Solo 401(k) Part 2: How to Set Up, Fund, Invest, and Maintain Your Plan

If you've got a side hustle, small business, or self-employment income, the Solo 401(k) is one of the most powerful retirement tools out there. In Part 1, we covered who qualifies and the ten benefits that make this plan so valuable for entrepreneurs. Now let's talk about how to actually set it up, get money into it, coordinate it with your other retirement accounts, and make it work for you. Because there's a big difference between having a Solo 401(k) and taking full advantage of everything it can do.

Quick Recap: Who Qualifies for a Solo 401(k)?

If you missed Part 1, here's the 30-second version. A Solo 401(k) is designed for self-employed individuals and business owners who have qualifying earned income and no employees who must be covered under the plan, other than an eligible spouse. Certain partnerships can also qualify. Whether you're consulting on the side, selling products online, or driving Uber, this plan was made for entrepreneurs like you.

You can establish a Solo 401(k) through a sole proprietorship, LLC, partnership, or S corporation, provided you meet the requirements. And yes, you can have a regular W-2 job with a company 401(k) and still establish a Solo 401(k) through a separate qualifying business. The key is understanding how your business structure, compensation, and other retirement plans affect your contributions.

Getting Your Solo 401(k) Set Up the Right Way

You can't just fill out a form online and call it good. A Solo 401(k) is a qualified retirement plan, and you need proper plan documents that comply with IRS requirements. Those documents establish the rules for contributions, investments, distributions, participant loans, and the other features you want your plan to offer.

Generally, you'll need to establish the plan through your business, adopt the appropriate plan documents, designate the trustee, and open an account in the name of the retirement plan. A separate EIN for the plan trust is commonly used when establishing the trust and its accounts. The exact requirements depend on your plan structure and financial institution.

Now, here's an important decision: Do you want a traditional brokerage Solo 401(k) or a self-directed Solo 401(k)?

If you only want to play in the Wall Street sandbox, you can open a plan through a brokerage like Fidelity or Schwab and invest in the securities they offer. But if you actually want to invest in what you know, whether that's real estate, private lending, cryptocurrency, private companies, or certain precious metals, you need plan documents and an investment arrangement that support those alternative assets.

That's what gives you the open architecture and flexibility to invest your way. With a properly structured self-directed Solo 401(k), you can serve as trustee, manage the plan's bank account, and make permitted investment decisions without routing every transaction through a traditional brokerage.

However, the plan documents need to support the features you intend to use. If you want participant loans, Roth contributions, voluntary after-tax contributions, or certain rollover options, those provisions need to be addressed when establishing your plan. Don't establish a stripped-down Solo 401(k) today and discover next year that it won't let you execute the strategies you actually wanted.

Making Solo 401(k) Contributions That Count

Here's where the Solo 401(k) crushes a traditional IRA in terms of contribution potential. You can contribute as both the employee and the employer, creating an opportunity to put substantially more money toward retirement.

For 2026, the basic employee deferral limit is $24,500, and the general annual limit for combined employee and employer contributions is $72,000, before eligible catch-up contributions. Your actual maximum depends on your compensation, business structure, and other retirement plans.

Here's how the 2026 employee deferral limits break down:

The higher amounts for participants age 50 and older include catch-up contributions. Beginning in 2026, certain higher-earning employees must make their catch-up contributions on a Roth basis, so your prior-year compensation and plan provisions matter.

But here's what I really want you to understand: Your employee contribution is only the first level. Your business can also contribute as the employer.

How Solo 401(k) Contributions Work With an S Corporation

Let's put this into the framework of my Trifecta. On the operations side, you've got your S corporation generating income. On the asset side, you've got your Solo 401(k), where you're building retirement wealth. Your business income and compensation are what allow you to fund that retirement account.

Now, suppose your S corporation generates $300,000 before accounting for your salary and related expenses, and you pay yourself a reasonable W-2 salary of $100,000. For this simplified example, we'll focus on the $100,000 salary because that's the compensation used to calculate your S corporation retirement contributions.

If you're under age 50, your potential contributions would look like this:

• Employee deferral: $24,500
• Employer contribution: $25,000 (25% of your $100,000 eligible W-2 salary)
• Total Solo 401(k) contributions: $49,500

That's $49,500 going into your retirement account based on a $100,000 salary, assuming the plan permits those contributions and you haven't used your employee deferral limit elsewhere.

