Married Solopreneurs: How to Save $144K into Mega Backdoor Roth for 2026
Watch: How a married couple can save $144,000 into a Mega Backdoor Roth for 2026 using a Solo 401k
If both spouses work in the same owner-only business, 2026 opens the door to one of the most powerful Roth savings strategies available to the self-employed. Using the Mega Backdoor Roth feature of a Solo 401k, each spouse can move up to $72,000 into Roth dollars — for a combined $144,000 of tax-advantaged retirement savings in a single year. This is roughly ten times what a person could contribute to a Roth IRA directly, and those dollars carry the same tax-free growth potential as any other Roth funds.
Below, we break down exactly how the $144,000 figure works, who qualifies, the two-step process behind each $72,000 contribution, and the deadlines you need to know.
How the $144,000 Adds Up
The $144,000 figure comes from two separate $72,000 contributions — one for each spouse. When a married couple both work in the same self-employed business, both participate in the same Solo 401k plan, and each has enough earned income to justify it, each spouse can independently make a $72,000 Mega Backdoor Roth contribution.
Participant
Maximum Mega Backdoor Roth Contribution (2026)
Spouse 1
$72,000
Spouse 2
$72,000
Combined Household Total
$144,000
Info Highlight: Two core principles govern these contributions — (1) you can’t save more than you earn, and (2) a Solo 401k is designed for self-employed individuals to save their earned self-employment compensation. Each spouse’s $72,000 must be supported by their own self-employment income.
Who Qualifies: The Owner-Only Rule
The Solo 401k is reserved for owner-only businesses. Both spouses can work in and contribute to the plan, but neither spouse’s business can have any non-owner, non-spouse, full-time W-2 employees.
What Counts as a Full-Time W-2 Employee?
A full-time W-2 employee — the kind that would disqualify you — is someone who is:
Factor
Threshold
Age
21 years or older
Hours (standard)
1,000 hours per year with a year of service
Hours (long-term part-time)
500 hours per year for two consecutive years
Example: A married couple runs an online consulting business with no other employees. Both spouses actively work in the business and each reports earned self-employment income. Because no one falls into the full-time W-2 employee category and both spouses have earned income, both spouses can participate in the Solo 401k and pursue the Mega Backdoor Roth.
Anatomy of the $72,000 Contribution
The Mega Backdoor Roth is a two-step process:
Step 1 — Make the Voluntary After-Tax Contribution
You first make a voluntary after-tax contribution to your Solo 401k. The voluntary after-tax limit is 100% of your self-employment compensation, dollar for dollar, up to the overall limit of $72,000 — assuming you make no other contributions to the Solo 401k (you skip the employee and employer contribution types and make a pure voluntary after-tax contribution).
Step 2 — Convert to Roth
You then transfer (convert) those voluntary after-tax dollars to a Roth Solo 401k or a Roth IRA. The funds can move into a separate Roth account opened under the name and EIN of the Solo 401k, or be transferred out of the plan to a Roth IRA. Either way, they then enjoy tax-free growth potential.
Important — The 403(b) Exception: The $72,000 voluntary after-tax limit assumes no contributions are being made to a 403(b) plan. Normally, contributions to another plan (such as a day-job 401k) don’t reduce your ability to make voluntary after-tax Solo 401k contributions. The exception is a 403(b): any contributions to a 403(b) — whether employee or employer — combined with what you want to contribute to your Solo 401k cannot exceed the overall limit.
What Counts as Self-Employment Compensation?
Because the voluntary after-tax limit is 100% of self-employment compensation up to $72,000, the next question is: what exactly is self-employment compensation? It depends on how your business is taxed.
Business Tax Treatment
How Self-Employment Compensation Is Determined
Sole Proprietor
(incl. single-member LLC taxed as sole prop)
Line 31 of Schedule C (net income after business expenses), less one-half of the self-employment tax
S-Corporation or C-Corporation
The W-2 wages you receive from your self-employed business
Partnership
Net income reported on Line 14 of the K-1 you receive, less one-half of the self-employment tax
As long as that calculated amount is at least $72,000 for each spouse, the full Mega Backdoor Roth contribution is available to that spouse.
