{ "presentation": "complete-card", "format_version": 3, "overview": "A solo 401(k) is a U.S. retirement plan for an owner-only business, potentially including a working spouse. It lets the owner save as both employee and employer, but the owner also takes responsibility for the plan’s paperwork.", "overview_sources": "IRS · current guidance", "overview_source_ids": [ "money59-solo-401k-one-participant" ], "sections": [ { "role": "explanation", "title": "How an owner-only retirement plan works", "items": [ { "label": "Business earnings fund two different contributions.", "text": "An employee deferral is money the owner chooses to put aside from pay. An employer contribution comes from the business. Both need qualifying earnings; investment income alone does not create contribution room. A sole proprietor with no net earnings cannot contribute for themselves that year.", "source": "IRS Publication 560 · 2025", "source_ids": [ "money59-solo-401k-p560" ] }, { "label": "2026 limits depend on earnings.", "text": "Employee deferrals: $24,500. Combined additions: the lesser of $72,000 or eligible compensation, excluding catch-up contributions.", "source": "IRS · 2026 limits", "source_ids": [ "money59-solo-401k-limits" ] }, { "label": "Catch-up room depends on age and the plan.", "text": "In 2026, permitted catch-ups are $8,000 at age 50+, or $11,250 at ages 60–63, with sufficient compensation.", "source": "IRS · 2026 catch-ups", "source_ids": [ "money59-solo-401k-catchup" ] }, { "label": "Employer math changes with the business structure.", "text": "A corporation generally bases its contribution on eligible wages. For a sole proprietor, the 25% plan rate becomes 20% of profit after the half-self-employment-tax adjustment. The IRS worksheet applies further earnings and contribution limits; 20% of gross revenue is not the calculation.", "source": "IRS Publication 560 · 2025", "source_ids": [ "money59-solo-401k-p560" ] }, { "label": "Opening the account also means adopting a plan.", "text": "The process includes an account application, adoption agreement defining the plan, and retained plan documents. Contributions need their tax year, employee/employer role and traditional/Roth treatment recorded. Money transferred into the account also needs an investment choice; opening it does not choose investments.", "source": "Charles Schwab · current plan instructions", "source_ids": [ "money59-solo-401k-schwab" ] }, { "label": "Election, setup and funding have different deadlines.", "text": "An existing owner plan generally needs the written deferral election by business year-end, with owner contributions deposited by the business tax-return deadline including extensions. A new sole-proprietor plan adopted after year-end has a special first-year deferral window: adoption and funding by the filing deadline without extensions. Late corporate/partnership setup allows employer contributions, not retroactive employee deferrals.", "source": "Fidelity · current deadline rules", "source_ids": [ "money59-solo-401k-fidelity" ] } ] }, { "role": "benefits", "title": "Why owners consider it", "items": [ { "label": "Employee deferrals can add room beyond an employer-only contribution.", "text": "That extra role is why owners compare a solo 401(k) with a SEP IRA. Someone also working a day job shares the personal deferral limit across applicable plans; a solo account does not create a second employee allowance. Business-side contribution room may still remain.", "source": "IRS · one-participant plans", "source_ids": [ "money59-solo-401k-one-participant" ] }, { "label": "Traditional and Roth treatment serve different tax purposes.", "text": "Traditional contributions generally offer a current deduction and taxable withdrawals later. Roth contributions use after-tax dollars; qualifying withdrawals are tax-free. That choice concerns when taxes are paid, not a guaranteed investment result.", "source": "Charles Schwab · current tax treatment", "source_ids": [ "money59-solo-401k-schwab" ] } ] }, { "role": "cautions", "title": "Good to know", "items": [ { "label": "Provider features and costs vary.", "text": "Schwab currently charges no opening or maintenance fee, while investment expenses and other transaction charges may apply. It allows direct deposits for salary deferrals; employer contributions use check, wire or eligible internal transfer. Administration services can