And if those are traditional pretax contributions, you can generate substantial current tax benefits. Your employee deferral generally reduces taxable W-2 wages, while the employer contribution is generally deductible by the business, subject to the applicable rules.

Planning matters. Your S corporation distributions don't count as compensation for calculating Solo 401(k) contributions. You need to evaluate your reasonable salary, payroll taxes, retirement contribution goals, and overall business income together.

If you're operating as a sole proprietor, the calculation is different. Employer contributions are generally based on an adjusted percentage of net self-employment earnings after accounting for the deductible portion of self-employment tax and the retirement contribution calculation itself.

That's why I don't want business owners guessing at their maximum contribution or simply transferring money into a retirement account at the end of the year.

What if Your Spouse Works in the Business?

If your spouse legitimately works in the business and receives qualifying compensation, they may also participate in your Solo 401(k). That creates another opportunity for your household to make retirement contributions.

For example, if both spouses receive sufficient eligible compensation and satisfy the plan requirements, each can potentially make employee deferrals and receive employer contributions, subject to their respective limits.

This can significantly increase your household's retirement savings. However, you don't automatically double the maximum contribution simply because you're married. Each spouse's contribution must be supported by their own eligible compensation, and the business must have the appropriate structure and plan provisions.

How to Combine Your Day-Job 401(k) With Your Solo 401(k)

Now let's take this another level. You can have a Solo 401(k) and a company 401(k) through your regular W-2 job, and you can potentially contribute to an IRA as well. I call one way of coordinating these plans the "Match and Out" strategy.

Let's say you have a day job paying $100,000, and your employer offers a 4% 401(k) match. You also operate a profitable consulting business through a separate S corporation. At your day job, you contribute $4,000 to receive the full $4,000 employer match. You've now got $8,000 going into that retirement plan, and half of it came from your employer. That's a benefit I don't want you leaving on the table. But you still have $20,500 of your 2026 employee deferral limit available if you're under age 50. Rather than putting all of it into your day-job plan, you can potentially contribute that remaining $20,500 to your Solo 401(k), assuming sufficient eligible compensation and the proper plan provisions.

Your S corporation can also make employer contributions based on the compensation it pays you. For example, suppose your S corporation pays you $100,000 in eligible W-2 wages. Here's what the retirement contributions could look like:

That's the power of coordinating your retirement accounts. You get the company match at work, take advantage of the retirement contributions available through your own business, and potentially have more control over how your Solo 401(k) dollars are invested.

Remember, the $24,500 employee deferral limit is generally shared across both 401(k) plans. Employer contributions are subject to separate rules, including aggregation requirements for related businesses.

You may also be eligible to contribute to an IRA. For 2026, the IRA contribution limit is $7,500, with an additional $1,100 catch-up contribution for eligible individuals age 50 and older. Income limits can affect traditional IRA deductions and direct Roth IRA eligibility.

Taking It Further With the Mega Backdoor Roth Strategy

Now we're going to put the Solo 401(k) on steroids. A properly structured Solo 401(k) can potentially allow voluntary after-tax contributions beyond your regular employee deferrals and employer contributions. Those additional after-tax dollars can then be converted or rolled into Roth, provided the plan permits the necessary transactions. This is what we call the mega backdoor Roth strategy.

Let's go back to our business owner with a $100,000 S corporation salary. For simplicity, assume this individual is under age 50, has no other 401(k) contributions, and has a Solo 401(k) that supports voluntary after-tax contributions and Roth conversions.

We've already established that this individual could potentially contribute $24,500 as an employee and $25,000 through the S corporation. That's $49,500. But the general annual contribution limit for 2026 is $72,000. Assuming the compensation and plan requirements are satisfied, that leaves another $22,500 of potential contribution room.

Here's the breakdown:

Why would you put in another $22,500 if you don't receive a current tax deduction for that contribution? Because those after-tax dollars can potentially be converted to Roth without being taxed again on the contribution itself. Any associated pretax earnings would generally be taxable when converted.

Now you've created an opportunity to move substantially more money into a Roth retirement structure than you could through a regular Roth IRA contribution alone. And the beauty is that the mega backdoor Roth strategy isn't restricted by the income limits that apply to direct Roth IRA contributions. However, don't confuse after-tax contributions with Roth contributions. They're not automatically the same thing, and the conversion process needs to be handled correctly. Not every Solo 401(k) offers the required features.