The Step-by-Step Procedure
1. Confirm Eligibility
Verify that you have an owner-only business and that both spouses report earned self-employment income.
2. Adopt a Solo 401k That Allows the Mega Backdoor Roth
Your plan documents must allow both steps — the voluntary after-tax contribution and the subsequent transfer to a Roth Solo 401k or Roth IRA. My Solo 401k Financial was the first Solo 401k provider to offer a plan supporting the Mega Backdoor Roth, and our documents allow it.
3. Open the Accounts
We are completely neutral on where accounts are opened — we don’t hold customer funds and don’t have access to the accounts — but we are hands-on in helping you open accounts at the bank or brokerage of your choice. Popular brokerage options include Fidelity and Schwab, and we’ve helped customers open accounts at hundreds of banks and credit unions nationwide.
4. Use Separate Accounts for Each Spouse
When both spouses participate, separate accounts are required for each. Each spouse needs their own voluntary after-tax account opened under the name and EIN of the Solo 401k for the benefit of that spouse.
5. Contribute, Then Convert
Each spouse contributes up to $72,000 to their voluntary after-tax account, then converts those dollars to a Roth Solo 401k or Roth IRA.
Is the Conversion Taxable?
There is no tax on the conversion of the after-tax principal. If no gains have accrued in the voluntary after-tax account at the time of conversion, the entire conversion is tax-free. If some gains have accrued before the funds are moved to the Roth account, only that small gains portion is taxable in the year of conversion.
Example: Assume a couple’s business is taxed as an S-corporation and each spouse receives $72,000 in W-2 wages. Each spouse contributes $72,000 as a voluntary after-tax contribution, then promptly converts $72,000 to their respective Roth Solo 401k or Roth IRA — $144,000 combined — with tax-free growth potential going forward. Because they convert quickly before gains accrued in the voluntary after-tax solo 401k account, there are no gains to be taxed at conversion.
Deadlines to Know
Action
Deadline
Make the voluntary after-tax contribution (for 2026)
Business tax return deadline, including any timely filed extension (in 2027 for the 2026 contribution)
Convert to Roth
No deadline — though most convert shortly after contributing
Important: While there’s no deadline to convert, most people convert soon after making the contribution — both to start investing for tax-free growth sooner and to minimize any gains in the voluntary after-tax account that would be taxable at conversion.
Beyond the Mega Backdoor Roth: More Reasons to Set Up a Solo 401k
Beyond the Mega Backdoor Roth, you can make other types of Roth contributions and perform Roth conversions — converting existing pre-tax Solo 401k dollars to Roth status.
Tax Credits
Our plan was the first offered by a Solo 401k provider to support the ability to claim tax credits under the SECURE Act — up to $1,500 total ($500 per year for three consecutive years). These credits are available not only to new plans but also to existing plans (for example, a basic plan at Fidelity or Schwab) that are upgraded to our plan to enable Mega Backdoor Roth and other features.
Alternative Investments
Our plan allows brokerage-type investments (stocks, bonds, mutual funds) plus true diversification into alternatives such as real estate, private placements, private stock, precious metals, and crypto.
Participant Loans
You can take a Solo 401k participant loan for any purpose — personal or business — without taxes or penalties, provided you stay within the loan terms: borrow up to 50% of the balance, not to exceed $50,000, properly documented. Interest is prime plus 1% (or a CD rate plus 2%), repaid in equal monthly or quarterly payments of principal and interest over a five-year term (longer if used to buy a primary residence). We prepare the required loan documents at no additional charge.
Compliance Support
We handle the Form 5500-EZ and 1099-R when needed, as long as we’re notified in a timely fashion. Note that a Form 5500-EZ isn’t required until the value of your Solo 401k (including any defined benefit plan) exceeds $250,000.
Ready to Save $144,000 into a Mega Backdoor Roth for 2026?
If you and your spouse run an owner-only business, we can help you set up the right Solo 401k structure to make the most of the Mega Backdoor Roth — including separate accounts for each spouse, the right conversion path to a Roth Solo 401k or Roth IRA, and ongoing compliance support.
