Watch the full live webinar: 10 Solo 401k Loan Myths Busted — hosted by My Solo 401k Financial

Live webinar hosted by My Solo 401k Financial. Watch the full session above or read the structured summary below.

Key Takeaways

• A Solo 401(k) is an owner-only plan — a 401(k) sponsored by a self-employed business that has no non-owner, non-spouse employees who meet the eligibility criteria (age 21+, 1,000 hours/year, one year of service).
• Hiring even one full-time W-2 employee who works 1,000+ hours per year with a year of service disqualifies the business from maintaining a Solo 401(k); the plan must be converted or terminated before that employee reaches eligibility.
• Under SECURE 2.0’s long-term part-time employee rules, part-time workers who log 500 or more hours per year for two consecutive years also become eligible, threatening owner-only status.
• A child employed by the business does not automatically end the Solo 401(k) — the child’s hours, age, and ownership percentage all determine whether they are treated as an eligible non-owner employee or as a co-owner exempt from the rules.
• Reorganizing the business entity (for example, converting from a sole proprietorship to an S corp) generally requires only a plan document update — not termination — as long as the business remains owner-only.
• When a Solo 401(k) is terminated, a final Form 5500-EZ is required regardless of plan asset value, and any outstanding 401(k) loan balance becomes a taxable distribution if not repaid first.
• Owning a second business that employs non-owner, non-spouse workers can end the Solo 401(k) under the IRS control group and affiliated service group rules, even if the plan’s sponsoring business has no employees of its own.

The Owner-Only Rule: The Foundation of Every Solo 401(k)

A Solo 401(k) survives or falls based on a single question: is the sponsoring business still an owner-only business? An owner-only business is one whose only workers are owners and their spouses — or W-2 employees who do not yet meet the plan eligibility criteria. The moment that definition breaks, the Solo 401(k) faces a decision.

A common myth is that most changes automatically force plan termination. They do not. Four paths are available — amend, terminate, freeze, or do nothing — and which path applies depends on the specific facts of the business change.

The 7 Triggers: A Change-by-Change Analysis

Trigger 1: Hiring a Full-Time W-2 Employee

Hiring a full-time W-2 employee is the most common Solo 401(k) end trigger. A full-time employee, for Solo 401(k) eligibility purposes, is someone who is age 21 or older, has completed one year of service, and has worked 1,000 or more hours during that year. Once such an employee exists, the business is no longer owner-only and the Solo 401(k) cannot be maintained.

When this happens, two paths are available. First, convert the Solo 401(k) into a traditional employer 401(k) plan that can cover non-owner, non-spouse employees. Second, terminate the Solo 401(k) before any employee reaches eligibility, rolling the assets to an IRA or taking a taxable distribution. Either path carries a cost: conversion means losing the Solo 401(k)’s advanced features — alternative investments, Mega Backdoor Roth, and plan loans — because a standard employer plan does not support them.

Trigger 2: Hiring Part-Time Employees Who Cross the 500-Hour Threshold

Part-time employees who work fewer than 1,000 hours per year do not immediately threaten the Solo 401(k) — but they can, over time. Under the long-term part-time employee rules enacted by SECURE 2.0, a part-time worker who logs 500 or more hours per year for two consecutive years becomes eligible to participate in the employer’s 401(k) plan. When that eligibility threshold is crossed, the Solo 401(k) faces the same convert-or-terminate decision described above.

The practical lesson: solopreneurs who employ part-time workers should track hours annually from day one — not wait until eligibility is imminent. Being blindsided by the two-year lookback is avoidable with advance planning.

Trigger 3: Hiring a Child (Who May or May Not Be a Problem)

Hiring a child does not automatically break the Solo 401(k) rules. A child employee preserves the owner-only status as long as at least one of the following is true:

• The child is under age 21 (below the 401(k) eligibility age).
• The child works fewer than 1,000 hours per year (or fewer than 500 hours per year for two consecutive years under the part-time rules).
• The child is age 21 or older but holds a 3% or greater ownership stake in the company — making them a co-owner who falls under the co-owner exception.

An adult child who works full-time as a W-2 employee without an ownership interest, however, is treated as any other non-owner employee and does threaten owner-only status.

