Solo 401(k) for Self-Employed Individuals

Eligibility, Contributions, Tax Treatment, and Compliance

A solo 401(k), also called an individual 401(k) or one-participant 401(k), is a retirement plan designed for self-employed individuals and business owners with no full-time employees other than a spouse.

Solo 401(k)s can offer high contribution limits, Roth and pre-tax contribution options, plan loan flexibility, and access to alternative assets. But they also come with important IRS rules around eligibility, contributions, prohibited transactions, tax reporting, and recordkeeping.

Use this page as a rules-focused overview of what solo 401(k) owners need to understand before opening, funding, or investing through a plan.

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Key Solo 401(k) Rules at a Glance
Who Qualifies for a Solo 401(k)?
Solo 401(k) Contribution Rules
Tax Treatment of a Solo 401(k)
Solo 401(k) Plan Loan Rules
Prohibited Transaction Rules
Alternative Investment Rules
UBTI and UDFI Considerations
Annual Reporting Requirements
Recordkeeping Responsibilities
Solo 401(k) Rules FAQs
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Key Solo 401(k) Rules at a Glance

Before opening or investing through a solo 401(k), it is important to understand the core rules that apply.

You must have eligible self-employment income.

You generally cannot have full-time employees other than your spouse.

Contributions must follow annual IRS limits and plan document rules.

Employee deferral limits generally apply across all plans combined.

Plan assets must be used for the benefit of the plan, not for personal use.

Transactions with disqualified persons may be prohibited.

An Entrust solo 401(k) allows for plan loans, though these loans must follow IRS loan rules.

Alternative assets must be titled properly in the name of the plan.

Income and expenses related to plan-owned assets should flow through the plan.

Certain business income or leveraged investments may trigger UBIT.

Form 5500-EZ may be required once plan assets reach the applicable IRS filing threshold or when the plan terminates.

Who Qualifies for a Solo 401(k)?

A solo 401(k) is generally available to a business owner with self-employment income and no employees other than the owner and, if applicable, the owner’s spouse.

You may qualify if you:

Have self-employment income from a trade or business.

Operate as a sole proprietor, LLC, partnership, S corporation, or C corporation.

Own a business with no common-law employees who meet plan eligibility requirements.

Have a spouse who works for the business and earns eligible compensation.

Have eligible business partners who may also participate in the plan, provided the business does not have common-law employees.

Spouse Participation

A spouse may participate in the plan if they legitimately work for the business and receive eligible compensation from that business.

When eligible, each spouse may be able to make employee deferrals, and the business may be able to make employer contributions for each spouse, subject to IRS limits and the terms of the plan.

Employee Limitations

No full-time employees: A solo 401(k) is designed for business owners whose only eligible participants are themselves, their spouse, or their business partners.

Under IRS rules, a common-law employee becomes eligible to participate in your workplace retirement plan once they work at least 1,000 hours in a 12-month period, or between 500 and 999 hours in each of two consecutive 12-month periods, subject to applicable age requirements.

Note: Independent contractors who receive Form 1099 generally are not eligible to participate in the business's retirement plan and do not, by themselves, disqualify the business from maintaining a solo 401(k).

Once any common-law employee qualifies to participate in a workplace retirement plan, the plan can no longer be limited to owners, and it loses its solo 401(k) status. At that point, the plan may need to be amended, converted, or administered as a standard employer-sponsored 401(k) plan.

Because workplace plan eligibility depends on business structure, compensation, employee status, and plan documents, business owners should review their situation with a qualified tax advisor, ERISA attorney, or plan administrator before establishing or maintaining a solo 401(k).

Solo 401(k) Contribution Rules

One of the biggest advantages of a solo 401(k) is that the business owner can contribute in two ways: as the employee and as the employer.