Remember: This information is provided for educational purposes only and should not be construed as tax, legal, or investment advice. Always consult with qualified tax, legal, and investment professionals before making decisions with your retirement funds.
This is one of the most common questions My Solo 401k Financial receives from owner-only businesses: how do I report the contributions I make to my Solo 401k to the IRS? The honest answer is — it depends. It depends on the type of contribution you’re making (employee pre-tax, employee Roth, employer pre-tax, employer Roth, or voluntary after-tax) and on how your self-employed business is taxed (sole proprietorship, S-corporation, C-corporation, or partnership). In this guide, we walks through exactly where each contribution type gets reported, no matter your business structure.
Watch: My Solo 401k Financial explains exactly how Solo 401k contributions get reported to the IRS
2025 and 2026 Solo 401k Contribution Limits
Before diving into reporting, it helps to know the overall contribution ceiling. A Solo 401k offered by My Solo 401k Financial allows for employee contributions, employer contributions, and voluntary after-tax Solo 401k contributions — the building block of the Mega Backdoor Roth Solo 401k strategy.
Contribution Type
Tax Year 2025
Tax Year 2026
Overall contribution limit
$70,000
$72,000
Super catch-up (ages 60–63)
$11,250
$11,250
ℹ️ Super Catch-Up vs. Normal Catch-Up
The $11,250 super catch-up contribution first became effective in 2025 and remains the same for tax year 2026. It’s only available to those who are age 60, 61, 62, or 63. You cannot make both a normal catch-up contribution and a super catch-up contribution in the same year if you fall within that age range — you have to choose one or the other.
Reporting for Sole Proprietorships (Schedule C)
If your self-employed business is a sole proprietorship — or an LLC taxed as a sole proprietorship, or you’re a 1099 contractor filing a Schedule C — the process starts with identifying Line 31 of Schedule C, the net profit line from self-employment activity. That’s your starting figure for calculating any Solo 401k contribution, whether employee, employer, or voluntary after-tax.
💡 How to Calculate Your Contribution
Start with Schedule C, Line 31 (net profit). Subtract one-half of self-employment income tax from that figure. Then plug the resulting net number into the Solo 401k contribution calculator found on the My Solo 401k Financial website — the calculator will perform the rest of the calculation for you automatically.
Where Sole Proprietorship Contributions Get Reported
Contribution Type
Where It’s Reported
Employee pre-tax contribution
Schedule 1, Line 16 (attached to Form 1040)
Employer pre-tax profit-sharing contribution
Schedule 1, Line 16 (attached to Form 1040)
Employee Roth contribution
Not reported anywhere on your tax return
Employer Roth contribution
Schedule 1, Line 16 — but also triggers a taxable in-plan conversion (see warning below)
Voluntary after-tax contribution
Not reported on your tax return — instead reported on Form 1099-R, Box 5, when converted (see Mega Backdoor Roth section below)
⚠️ Employer Roth Contributions Have a Hidden Tax Catch
Employer Roth Solo 401k contributions are allowed — but don’t get too excited. When you make an employer Roth Solo 401k contribution, you have to treat it as a taxable in-plan conversion. If you’re trying to maximize your Roth Solo 401k contributions, you should not do it through the employer Roth contribution. Instead, use the voluntary after-tax Solo 401k contribution, which can then be converted to the Roth Solo 401k. It’s more advantageous because it’s calculated dollar-for-dollar, whereas employer Roth contributions are calculated as a percentage — effectively 20% of Schedule C Line 31 income after subtracting one-half of self-employment income tax.
How the Mega Backdoor Roth Solo 401k Gets Reported
Voluntary after-tax Solo 401k contributions are not reported on your personal or business tax return for a sole proprietorship. Instead — and this is the part that catches people off guard — they get reported on Form 1099-R, Line 5a (Box 5).