Trigger 4: Changing the Business Entity (Usually Just a Document Update)

Reorganizing the business — for example, converting from a sole proprietorship to an S corporation — does not require terminating the Solo 401(k), provided the business remains owner-only. The plan documents must be updated to reflect the new sponsoring entity (the S corp becomes the plan sponsor), but the plan itself continues. Balances are unaffected, investments are unaffected, and no distribution or rollover is triggered.

Trigger 5: Retiring or Stopping Self-Employment

A Solo 401(k) is a business-sponsored plan. If the self-employed business permanently closes — whether through retirement, dissolution of the entity, or a return to traditional employment — the 401(k) plan must likewise be wound down. The assets must be transferred to an IRA or taken as a taxable distribution, and a final Form 5500-EZ must be filed. This final 5500-EZ is required even if the plan value has always been below $250,000 and no 5500-EZ has ever been filed during the plan’s life.

A nuanced middle path exists: if the solopreneur stops active self-employment but has not permanently closed the business (for example, they return to corporate work but remain open to occasional consulting), they may be able to freeze the plan rather than terminate it. Freezing preserves the plan and its investments in place without requiring a distribution. New contributions cannot be made without self-employment income to justify them, but the existing assets — including alternative investments like real estate or private equity — remain inside the plan.

Trigger 6: A Spouse Exiting the Business or Divorce

When spouses co-own and co-participate in a Solo 401(k), a spouse’s departure — through divorce or otherwise — does not necessarily end the plan. If the remaining spouse continues to operate the owner-only business, the Solo 401(k) can continue under that spouse’s name. The departing spouse’s balance is transferred out (to their own IRA or taken as a taxable distribution), which requires a 1099-R to report the transfer but does not require a final Form 5500-EZ, since the plan itself is not being shut down.

In the case of divorce specifically, a Qualified Domestic Relations Order (QDRO) is the court order that governs how the Solo 401(k) assets are divided between the spouses. The QDRO specifies the allocation, and only after its terms are satisfied can the departing spouse’s portion be moved out of the plan.

Trigger 7: Owning a Second Business With Employees (Control Group Rules)

The IRS does not evaluate each business a solopreneur owns in isolation. Under the control group rules and affiliated service group rules, a group of businesses owned by the same person — or by related persons, such as a husband and wife — is treated as a single employer for retirement plan purposes. If any business in that group employs a non-owner, non-spouse worker who meets the eligibility criteria, no company in the group can maintain a Solo 401(k), because those employees are counted across all entities.

The affiliated service group rules cast an even wider net, looking at functional and service relationships between businesses — not just common ownership. A solopreneur who adds a second business, a side venture, or even a consulting entity should confirm whether the new business creates a controlled or affiliated group before assuming the Solo 401(k) is safe.

The one clear exception: if the solopreneur simply expands their self-employment activity under a new entity — with no employees in any related business — there is generally no problem. The solopreneur can even aggregate income from all their owner-only businesses to justify Solo 401(k) contributions, with no change to the plan documents required.

7 Triggers at a Glance: What Each Change Means for Your Solo 401(k)

Note: “Convert” means upgrading to a standard employer 401(k) plan that can cover non-owner, non-spouse employees. Advanced features (alternative investments, Mega Backdoor Roth, plan loans) are generally lost upon conversion or if assets roll to a standard IRA.

3 Common Myths About Solo 401(k) Plan Changes

Myth 1: “My staff can sign a waiver to opt out — that keeps the Solo 401(k) intact.”

False. A Solo 401(k) is only for businesses without non-owner, non-spouse employees who meet the eligibility criteria. Whether those employees want to participate in the plan is irrelevant. Even if every eligible employee signs a waiver declining plan participation, the business has still lost its owner-only status. The plan must be converted or terminated.

Myth 2: “Changing plan providers forces termination.”

False. Switching Solo 401(k) plan document providers — for example, to access advanced features like the Mega Backdoor Roth, alternative investments, or 401(k) loans — does not constitute a plan termination. The plan continues; the document restates it under the new provider. Assets, balances, and investment positions are unaffected.

Myth 3: “I’ll have to sell my real estate or alternative investments to close the plan.”

False. If a Solo 401(k) must be terminated and the plan holds alternative investments — real estate, promissory notes, private equity — those investments do not have to be liquidated. They can be transferred in kind to a self-directed IRA that is set up to hold those same asset types. The transfer is reported on a 1099-R but is non-taxable as a direct rollover. Only a 401(k) loan balance at the time of termination becomes immediately taxable if not first repaid.