Contribution Rule	What to Know
Employee deferrals	The participant may defer eligible compensation into the plan up to the annual IRS limit. As the employee, you may be able to defer compensation into the plan up to the annual IRS limit. For 2026, this is $24,500. If you're age 50 or older, you can defer an additional $8,000 in catch-up contributions. If you're between ages 60 and 63, SECURE 2.0's "super" catch-up provision increases that additional amount to $11,250 instead.
Employer contributions	The business may make profit-sharing contributions based on income, compensation, entity type, and plan terms. As the employer, the business may also make profit-sharing contributions to the plan. Employer contributions are based on business income and compensation. The calculation may vary depending on whether the business is taxed as a sole proprietorship, partnership, corporation, or another structure. The total number of contributions across employee and employer contributions per plan may not exceed $72,000. Note that this combined limit does not include the catch-up and "super" catch-up contribution limit. Depending on the business structure and applicable deadlines, a solo 401(k) may be established after year-end for purposes of making deductible employer contributions for the previous tax year. In applicable situations, business owners may have until their tax filing deadline, including extensions, to calculate the previous year’s income and determine the employer contribution amount.
Catch-up contributions	Participants age 50 or older may qualify for additional catch-up contributions. Participants ages 60 through 63 may qualify for a higher catch-up contribution limit under SECURE 2.0 rules, if applicable. If you participate in another 401(k), 403(b), SIMPLE, or similar employer plan during the same year, your employee deferrals across plans may need to be coordinated. The employee deferral limit applies across all plans, not separately to each plan. Because contribution limits can depend on income, entity type, plan provisions, age, and participation in other plans, contribution calculations should be reviewed with a qualified tax professional.
Roth and pre-tax treatment	Every Entrust solo 401(k) allows for participants to choose between pre-tax and Roth contributions from day one.
Multiple plans	If you participate in another retirement plan, your employee deferrals may need to be coordinated across all plans.
Overall limits	Total contributions cannot exceed the applicable IRS annual limit.

Tax Treatment of a Solo 401(k)

At Entrust, every solo 401(k) allows for pre-tax and Roth contributions automatically.

Tax Rule	What to Know
Pre-tax contributions	Taxes are generally paid when funds are distributed. Pre-tax contributions may reduce current taxable income. Taxes are paid when funds are distributed and taxed as ordinary income.
Roth contributions	Made with after-tax dollars. Roth contributions are made with after-tax dollars. Qualified Roth distributions may be tax-free if the applicable five-year holding period has been satisfied and you’ve reached age 59½. Roth treatment can be useful for investors who want tax-free withdrawals in retirement, but Roth contributions do not provide the same current-year tax deduction as pre-tax contributions.
Taxable distributions	Distributions of pre-tax assets are taxed as ordinary income.
Early withdrawals	Withdrawals before age 59½ may be subject to a 10% early withdrawal penalty unless an exception applies.
In-Service Withdrawals	Entrust's solo 401(k) allows in-service withdrawals while the participant is still operating the business. Depending on the source of the funds and applicable plan requirements: • Employer contributions may be withdrawn after the participant has maintained the plan for five years. • Before five years, employer contributions that have been in the plan for at least 24 months may be withdrawn. • Participants age 55 or older may withdraw employer contributions. • Employee elective deferrals may be withdrawn after age 59½. • Hardship withdrawals may also be available when applicable hardship requirements are met.
Required minimum distributions	Pre-tax solo 401(k) assets may be subject to RMD rules once the participant reaches the applicable RMD age. Roth 401(k) assets are not subject to lifetime RMDs under current rules.

Solo 401(k) Plan Loan Rules

An Entrust solo 401(k) allows participant loans. These loans must follow IRS rules and plan requirements.

The Plan Loan Must:

Stay within IRS loan limits

Charge a reasonable rate of interest

Follow a repayment schedule

Require substantially level payments

Maximum Loan Amount

The maximum loan amount is the lesser of:

50% of the participant’s vested account balance

or $50,000

The loan must be repaid within five years, unless it is used to purchase a principal residence and the plan allows a longer repayment term.

Plan loans include a reasonable interest rate, and the interest is paid back into the participant's account rather than to Entrust or the IRS.

If a Plan Loan Defaults

If a plan loan is not repaid according to the rules, the outstanding loan balance at the time of default will be treated as a deemed distribution, potentially resulting in taxes and a 10% early withdrawal penalty.

A solo 401(k) loan is not the same as simply taking money out of the plan. It must be structured, documented, and repaid according to the plan and
IRS requirements.

Prohibited Transaction Rules

Solo 401(k) plans are subject to prohibited transaction rules. These rules are designed to prevent retirement plan assets from being used for personal benefit before retirement. The plan owner, certain family members, fiduciaries, and related businesses may be considered disqualified persons.