carry separate costs.", "source": "Charles Schwab · current pricing and funding", "source_ids": [ "money59-solo-401k-schwab" ] }, { "label": "Retirement money has withdrawal restrictions.", "text": "The plan requires a permitted distribution event. Traditional withdrawals are taxable, with possible penalties before 59½. Fidelity’s standard plan excludes loans, in-plan Roth conversions and Roth employer contributions. A Roth employee account alone does not establish a mega-backdoor route.", "source": "Fidelity · current plan features", "source_ids": [ "money59-solo-401k-fidelity" ] }, { "label": "Some 2026 catch-ups must be Roth.", "text": "The wage test concerns more than $150,000 of 2025 wages from the plan sponsor. Self-employment profit alone is not that wage test; business owners paid W-2 wages need to distinguish the two.", "source": "Fidelity · 2026 Roth catch-up rule", "source_ids": [ "money59-solo-401k-fidelity" ] }, { "label": "Hiring eligible workers changes the arrangement.", "text": "An owner-only plan cannot simply ignore eligible employees, including qualifying part-time workers. Coverage and testing requirements can change. A spouse must actually work for compensation to participate; marriage alone is insufficient.", "source": "IRS · one-participant plans", "source_ids": [ "money59-solo-401k-one-participant" ] }, { "label": "Annual reporting and closing the plan need attention.", "text": "The latest inspected Form 5500-EZ instructions, for 2025, require filing when combined employer one-participant plan assets exceed $250,000. A final-year return is required even below that threshold. Use the applicable year’s instructions rather than assuming closing a provider login closes the plan.", "source": "IRS Form 5500-EZ · 2025 instructions", "source_ids": [ "money59-solo-401k-5500" ] } ] }, { "role": "community", "title": "From community discussion", "items": [ { "label": "A contractor chose contribution room despite extra reporting.", "text": "A 31-year-old earning about $140,000 wanted to save $30,000–$40,000 yearly. A spouse’s raise had prompted questions about income eligibility for direct Roth IRA contributions. They chose the solo plan over a SEP while asking about backdoor Roths. Replies flagged a $69,000 example as a 2024 cap; the household’s choice does not establish everyone’s eligibility.", "source": "Community · Reddit", "source_ids": [ "money59-solo-401k-reddit-sep" ] }, { "label": "Profit records and deadlines became the owner’s HR job.", "text": "Owners described leaving W-2 work, comparing SEP plans, missing setup deadlines, and keeping books clear enough for a tax preparer to calculate contributions. The provider login and profit records were recurring work; hiring prompted another plan review.", "source": "Community", "provenance": "preserved-community-record" }, { "label": "Paperwork felt burdensome for one owner and easy for another.", "text": "An S-corp owner reported rejected paperwork and mailed-check frustration at Schwab. They quoted a competing service at $500 setup, $80 monthly and 0.6% annually, without confirming a switch. A reply described roughly five-minute contributions through chat; another reported a smooth Fidelity experience. The quote is one reported offer, not current public pricing.", "source": "Community · Reddit", "source_ids": [ "money59-solo-401k-reddit-friction" ] }, { "label": "A Roth label did not deliver the desired employer feature.", "text": "A poster had already used the employee allowance at a day job and wanted Roth employer contributions. Fidelity’s representative said its plan accepted only employee Roth deferrals. Replies disagreed about law versus provider policy, illustrating why Roth, loans and after-tax conversion features need separate checks.", "source": "Community · Reddit", "source_ids": [ "money59-solo-401k-reddit-features" ] }, { "label": "A forum shortcut overstated the employer calculation.", "text": "One discussion record used $140,000 × 20% = $28,000 plus a $23,500 employee deferral. That omits the self-employment-tax adjustment, and the deferral figure belongs to 2025. The removed reply cannot be freshly inspected; its numbers remain an example of why year and earnings basis matter.", "source": "Community", "provenance": "preserved-community-record" } ] } ], "related": [ "roth-vs-traditional", "mega-backdoor-roth", "backdoor-roth", "side-hustle-1099" ] }