What Solo 401(k) Termination Actually Involves

When a Solo 401(k) must be formally terminated, four steps are required:

1. Repay or default any outstanding plan loan. If a loan balance remains at termination, it is treated as a taxable distribution.
2. Transfer or distribute all plan assets. Assets may be transferred to an IRA (non-taxable direct rollover) or taken as a taxable distribution. Alternative investments that cannot be liquidated are transferred in kind to a self-directed IRA.
3. File a final Form 5500-EZ. This filing is required regardless of whether a 5500-EZ has ever been filed before, and regardless of plan value. There is no minimum-balance exception on termination.
4. Issue a 1099-R. The distribution or rollover is reported on a 1099-R. A direct rollover to an IRA is non-taxable but still reportable.

Frequently Asked Questions

Live webinar: Free Isn’t Free — 5 TRAPS in Fidelity Solo 401(k) That Cost Solopreneurs THOUSANDS | My Solo 401k Financial

Key Takeaways

• The Fidelity Solo 401(k) free plan does not automatically enable designated Roth employee contributions — the solopreneur must separately execute and retain a Designated Roth Addendum, and if it is missing or misfiled, no Roth provisions legally exist in the plan.
• Starting with 2026 contributions, catch-up contributions for participants age 50 or older who earn more than $150,000 in W-2 wages from their self-employed business must be made on a Roth basis — a requirement that is impossible to meet if the Roth addendum was never executed.
• Fidelity’s basic Solo 401(k) plan documents do not support in-plan Roth conversions or the Mega Backdoor Roth, even though the in-plan Roth option appears on the Designated Roth Addendum form.
• Entering the date of sign-up rather than January 1 of the current tax year as the plan effective date unknowingly restricts the compensation window, reducing the maximum allowable Solo 401(k) contribution for the first year.
• Employer contribution percentages are hard-coded as pro-rata in Fidelity’s plan documents, forcing the primary solopreneur and spouse to use the identical employer contribution percentage — a significant limitation for couples with different savings goals.
• Errors in Fidelity’s self-completed adoption agreement — including an incorrect plan number, wrong effective date, or undisclosed prior plans — cause the plan to lose reliance on Fidelity’s IRS opinion letter, reclassifying it as an individually designed plan.
• The Fidelity free plan does not include the SECURE Act automatic enrollment tax credit feature, meaning solopreneurs cannot claim the $1,500 credit ($500/year × 3 years) available to plans with an eligible automatic contribution arrangement (EACA).

Why Solopreneurs Choose the Fidelity Solo 401(k) — And What They Miss

The Fidelity Solo 401(k) free plan attracts self-employed business owners for understandable reasons: zero setup cost, zero custody fees, and the Fidelity brand name. But there is a cost comparison most solopreneurs don’t make.

Importantly, using My Solo 401k Financial plan documents does not mean giving up Fidelity as a custodian. The majority of My Solo 401k Financial’s customers who open brokerage accounts choose Fidelity — they simply bring their own plan documents. The accounts stay at Fidelity; the legal framework that governs what those accounts can do is far more capable.

The Root Cause: Fidelity’s Free Plan Is Self-Service

A Solo 401(k) is a legal entity — a trust. Like any trust, the documents that create it dictate what it can do. When a solopreneur sets up the Fidelity Solo 401(k) free plan, they receive a set of documents — including an adoption agreement, basic plan document, trust agreement, and optional addenda — and are responsible for completing them correctly.

Fidelity does not pre-fill the paperwork. Fidelity does not proactively enable optional features. And Fidelity does not catch errors before they create compliance exposure. Every trap described below flows from that single structural reality.

The 5 Traps in Fidelity’s Free Solo 401(k) Plan

Trap 1 — Roth Not Auto-Enabled, and In-Plan Roth Conversions Not Supported

The Fidelity Solo 401(k) free plan does not automatically activate the Designated Roth employee contribution feature. To make Roth employee deferrals, the solopreneur must separately execute a Designated Roth Addendum. That addendum is not automatically returned to Fidelity — it must be retained in the solopreneur’s own business records. If it is missing or misfiled, no Roth provisions legally exist in the plan.