Prohibited Transactions May Include:

Using plan-owned property for personal use

Buying property from or selling property to the plan

Personally benefiting from plan assets

Lending plan assets to a disqualified person

Borrowing improperly from the plan outside permitted loan rules

Paying personal expenses with plan funds

Allowing a disqualified person to use or occupy plan-owned real estate

Providing goods, services, or facilities between the plan and a disqualified person

Using plan assets to benefit the plan owner’s personal business

Example: Plan-Owned Real Estate

If a solo 401(k) purchases real estate, the plan owner cannot live in the property, vacation there, store personal items there, or allow certain family members to use it.

The investment must be held for the plan’s benefit, not for personal use.

Violating prohibited transaction rules can result in significant taxes, penalties, and plan consequences. Investors should review any transaction involving the plan with a qualified professional before moving forward.

Alternative Investment Rules

A self-directed solo 401(k) with Entrust can provide access to alternative assets such as real estate, private equity, private lending, precious metals, and more.

When a solo 401(k) invests in alternative assets, the plan—not the individual participant—must be the investor.

That Means:

Assets should be titled in the name of the plan
Investment documents should identify the plan as the owner or investor
Expenses related to plan-owned assets should be paid by the plan
Income generated by plan-owned assets should return to the plan
The participant should not personally pay investment expenses
The participant should not personally receive income from plan assets
Records should clearly show that the asset belongs to the plan

Example: Rental Property

If a solo 401(k) owns rental property, rent should be paid to the plan, and property-related expenses should be paid from plan funds. The participant should not deposit rent into a personal bank account or personally pay plan-owned property expenses. Proper titling, documentation, and recordkeeping are essential when investing in alternative assets through a solo 401(k).

In-Kind Rollovers

Eligible assets held in another retirement account may be rolled directly into a solo 401(k) without first being converted to cash, provided the asset has an established fair market value (FMV).

Moving an asset in-kind, rather than selling and reinvesting, has real advantages: it avoids the risk of an unintended taxable distribution, skips the time and hassle of a sale and repurchase, and for income-producing assets like rental property, keeps your income stream uninterrupted throughout the move.

Annual contributions, however, cannot be made in kind.

UBTI and UDFI Considerations

Unrelated business income tax (UBIT) may apply when a retirement plan earns unrelated business taxable income, or UBTI. This can happen when the plan earns income from an active trade or business that is unrelated to the plan’s tax-exempt purpose.

Investments That May Be Subject to UBIT

A solo 401(k) investment may be subject to UBIT if it involves:

An active operating business

Certain pass-through partnerships

LLCs taxed as partnerships

Debt-financed investments

Leveraged real estate

Other investments that may generate UBTI

Solo 401(k)s and Leveraged Real Estate

Unlike an IRA, a solo 401(k) may qualify for an exception under IRC Section 514(c)(9) for certain debt-financed real estate investments. As a result, a solo 401(k) may not be subject to UBIT on qualifying leveraged real estate income in situations where an IRA would.

This exception is technical and does not apply to every investment or every type of income. Investors should consult a qualified tax professional before using leverage or investing in partnerships, LLCs, operating businesses, or other assets that may generate UBTI.

Annual Reporting Requirements

Solo 401(k) plans may have annual filing requirements.

The plan is required to file Form 5500-EZ once plan assets reach $250,000. Filing may also be required when the plan is terminated, even if the plan’s assets are below the normal threshold.

Other tax filings may apply depending on plan activity.

For example:

A plan with UBTI may need to file Form 990-T
A plan that makes reportable distributions may have tax reporting obligations
A terminating plan may need to file Form 5500-EZ
Additional filings may apply depending on plan activity and structure

The plan sponsor, trustee, or administrator is responsible for understanding and satisfying applicable filing requirements. Missing required filings can result in penalties, so solo 401(k) owners should review reporting obligations annually with their tax or plan administration professional.

Recordkeeping Responsibilities

A solo 401(k) gives the business owner control, but it also requires strong recordkeeping.

Entrust provides the recordkeeping infrastructure and administrative support needed to help you maintain accurate records and keep your plan in good standing. However, the plan sponsor, trustee, or administrator should also maintain clear and complete records.