Also, the $72,000 limit applies to annual additions within the relevant plan and employer aggregation rules. You cannot assume that contributions to unrelated employers' plans can all be converted through your Solo 401(k), or that every dollar converted will be tax-free.

This is why your plan design matters just as much as the contribution limits.

Rolling Over Existing Retirement Accounts Into Your Solo 401(k)

Got an old IRA or dusty 401(k) from a previous job? You may be able to roll eligible retirement funds into your Solo 401(k) and take greater control over how they're invested. Depending on the type of account, whether the funds are eligible for distribution, and your Solo 401(k) plan provisions, you may be able to roll over funds from:

• Traditional IRAs
• SEP IRAs
• Former employer 401(k) plans
• Certain other qualified retirement plans
• SIMPLE IRAs after the applicable two-year period

A Roth IRA cannot be rolled into a Roth 401(k), although eligible designated Roth funds from another retirement plan may be transferable under the applicable rules.

Now, let's say you have $150,000 sitting in an old employer 401(k). You establish a self-directed Solo 401(k) and complete an eligible direct rollover. Those retirement dollars can potentially become available for permitted investments under your new plan without creating a taxable distribution. This is especially valuable if you've accumulated retirement savings over the years but haven't had the flexibility to invest them in assets you know and understand.

I generally prefer direct rollovers when available because the money moves between retirement arrangements without passing through your personal bank account. That helps avoid unnecessary withholding, rollover deadlines, and administrative complications.

There's also a planning opportunity for business owners using the backdoor Roth IRA strategy. Rolling eligible pretax IRA funds into a 401(k) can sometimes help address the IRA pro-rata rule, provided the rollover is completed properly.

Borrowing From Your Solo 401(k)

Here's one of my favorite features: the participant loan. Unlike an IRA, a Solo 401(k) can permit you to borrow from your retirement account. Generally, the maximum loan is the lesser of $50,000 or 50% of your vested account balance, subject to certain exceptions and adjustments.

Let's say you have $150,000 in your Solo 401(k) and need $40,000 for a short-term financial need. If your plan permits participant loans and you meet the requirements, you could potentially borrow that money without taking a taxable retirement distribution. You generally repay the loan over five years, with payments made at least quarterly, and the interest goes back into your own retirement account. Certain loans used to purchase a principal residence may qualify for a longer repayment period.

Now, don't get carried away. This is a real loan, and you need to follow the terms. If you miss payments or fail to repay it properly, the outstanding amount can become taxable and potentially trigger an early-distribution penalty.

And here's another important distinction: Interest paid on a Solo 401(k) participant loan isn't automatically a business tax deduction simply because you used the proceeds for a business purpose. The use of the funds, applicable deduction rules, and prohibited transaction restrictions all matter. The participant loan is a powerful option for accessing capital, but it needs to be structured and administered correctly.

Investing Beyond Wall Street With Your Solo 401(k)

This is where it gets fun. A self-directed Solo 401(k) lets you take your investing off the stock market treadmill and into something you actually understand. Real estate, private lending, precious metals, private companies, and cryptocurrency can all be potential investment options when the plan permits them and the transactions comply with retirement plan rules.

But here's the important part: Your Solo 401(k) owns the investment. You don't own it personally.

If your Solo 401(k) purchases an investment property, the retirement plan is the owner. Rental income goes back into the plan, and property expenses must be paid with plan funds. You can't use the property personally or treat it like another rental in your individual portfolio. The same principle applies to private loans, business investments, and other alternative assets. Transactions involving you or other disqualified persons can create serious prohibited transaction problems.

You also need to consider whether an investment could generate unrelated business taxable income or other tax obligations. Not every investment receives the same tax treatment simply because it's held inside a retirement account.

I love self-directed investing because it gives entrepreneurs the opportunity to use their knowledge and experience. But you need to understand the rules before moving retirement dollars into an investment.

What if You Already Have a Solo 401(k) at a Brokerage?

Already have a Solo 401(k) that's stuck inside a traditional brokerage? No problem. Depending on your existing plan and provider, you may be able to restate the plan documents to support self-directed investing and additional plan features.

A restatement essentially updates or replaces the governing plan documents while continuing the existing retirement plan. In an appropriate restatement, the plan can retain its identity and existing plan trust EIN, although account arrangements and other administrative details may need to change. This can give you access to investment options that weren't available under your previous brokerage arrangement.