The Designated Roth Addendum also lists in-plan Roth conversions as an optional feature. But Fidelity’s instructions state clearly that it does not support this feature. The only path to Roth dollars in the Fidelity free plan is through designated Roth employee contributions — no in-plan conversions, and no Mega Backdoor Roth.

Trap 2 — Eligibility Provision Errors

The Fidelity Solo 401(k) free plan’s adoption agreement requires the solopreneur to complete eligibility provisions. These provisions define who is eligible to participate. Getting them wrong in either direction creates a problem.

Setting requirements too high: A solopreneur who elects the standard age and service requirements (age 21, 1,000 hours per year) without checking the box indicating those requirements do not apply to themselves or their spouse will have to wait until they have satisfied those requirements before making contributions. Contributions made before eligibility is met are ineligible contributions.

Setting requirements too low: A solopreneur who universally waives service requirements so that they and their spouse can participate immediately may inadvertently make part-time or seasonal W-2 employees eligible to participate in the plan as well — at which point the plan is no longer a Solo 401(k).

Trap 3 — Wrong Effective Date Shrinks the Contribution Window

The Fidelity Solo 401(k) free plan adoption agreement requires an effective date for the plan. Many solopreneurs simply enter the date they sign up — say, October of the current year. That choice unknowingly restricts the compensation window for the entire first year.

Trap 4 — Hard-Coded Pro-Rata Employer Contributions

Fidelity’s basic Solo 401(k) plan documents hard-code employer contributions as pro-rata. Every employer contribution percentage applied to the primary solopreneur must be applied at the identical percentage to the spouse’s W-2 wages. The solopreneur cannot change this in Fidelity’s documents.

My Solo 401k Financial’s plan documents allow different employer contribution percentages for each participant. One spouse can elect the maximum 25%; the other can elect zero.

Trap 5 — Document Errors Void IRS Opinion Letter Protection

The Fidelity Solo 401(k) free plan comes with an IRS opinion letter — confirmation that Fidelity’s prototype plan documents satisfy Internal Revenue Code qualification requirements. That opinion letter is valuable because it can be cited on Form 5500-EZ, which is required when plan assets exceed $250,000.

But Fidelity’s own plan documents state that if the solopreneur makes errors in the self-completed adoption agreement — including an incorrect effective date, a wrong plan number, or failure to disclose prior plans — the plan cannot rely on Fidelity’s opinion letter. The plan is then treated as an individually designed plan.

Fidelity Free Plan vs. My Solo 401k Financial Plan: Feature Comparison

Why Fidelity Made These Omissions — And What It Costs Solopreneurs

The Fidelity Solo 401(k) free plan’s missing features are not oversights — they are business decisions. Fidelity designed a streamlined prototype plan that handles standard brokerage investments. Features like the Mega Backdoor Roth, participant loans, and in-plan Roth conversions require more complex plan language and ongoing administrative support that Fidelity has chosen not to offer in the free plan.

The cumulative impact over a solopreneur’s working lifetime can be substantial. Missing the $1,500 SECURE Act credit is a direct, immediate tax cost. Missing the Mega Backdoor Roth forecloses potentially hundreds of thousands of dollars in tax-free retirement growth. Missing participant loans eliminates a liquidity option. Missing 5500-EZ support creates a compliance burden the moment the plan exceeds $250,000.

Solopreneurs who already use My Solo 401k Financial’s plan documents with their Fidelity accounts can invest in the full range of Solo 401(k) features while keeping their Fidelity brokerage relationship intact.

Key Terms

Fidelity Solo 401(k) free plan

Fidelity’s basic prototype Solo 401(k) plan available at no setup cost directly through Fidelity, using Fidelity’s own plan documents that the solopreneur must self-complete.

IRS opinion letter

A letter from the IRS confirming that a prototype retirement plan document satisfies Internal Revenue Code qualification requirements. The opinion letter number must be reported on Form 5500-EZ. If the plan cannot rely on its opinion letter, it is reclassified as an individually designed plan.

Designated Roth Addendum

A supplemental plan document that formally enables designated Roth employee contributions within a 401(k). Under Fidelity’s free plan process, the solopreneur must separately execute and retain this addendum in their own business records.

