The Solo 401(k): the biggest deduction most owners never take
The short answer
A Solo 401(k) is a full 401(k) for a business with no employees other than the owner (and spouse). You contribute twice — as the employee ($24,500 in 2026, indexed annually) and as the employer (up to 25% of compensation) — for a combined shelter of up to $72,000 in 2026 (more with catch-ups), doubled if your spouse works in the business. It pairs naturally with an S-corp salary and can include a Roth option.
Who this works for — and who it doesn't
Good fit
- Profitable owners with no full-time employees beyond family
- S-corp owners coordinating salary and retirement in one plan
- High savers who've maxed IRAs and want a bigger shelter
Not a fit
- Businesses with non-spouse employees — a Solo plan generally can't exclude them; you need a real 401(k) instead
- Owners who need every dollar of cash flow this year
- Anyone expecting to raid it early — it's retirement money, with penalties to match
How it works
- Open the plan at a brokerage (often free) — ideally early in the year, not December 28th.
- Defer as the employee from salary or self-employment income, traditional or Roth.
- Contribute as the employer: up to 25% of W-2 wages (S-corp) or ~20% of net self-employment earnings (sole prop) — always pre-tax, always deductible.
- Add your spouse if they genuinely work in the business, doubling both layers.
- Coordinate with your S-corp salary — the employer layer is a percentage of compensation, so the salary study and the retirement plan are one combined calculation.
A worked example
Elena's S-corp pays her an $80,000 documented salary from $200,000 of profit.
Elena's Solo 401(k), one year
Illustrative only — limits index annually and the optimal split against your S-corp salary is a calculation, not a default.
Common mistakes that draw IRS attention (or just cost you money)
- Opening the plan after year-end and losing the deferral window
- Hiring a first employee and not realizing the "solo" plan now has coverage obligations
- Contributing more than compensation supports — the employer layer is a percentage of pay, not of profit
- Forgetting Form 5500-EF once plan assets pass the filing threshold
Frequently asked questions
How much can I put into a Solo 401(k)?
You contribute in two roles: as employee (an annual deferral limit in the low-$20,000s, indexed each year, plus catch-up at 50+) and as employer (up to 25% of W-2 compensation, or roughly 20% of net self-employment income). Combined, total contributions can reach $72,000 in 2026, plus catch-ups, depending on the year's limits.
Solo 401(k) or SEP-IRA?
At the same income, the Solo 401(k) almost always allows larger contributions because of the employee deferral layer, and it can offer a Roth option and loans. The SEP wins mainly on simplicity. We compare both in your actual numbers before choosing.
Can my spouse participate?
Yes — if your spouse legitimately works in the business and is paid compensation, they get their own employee deferral and employer contribution, effectively doubling the household shelter.
When do I have to set it up?
Generally the plan should be established by year-end for full benefits, with employer contributions fundable up to your tax filing deadline. Rules have loosened for some late setups, but do not plan on the exception — open it early.
Want the salary + retirement math run as one plan?
The S-corp salary, the QBI deduction, and the Solo 401(k) are a single optimization. We run all three together on your real numbers.
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