ℹ️ Why a 1099-R Gets Issued
The Form 1099-R gets issued when you perform the Mega Backdoor Roth Solo 401k conversion — meaning you make the voluntary after-tax Solo 401k contribution into that specific holding account, and then immediately convert those funds to the Roth Solo 401k or Roth IRA. The 1099-R reports that conversion, not the contribution itself.
My Solo 401k Financial will automatically report that 1099-R for you for the Mega Backdoor Roth conversion — as long as you complete their online conversion form, found in the Forms section of their website. My Solo 401k Financial does not have access to client funds, so timely completion of that form is essential; as long as it’s submitted on time, they will issue the form with a copy sent to you and an electronic copy filed with the IRS, at no extra charge.
💡 My Solo 401k Financial Pioneered This Strategy
My Solo 401k Financial was the first in the industry to offer the Mega Backdoor Roth Solo 401k and has processed thousands of these conversions for clients over the years.
Reporting for S-Corporations and C-Corporations
If your self-employed business is an S-corporation, an LLC taxed as an S-corporation, or a C-corporation, the starting figure is different. You’ll first need to determine your W-2 wages from the business — based on Box 1 of your W-2 (gross wages). You may need to add the amount listed in Box 12 to that figure to arrive at your gross W-2 wages, which is what you’ll use to calculate all your Solo 401k contributions.
Where S-Corp and C-Corp Contributions Get Reported
Contribution Type
S-Corporation
C-Corporation
Employee pre-tax contribution
Schedule 1, Line 16 (personal Form 1040)
Schedule 1, Line 16 (personal Form 1040)
Employee Roth contribution
Box 12, Code AA on Form W-2 (check Box 13, Retirement Plan); not deductible
Box 12, Code AA on Form W-2; not deductible
Employer pre-tax profit-sharing contribution
Form 1120-S, Line 17
Form 1120, Line 33
Employer Roth contribution
Form 1120-S, Line 17 (deductible) — but taxable in-plan conversion reported on Form 1099-R, Lines 5a/5b
Form 1120, Line 23 (deductible) — but taxable in-plan conversion reported on Form 1099-R, Lines 5a/5b
💡 Example: $25,000 Employer Roth Contribution for an S-Corp
Suppose your self-employed business is taxed as an S-corporation, and you make a $25,000 employer Roth Solo 401k contribution. You would report that $25,000 on Form 1120-S, Line 17 as a deduction on the business return. But because it must be treated as a taxable in-plan conversion, a Form 1099-R would also be issued — listing $25,000 on Line 5a (amount converted) and $25,000 again on Line 5b (taxable amount). That $25,000 taxable amount then flows through to Lines 5a and 5b of your Form 1040, under the “Pensions and Annuities” section.
⚠️ Employee Roth Solo 401k Contributions Use a Different Reporting Method for S-Corps/C-Corps
Unlike a sole proprietorship (where employee Roth contributions simply aren’t reported anywhere), an S-Corp or C-Corp employee Roth Solo 401k contribution gets listed in Box 12, Code AA of the Form W-2, and Box 13 (“Retirement Plan”) should be checked. It’s still not deductible, since employee Roth Solo 401k contributions are never tax-deductible — but it does require a specific entry on the W-2 itself.
Reporting for Partnerships (Schedule K-1)
If your self-employed business is a partnership, or an LLC taxed as a partnership, you’ll first need to determine your earned income for Solo 401k contribution purposes by referring to Schedule K-1, Line 14, Code A — the self-employment income line. That figure, once you subtract one-half of self-employment income tax, is what gets plugged into the Solo 401k online contribution calculator.
Where Partnership Contributions Get Reported
Contribution Type
Where It’s Reported
Employee & employer pre-tax contributions
BOTH: Schedule 1, Line 16 (personal Form 1040) AND Schedule K-1, Line 13, Code R
Employee Roth contribution
Not reported on the tax return
Employer Roth contribution
Deductible on Schedule 1, Line 16 AND Schedule K-1, Line 13, Code R — but also taxable in-plan conversion on Form 1099-R, Lines 5a/5b
ℹ️ Partnerships Report Contributions in TWO Places
Unlike a sole proprietorship, employee and employer pre-tax Solo 401k contributions for a partnership business must be reported in two separate places: Schedule 1, Line 16 of your personal Form 1040, andSchedule K-1, Line 13, using Code R. My Solo 401k Financial notes that you can find more detail on this in IRS Publication 560, page 15, under the section titled “Where to Deduct Contributions.”