Mega Backdoor Roth

A strategy allowing Solo 401(k) participants to make voluntary after-tax (non-Roth) contributions up to the annual additions limit, then convert those dollars to Roth, enabling tax-free growth well beyond normal Roth contribution limits. Not supported by Fidelity’s basic Solo 401(k) plan.

Form 5500-EZ

An IRS annual report required for one-participant retirement plans when fair market value of plan assets exceeds $250,000 at the end of the plan year. Fidelity’s basic Solo 401(k) does not include 5500-EZ preparation support.

SECURE Act automatic enrollment tax credit

A tax credit of up to $1,500 — $500 per year for three consecutive years — available to plan sponsors whose plan includes an eligible automatic contribution arrangement (EACA). Fidelity’s basic Solo 401(k) does not include the EACA feature, so this credit is not available to Fidelity free plan users.

Frequently Asked Questions

Live webinar: 10 SEP IRA Traps Every Self-Employed Business Owner Must Know — My Solo 401k Financial Daily Webinar Series [9/4/2026]

Key Takeaways

• Any part-time employee who earns just $800 in three of the last five years triggers mandatory SEP IRA contributions at the exact same percentage the owner contributes for themselves — there is no flexibility under the SEP IRA’s statutory rules.
• SEP IRAs are legally prohibited from offering participant loans, while a Solo 401(k) permits borrowing up to 50% of the account balance, capped at $50,000, tax-free and penalty-free.
• The Mega Backdoor Roth strategy — which can move up to $72,000 into a Roth account in 2026 — is completely unavailable in a SEP IRA because the plan can only accept employer contributions.
• A Solo 401(k) with automatic enrollment qualifies for a $1,500 SECURE Act tax credit ($500/year for three years) — a dollar-for-dollar tax reduction that SEP IRAs cannot access.
• SECURE 2.0 authorized Roth SEP IRAs on paper, but as of the webinar date, Fidelity, Schwab, and Vanguard do not support Roth SEP IRA contributions on their platforms.
• A Solo 401(k) owner only files the informational Form 5500-EZ when the plan exceeds $250,000 in assets — while a SEP IRA triggers annual IRS reporting via Form 5498 on every contribution made.

SEP IRA vs Solo 401(k): Why “Simpler” Can Cost You More

The SEP IRA vs Solo 401(k) question comes up constantly among self-employed entrepreneurs, and the SEP IRA sometimes wins the first impression on the illusion of simplicity.

The problem is that simplicity at setup does not mean simplicity at scale. When the SEP IRA vs Solo 401(k) comparison moves past the setup form and into real-world use — hiring even part-time help, planning a Roth conversion, investing in real estate, or needing emergency capital — the SEP IRA’s structural traps surface fast. Most owners don’t discover them until they’ve already cost money.

This SEP IRA vs Solo 401(k) analysis walks through all ten traps identified in the webinar — plus two bonus traps most advisors never mention — with a direct comparison on each point.

SEP IRA vs Solo 401(k): Key Terms Defined

SEP IRA (Simplified Employee Pension Individual Retirement Account)

An IRA-based retirement plan funded exclusively with employer contributions. The employer contributes the same percentage of compensation for every eligible employee, including the owner.

Solo 401(k) (also: One-Participant 401(k), Self-Employed 401(k))

A qualified retirement plan available to self-employed individuals with no full-time non-owner, non-spouse W-2 employees. Accepts employee elective deferrals, employer profit-sharing contributions, and voluntary after-tax contributions.

Pro Rata Rule

The IRS rule that aggregates all traditional, SEP, and SIMPLE IRA balances when calculating the taxable portion of a Roth IRA conversion. A large pre-tax IRA balance inflates the taxable fraction of any non-deductible (after-tax) contribution converted to Roth.

Mega Backdoor Roth

A two-step strategy available only in 401(k) plans that allow voluntary after-tax contributions: (1) contribute after-tax dollars up to the overall plan limit, then (2) convert those funds to a Roth account. The 2026 overall limit is $72,000. Not available in any IRA-type plan, including a SEP IRA.

Unrelated Debt-Financed Income (UDFI) Tax

A tax imposed on income generated inside an IRA (including a SEP IRA) that is attributable to acquisition indebtedness — i.e., a mortgage used to purchase real estate held inside the plan. Solo 401(k) plans are exempt from UDFI on qualifying real estate.

