often passes tax law changes (the SECURE Act, CARES Act, etc.) that affect retirement plans. The IRS typically issues deadlines by which all plan documents (including Solo 401(k)s) must adopt certain amendments. While no major court cases have targeted individual Solo 401(k) owners for failing to update documents, it is in the regulations that failing to keep your plan document current could endanger your plan’s qualified status. In practice, when you use a prototype plan from a provider, they handle these restatements for you. But if you “DIY” with an old document, be aware of this obligation. The safe route, affirmed indirectly by IRS enforcement, is to use an approved document provider or stay on top of required amendments.

Overall, legal precedents reinforce one major theme: treat your Solo 401(k) with the formality and care of any big 401(k) plan. Just because it’s “solo” doesn’t mean it’s informal. The courts expect you to follow the law to the letter. The good news is, by doing things right, you likely never have to worry about legal troubles. Solo 401(k) owners who stick to IRS guidelines, avoid self-dealing, and keep proper documentation will find that the law solidly supports the benefits of their qualified plan.

FAQs: Solo 401(k) as a Qualified Plan

Is a Solo 401(k) the same as a qualified plan? Yes. A Solo 401(k) is a qualified retirement plan under IRS rules, just like any other 401(k). It meets the criteria for tax benefits and must follow 401(k) regulations.

Do I need an EIN (Employer ID Number) for a Solo 401(k)? Yes, in most cases. Since a Solo 401(k) is an employer-sponsored plan, you should obtain an EIN for your business (sole proprietor can get one free) to open the plan.

Can I have a Solo 401(k) and a regular 401(k) at another job? Yes. You can contribute to both, but your total employee deferrals across both plans are limited to $22,500 (in 2023). You can still make employer contributions to the Solo 401(k) from your business income.

What happens to my Solo 401(k) if I hire an employee? Once you hire a full-time employee who meets eligibility, you can’t keep a “Solo” 401(k) for only yourself. You’d need to convert it to a traditional 401(k) plan covering them (with proper testing or safe harbor provisions) or shut it down and possibly roll over the assets to an IRA or new plan.

Is a Solo 401(k) better than a SEP-IRA? For many self-employed folks, yes. A Solo 401(k) lets you contribute more at identical incomes (due to the employee deferral), and offers Roth and loan features. A SEP is simpler but has no Roth or loans and lower contribution potential for those under the 401(k) deferral limit.

Are Solo 401(k) contributions tax-deductible? Employee deferrals can be pre-tax (deductible) or Roth (not deductible). Employer contributions are always pre-tax deductible to the business. So you can deduct a significant portion of your income by contributing to a Solo 401(k).

When do I have to take RMDs from a Solo 401(k)? At age 73 (for those reaching 72 after 2022, per SECURE Act 2.0). Unlike a corporate 401(k), you cannot delay RMDs past this age by continuing to work, because you are a 5%+ owner in your own business (owners don’t get the deferral exception).

Can I roll over my IRA or old 401(k) into a Solo 401(k)? Yes, you generally can roll pre-tax funds from a traditional IRA or former employer’s 401(k) into a Solo 401(k) plan. This can consolidate assets and potentially allow those funds to be used for plan loans. Roth IRAs cannot be rolled into a 401(k), but Roth 401(k) funds from a prior plan can be rolled into the Roth solo 401(k) subaccount.

How late can I set up and contribute to a Solo 401(k)? You must establish the Solo 401(k) plan by December 31 of the year for which you want to make elective deferrals. Employer contributions can be made up until your tax filing deadline (plus extensions), but the plan must exist by year-end. Don’t wait until tax season to open a Solo 401(k) for the previous year – unlike a SEP, that won’t work.

Do I need to file any forms annually for a Solo 401(k)? Not until the plan grows. If your Solo 401(k) assets exceed $250,000 at the end of a year, you’ll file a Form 5500-EZ for that year (due the following July). If under $250k, no annual filing is required. Always file a final 5500-EZ when you terminate the plan, regardless of balance.

Can my spouse participate in my Solo 401(k)? Yes, if your spouse earns income from your business, they can be included. You can each contribute to the plan with your respective compensation, effectively doubling your household’s contribution limit within one plan.

Is a Solo 401(k) protected from creditors and bankruptcy? Generally yes. While Solo 401(k)s aren’t under ERISA, they are still tax-qualified retirement funds. In bankruptcy, such retirement funds are usually exempt from creditors. And most states shield retirement plan assets from lawsuits. Specific protection can vary by state, but in practice your Solo 401(k) enjoys strong protection similar to other retirement accounts.