Records to Keep

Adopted plan documents and amendments

Contribution records

Employee deferral elections

Employer contribution calculations

Rollover and transfer records

Investment purchase documents

Asset titling records

Expense and income records

Loan documents and repayment records

Annual asset valuations

Distribution records

Tax filings and supporting documentation

Documentation related to plan termination, if applicable

Accurate records help support contribution calculations, annual reporting, asset valuations, tax filings, and compliance reviews. This is especially important for self-directed plans holding alternative assets, which may require additional documentation and independent valuations.

Solo 401(k) Rules FAQs

Can I have a solo 401(k) if I also have a W-2 job?

Yes. You can maintain a solo 401(k) for your self-employment income even if you also participate in a 401(k) from another business. However, your total employee contributions across both plans cannot exceed the annual IRS limit.

What happens to my solo 401(k) if I hire employees?

If you hire a full-time employee (other than your spouse) who meets eligibility requirements, your plan loses its solo 401(k) status. You would need to either terminate the plan or convert it to a regular 401(k) plan that covers eligible employees.

Can I invest my solo 401(k) in real estate?

Yes. With a self-directed solo 401(k), you can purchase real estate, including rental properties, commercial buildings, raw land, and mortgage notes, as long as you follow IRS rules and avoid prohibited transactions.

Can I convert my solo 401(k) to a Roth?

Yes. You can convert pre-tax funds in your solo 401(k) to Roth by paying income tax on the converted amount in the year of conversion.

When do required minimum distributions (RMDs) begin for a solo 401(k)?

RMDs from a traditional solo 401(k) begin at retirement age under current law (per SECURE 2.0). Roth solo 401(k) accounts are no longer subject to RMDs during the owner's lifetime.

Can my spouse participate in my solo 401(k)?

Yes, if your spouse works for the business and receives eligible compensation, they may be able to participate in the plan.

This may allow your spouse to make employee deferrals and receive employer contributions, subject to IRS limits and plan terms.

Who handles solo 401(k) tax reporting?

The plan trustee is responsible for solo 401(k) tax reporting.

However, the plan sponsor, administrator, custodian, recordkeeper, or tax professional may also play a role. Ultimately, the business owner should understand which filings apply and confirm who is responsible for preparing and submitting them. Entrust provides recordkeeping and account support to help make that process easier to manage.

What happens to my solo 401(k) if I violate prohibited transaction rules?

Entrust's educational resources and plan documentation are designed to help you recognize and avoid common prohibited transaction pitfalls before they happen, though responsibility for complying with these rules ultimately rests with the plan owner.

A prohibited transaction can have serious tax and plan consequences. Depending on the case, taxes, penalties, or other consequences may apply. The IRS may require plan corrections to avoid plan disqualification.

If you believe a prohibited transaction may have occurred, contact a qualified tax advisor or ERISA attorney as soon as possible.

Can I take a loan from my solo 401(k)?

Yes, the Entrust solo 401(k) allows loans. The maximum loan amount is the lesser of 50% of the participant’s vested account balance or $50,000.

Loan payments are typically required at least quarterly and the loan must be repaid within five years, unless the loan is used to purchase a principal residence and the plan allows a longer repayment term.

Plan loans include a reasonable interest rate, and the interest is paid back into the participant's account rather than to Entrust or the IRS.

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Build a Self-Directed Retirement Strategy with Entrust

A solo 401(k) can be a powerful retirement tool for self-employed investors who want higher contribution potential, flexible tax treatment, and access to alternative assets. But the rules matter, and how well your plan is administered makes a real difference.

With more than 45 years of experience in self-directed retirement accounts, Entrust provides the plan documents, recordkeeping infrastructure, and in-house client support to help you navigate these requirements with confidence, so you can focus on your investments instead of the paperwork.

Ready to explore whether a solo 401(k) fits your retirement strategy?

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Important Information

The Entrust Group does not provide tax, legal, or investment advice. All information provided is for educational purposes only.

Solo 401(k) rules are complex and may vary based on your business structure, plan document, income, investments, and tax situation. Please consult a qualified tax advisor, attorney, or plan administrator before establishing a plan, making contributions, taking distributions, borrowing from the plan, or completing any investment transaction.

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