Rule of 55

An exception allowing penalty-free withdrawals from a qualified plan (but not an IRA) if the participant separates from service at age 55 or older. Applies to Solo 401(k) plans; never applies to a SEP IRA.

Trap 1: Accidental Employees — The $800 Time Bomb

The SEP IRA carries strict statutory inclusion rules with no flexibility. Any assistant or part-time employee who earns as little as $800 in three of the last five years qualifies for mandatory employer contributions at the exact same percentage the business owner contributes for themselves.

How a Solo 401(k) Handles This

A Solo 401(k) can legally exclude part-time W-2 employees who did not work 1,000 hours in a single year or 500 hours in two consecutive years. As long as there are no full-time, non-owner, non-spouse W-2 employees, there is no eligibility conflict — no surprise mandatory contributions as the business scales.

Trap 2: The Backdoor Roth IRA Pro Rata Problem

The SEP IRA sabotages the backdoor Roth IRA strategy. The IRS pro rata rule treats all traditional, SIMPLE, and SEP IRA balances as a single aggregate when calculating the taxable portion of any non-deductible IRA conversion to Roth.

How a Solo 401(k) Handles This

Qualified 401(k) plans — including the Solo 401(k) — are completely exempt from the IRA pro rata rule. Solo 401(k) assets are never aggregated with personal IRAs when calculating the taxable ratio of a backdoor Roth IRA conversion. Rolling millions of pre-tax dollars into a Solo 401(k) does not affect the backdoor Roth IRA analysis at all.

Trap 3: No Mega Backdoor Roth — Up to $72,000 in 2026 Off the Table

A SEP IRA can only accept employer contributions. Because a voluntary after-tax contribution is not an employer contribution, the Mega Backdoor Roth strategy is completely unavailable in a SEP IRA — period.

The Mega Backdoor Roth Solo 401(k) strategy works by making voluntary after-tax contributions — up to the overall plan limit — and then converting those funds to a Roth account. For 2026, a self-employed individual could contribute up to $72,000 as a voluntary after-tax Solo 401(k) contribution and immediately transfer that amount to a Roth Solo 401(k) or a Roth IRA, where it grows entirely tax-free.

Trap 4: The Real Estate UDFI Tax Trap

Self-directed retirement investors who want to use debt financing on real estate held inside an IRA face a specific and costly tax: the Unrelated Debt-Financed Income (UDFI) tax. The IRS imposes this tax on income generated inside an IRA — including a SEP IRA — that is attributable to a mortgage used to purchase the property.

Non-recourse financing is required when a retirement account invests in real estate with a loan. Non-recourse lenders typically require 50% down, shorter terms, and higher interest rates — but even when those conditions are met, a SEP IRA will still owe UDFI tax on the debt-financed portion of any income earned.

How a Solo 401(k) Handles This

A Solo 401(k) is exempt from UDFI when the real estate is held inside the plan and subject to acquisition indebtedness. This exemption gives the self-directed real estate investor a major structural advantage — the same leveraged real estate transaction produces no UDFI tax inside a Solo 401(k) while generating a significant tax liability inside a SEP IRA.

Trap 5: No Participant Loans — Your Money Is Locked Up

Under IRS rules, an IRA cannot legally extend a loan or line of credit to its owner. A SEP IRA is an IRA. That means a business owner with their retirement savings in a SEP IRA cannot borrow against those funds for any reason — business emergency, cash-flow gap, or investment opportunity.

How a Solo 401(k) Handles This

A Solo 401(k) that includes loan provisions permits the plan participant to borrow up to 50% of the account balance, capped at $50,000. The loan must be repaid with equal payments of principal and interest over a five-year term (or longer if used to purchase a primary residence). The interest rate is prime plus 1% or a CD rate plus 2%. The loan proceeds are tax-free and penalty-free as long as the repayment schedule is followed.

Trap 6: The Defined Benefit Plan Contribution Cap

Many high-earning solopreneurs combine a defined contribution plan with a defined benefit plan to maximize annual tax deductions. The trap for SEP IRA owners: if they want to preserve the ability to maximize contributions to a defined benefit plan, they must cap their SEP IRA employer contributions at no more than 6% of compensation.