However, make sure you're working with professionals who understand the difference between restating an existing plan, transferring plan assets, and terminating or replacing a plan. Those are different transactions with different requirements.

Staying Compliant and Out of Trouble

Setting up a Solo 401(k) is relatively straightforward. Keeping it clean is where business owners can get themselves into trouble.

A Solo 401(k) is still a qualified retirement plan, and the IRS expects you to maintain proper records, follow your plan documents, report transactions when required, and keep the plan updated as retirement laws change.

1. Keep Your Plan Documents Current

Your plan documents need to reflect applicable retirement plan laws and the features you're actually using. Pre-approved defined contribution plans generally operate on recurring IRS restatement cycles, commonly six years, but interim amendments or other updates may be necessary. Don't assume that because you established your plan five years ago, everything is still current.

2. Track Your Contributions and Investment Activity

You need accurate records of employee deferrals, employer contributions, Roth amounts, voluntary after-tax contributions, rollovers, participant loans, and investment activity.

If you're self-directing into real estate or private investments, proper accounting becomes even more important. You should be able to document what the plan owns, how much it contributed, the income it received, and the expenses it paid.

3. File Form 5500-EZ When Required

Once your one-participant plan has $250,000 or more in total assets at the end of the plan year, you're generally required to file Form 5500-EZ. Assets in other one-participant plans maintained by the same employer can count toward this threshold. A final Form 5500-EZ can also be required when a plan is terminated, even if its assets are below $250,000.

For a calendar-year plan, the annual filing deadline is generally July 31 of the following year, unless an applicable extension or other deadline rule applies. This is an informational filing, not a tax payment. But don't underestimate the consequences of failing to file it properly. Penalties can become substantial.

4. Monitor Employee Eligibility

A Solo 401(k) works because the business doesn't have employees who must be covered beyond the permitted owner, partner, or spouse arrangements. If you start hiring employees, you need to review their eligibility. Certain long-term part-time employees may become eligible under the applicable service requirements, even if they don't work full-time. You can't simply ignore employee eligibility because your plan is called a Solo 401(k).

5. Review Your Plan Every Year

Your retirement strategy should evolve as your business grows. Changes in your salary, business income, marital status, employees, investments, or retirement goals can all affect how you should use the plan. I recommend reviewing your contribution strategy before year-end, not waiting until tax season to discover you've missed an opportunity. If you don't want to deal with plan maintenance and filings yourself, get a professional team that understands these rules. It's a lot cheaper to maintain your plan correctly than to fix mistakes after an IRS notice or audit.

When Do You Need to Establish and Fund Your Solo 401(k)?

This is where I want business owners paying attention, especially as year-end approaches.

The deadlines for establishing a Solo 401(k), making employee deferral elections, depositing contributions, and funding employer contributions are not always the same.

For an S corporation with W-2 employees, including an owner-employee, elective deferrals generally need to be arranged through timely payroll elections and withholding. You can't simply wait until the following tax season and retroactively decide that last year's wages were deferred into a 401(k). Employer contributions may have a later funding deadline tied to the business's tax return, including applicable extensions.

Sole proprietors have additional flexibility under certain SECURE Act and SECURE 2.0 provisions, including special rules for establishing a plan and making first-year elective deferrals. Those exceptions should not be assumed to apply to every business entity.

The takeaway is simple: Don't wait until you're filing your tax return to start thinking about retirement contributions.

If you want to maximize your Solo 401(k), you need to evaluate your business income, compensation, plan provisions, and contribution deadlines while there's still time to act.

The Bottom Line

The Solo 401(k) gives small business owners and side hustlers tremendous control: high contribution limits, tax savings, Roth opportunities, and the power to invest in assets they actually know and understand. But the real opportunity comes from establishing the right plan, coordinating it with your business structure, maximizing the contributions available to you, and keeping everything compliant.

If you're ready to establish a Solo 401(k), or you're wondering whether your existing plan is structured to take advantage of these strategies, Book a Comprehensive Tax and Business Consultation with my law firm, KKOS Lawyers. We'll help you evaluate your options and determine the right structure for your business and retirement goals.

And if you're ready to explore self-directed retirement investing, my team at Directed IRA can help you understand the account and investment options available for your retirement strategy.

Get your Solo 401(k) established, funded, and working for you. Your retirement plan should be building wealth just as strategically as your business.