For workers looking to start their own business or work independently, retirement plans are available that allow these entrepreneurs to build their savings on their own. One such plan includes Solo 401(k)s: a specific kind of retirement plan for business owners with no employees. While like a traditional 401(k) plan and rather direct in its design, Solo 401(k) users have rules which must be adhered to in order to be used correctly and save in a tax-advantaged way. So, what Solo 401(k) rules can owners expect to follow? Let’s review all the Solo 401(k) rules business owners should consider before creating an account.
Rules to Follow for Solo 401(k)s
Eligibility
A Solo 401(k) is designed for self-employed individuals and business owners with no common-law employees, other than a spouse. You can establish a plan as soon as your business starts generating self-employment income.
While Solo 401(k) plans do not have age or service restrictions for the business owner, you cannot use custom eligibility requirements to exclude regular employees from the plan if they meet statutory limits. Under federal law, if your business hires any non-spouse employee who is at least 21 years old and works more than 1,000 hours in a year (or 500 hours per year over two consecutive years), they must be allowed to participate. This automatically disqualifies the plan from being a Solo 401(k).
A spouse who legitimately works for the business can participate fully, allowing the plan to retain its Solo 401(k) status. For 2026, both you and your spouse can contribute up to $24,500 each as employee salary deferrals (plus catch-up contributions if eligible), provided each person earns sufficient income from the business. Combined with employer profit-sharing contributions, this allows a married couple to significantly maximize their joint retirement savings.
Contribution Limits
According to the 2026 Solo 401(k) limits, business owners can contribute to their retirement accounts as both employer and employee. Under these rules, owners can contribute up to the maximum amount to their Solo 401(k) limits, which are capped as follows:
Employee contribution:
$24,500 or 100% of your income depending on which is less. Individuals 50 and over may contribution additional funds up to $8,000.
Employer contribution:
Business owners may generally contribute up to 25% of compensation as an employer contribution. For 2026, compensation used to calculate contributions is capped at $360,000.
Combined employer and employee contributions:
Total contributions are generally limited to $72,000 in 2026, excluding catch-up contributions.
Business owners should remember that these limits apply to other accounts as well. If a business owner has additional employment that provides a retirement savings account, some limits must be appropriately coordinated with those other plans. Generally, salary deferrals are one limit across all sources of employment; employer contributions are not.
Taxes
Business owners have the great advantage of choosing whether to make their Solo 401(k) a tax-deferred or Roth account. However, like any account, certain Solo 401(k) rules apply and must be carefully considered before implementing your retirement strategy.
While traditional tax-deferred Solo 401(k)’s allow business owners to contribute funds to their account outside of taxes and save in the present, deferring taxes requires they be paid in future withdrawals and distributions during retirement.
As opposed to the traditional tax-deferral, Roth Solo 401(k)’s don’t provide for an initial tax-deferral on employee contributions and require taxes to be applied before depositing into the account. This feature allows Solo 401(k) funds to grow and be distributed tax-free later.
When considering between a tax-deferred or Roth Solo 401(k), business owners should carefully examine their finances to decide the right plan for their retirement goals. (Please note all employer contributions are considered pre-tax.)
Withdrawals
Like most retirement plan accounts, Solo 401(k) have rules about when members can withdraw their savings. Typically, business owners have limited opportunities to withdraw money from their Solo 401(k) prior to the age of 59 ½. Should an individual need to withdraw before that age, different penalties apply depending on the account type:
- Tax-deferred Solo 401(k): members making early withdrawals must not only pay taxes on their retirement contributions, but also pay an additional 10% early withdrawal penalty. Pre-tax accounts derived from employee contributions may only be withdrawn for hardship, while employer accounts can have more liberal requirements.
- Roth Solo 401(k): Salary deferrals are never allowed to leave before 59 ½ years of age unless due to hardship. Taxes only apply to earnings that don’t meet Roth holding requirements.
Opening a Solo 401(k)
Like other retirement plans, Solo 401(k)s have rules governing when participants can access their savings. Generally, withdrawals taken before age 59½ may be subject to ordinary income taxes and an additional 10% early-distribution tax, unless an exception applies. The specific distribution options available depend on the plan document and the circumstances of the withdrawal.
- Traditional/Tax-Deferred Solo 401(k): Withdrawals are generally subject to ordinary income tax. Distributions taken before age 59½ may also be subject to the additional 10% early-distribution tax unless an exception applies. Some plans may allow hardship distributions or other permitted withdrawals before age 59½, subject to applicable requirements.
- Roth Solo 401(k): Contributions are made with after-tax dollars. A qualified Roth distribution is generally tax-free when it is made after age 59½, after the participant’s death or disability, and the Roth account has satisfied the applicable five-year holding period. Nonqualified distributions may be subject to income tax and the additional 10% early-distribution tax on the earnings portion, unless an exception applies.
Precautions to Take with a Solo 401(k)
While Solo 401(k) plans offer valuable retirement savings opportunities, business owners should be aware of important compliance requirements. Before establishing or changing a plan, consider discussing these requirements with your plan administrator, tax professional, or financial advisor.
Form 5500-EZ:
Generally, plans with more than $250,000 in assets must file Form 5500-EZ annually. A final filing is also generally required when a plan terminates.
Hiring Employees:
A Solo 401(k) is generally intended for business owners with no employees other than a spouse. If you hire an employee who becomes eligible under the plan, review the plan promptly to determine whether it needs to be amended or another retirement plan should be established.
Multiple Businesses:
Owners with interests in multiple businesses should review the controlled group and affiliated service group rules, as employees of related businesses may need to be considered when determining plan eligibility.
Keep Documents Current:
Work with your plan administrator to keep plan documents and required filings up to date and ensure the plan continues to follow applicable rules.
Though there are many Solo 401(k) rules to follow, business owners can rest assured whichever account option they choose to make will help build long-term retirement benefits. supports Solo 401(k) clients in reaching the best savings and financial stability for their retirement plans by making the process as simple as possible and by helping ensure compliance with the rules. Contact California Pensions today to learn more.