Normally, a self-employed individual can contribute 20–25% of compensation as an employer contribution. But pairing a SEP IRA with a defined benefit plan forces that 6% ceiling — potentially leaving hundreds of thousands of dollars in deferred compensation out of the defined benefit plan.

How a Solo 401(k) Handles This

A Solo 401(k) owner facing the same 6% employer-contribution ceiling can still fill additional contribution buckets: the employee elective deferral bucket and the voluntary after-tax bucket. In 2026, the overall limit is $72,000. A Solo 401(k) owner can keep employer contributions at 6% and still reach the $72,000 ceiling through those additional buckets — something a SEP IRA owner categorically cannot do.

Trap 7: Zero Tax Credits — $1,500 Left on the Table

Congress created two tax credits to encourage 401(k) adoption by businesses: a startup cost credit and an automatic enrollment contribution credit. The SEP IRA is excluded from both.

A Solo 401(k) that includes automatic enrollment provisions qualifies for $500 per year for three consecutive years — a total of $1,500 in direct tax credits. This is a dollar-for-dollar reduction in tax liability, not just a deduction.

Trap 8: The Roth SEP IRA Is Theory, Not Reality

SECURE 2.0 authorizes Roth contributions inside a SEP IRA. In practice, Fidelity, Schwab, and Vanguard do not support Roth SEP IRA contributions, as of the webinar date. The legal authorization exists; the operational infrastructure does not.

A Solo 401(k) has no such gap. Pre-tax contributions, Roth contributions, and mega backdoor Roth contributions are all available through the plan document — and the plan is fully portable across custodians including Fidelity, Schwab, E*Trade, and others.

Trap 9: The SEP IRA Contribution Lockout

If a self-employed individual makes contributions to a safe-harbor SEP IRA using IRS Form 5305-SEP, they are barred from making contributions to a Solo 401(k) for the same tax year. Funding the SEP IRA freezes access to every additional bucket the Solo 401(k) offers — the employee elective deferral, the voluntary after-tax contribution — for the entire year.

Trap 10: The Form 5498 Audit Trail

The SEP IRA’s “no paperwork” reputation is a myth. Financial custodians are legally required to file IRS Form 5498 reporting every contribution made to a SEP IRA. This creates an audit trail that the IRS matches against personal Schedule C or W-2 filings every year — creating ongoing scrutiny that a Solo 401(k) owner does not face on contributions.

A Solo 401(k) owner files Form 5500-EZ only when the plan’s total assets — including any connected defined benefit plan — exceed $250,000. Below that threshold, there is no annual contribution reporting requirement for the plan itself. Pre-tax and/or Roth Employee, Pre-tax Employer, and Voluntary After-Tax contributions are all non-reportable by the plan until that threshold is crossed.

Bonus Trap 1: You Cannot Roll a Roth IRA Into a SEP IRA

SECURE 2.0 authorized Roth dollars inside a SEP IRA, which leads some people to assume a Roth IRA can be rolled into a SEP IRA. The IRS rollover chart is clear: a Roth IRA cannot be rolled into a SEP IRA. The same restriction applies to rolling a Roth IRA into a Solo 401(k).

Understanding the rollover chart correctly before attempting any consolidation move matters. Attempting an impermissible rollover triggers taxable events and possible penalties.

Bonus Trap 2: The Rule of 55 Never Applies to a SEP IRA

The Rule of 55 allows individuals who separate from service at age 55 or older to take distributions from a qualified plan without the 10% early-withdrawal penalty. A SEP IRA is an IRA, not a qualified plan — the Rule of 55 never applies to it.

A Solo 401(k) is a qualified plan, so the Rule of 55 can apply. For a solopreneur, “separating from service” means completely dissolving and closing the business. That is a high bar — but the option exists. With a SEP IRA, the option does not exist under any circumstances.

SEP IRA vs Solo 401(k): Full Feature Comparison for Self-Employed Business Owners

SEP IRA vs Solo 401(k) bottom line: the Solo 401(k) wins on eleven of twelve features; the two plans are equal only on the Roth IRA rollover restriction.

Live Attendee Questions from the Webinar

Can a Schwab or Fidelity after-tax Solo 401(k) account be set up without a financial advisor, then transfer the funds to a Roth IRA managed by an advisor?

SEP IRA vs Solo 401(k): Frequently Asked Questions