Are Solo 401k Contributions Reported on Form 5498?
A question My Solo 401k Financial hears often: are Solo 401k contributions reported on Form 5498? The answer is no.
⚠️ Form 5498 Is for IRAs Only — There’s No Such Thing as a “Solo IRA”
Form 5498 is used for IRAs — traditional IRAs, Roth IRAs, SEP IRAs. It is not used for Solo 401k plans. IRA custodians use Form 5498 to report contributions, rollovers, Roth conversions, and year-end fair market value. A Solo 401k is not an IRA. My Solo 401k Financial often hears people refer to a “solo IRA” when they actually mean a Solo 401k — but there’s no such thing as a solo IRA. You can have a Solo 401k, you can have an IRA, and you can even have both at the same time, but they are two entirely separate account types with separate reporting rules.
How Should You Keep Records of Your Contributions?
A frequent question: what should a Solo 401k owner keep for records when making contributions? The Solo 401k holding accounts — also known as bank or brokerage accounts — are used to track contributions and indirectly report them. That’s the entire purpose of having separate holding accounts for pre-tax Solo 401k funds, Roth Solo 401k funds, and voluntary after-tax Solo 401k funds.
Plan Setup
Number of Holding Accounts
One-participant plan
3 — pre-tax, Roth, and voluntary after-tax buckets
Two-participant plan (e.g., both spouses self-employed)
6 — each participant has their own pre-tax, Roth, and voluntary after-tax bucket
ℹ️ It’s Still Just One Plan
Even with three or six separate holding accounts, it’s considered just one Solo 401k plan — not three or six separate plans. You’re simply required to track each contribution source separately. That’s how you indirectly record-keep your contributions: through those separate brokerage or bank accounts, combined with reporting on your personal and/or business tax return depending on the contribution type. You don’t need to report this information to My Solo 401k Financial unless they request it when preparing Form 5500-EZ.
When Does Form 5500-EZ Come Into Play?
Form 5500-EZ can also be used to report contributions — but it’s important to understand that this is not for reporting to the IRS for tax deduction purposes. It’s strictly for informational reporting.
Question
Answer
When does Form 5500-EZ apply?
When the market value of the entire plan (all assets, cash, and holding accounts combined — pre-tax, Roth, and voluntary after-tax) exceeds $250,000
Are contributions reported on it?
Yes, but only if you’re already required to file the return in the first place
What if I also have a defined benefit plan?
If the combined, aggregated value of the defined benefit plan and the Solo 401k exceeds $250,000, you must file a separate Form 5500-EZ for each plan
💡 Two Plans, Two Separate Filings
If you have both a defined benefit plan and a Solo 401k for your self-employed business, and the aggregate value of both plans exceeds $250,000, you’ll need to file a separate Form 5500-EZ for each plan — one for the defined benefit plan, and one for the Solo 401k plan. My Solo 401k Financial will file and prepare Form 5500-EZ for clients, as long as you timely request it through their online Form 5500-EZ request form on the Forms tab of their website. They don’t have access to client funds, so it’s your responsibility to notify them in a timely fashion.
Reporting vs. Deposits: Why the Year Matters
An important distinction: you need to report contributions based on the tax year they’re made for, not necessarily the calendar year you actually deposit them. If you already had a Solo 401k plan open by December 31st of last year, you have until your business tax return due date plus any timely filed extension this year to make all contribution types — employee, employer, and voluntary after-tax — for last year’s tax year.
ℹ️ Common Sense, But Frequently Misunderstood
Even if you’re physically making the contribution in 2026, if it’s designated for tax year 2025, you must report it on your 2025 tax return — not your 2026 tax return. My Solo 401k Financial notes that this sounds like common sense, but they get questions about it quite often.
Common Mistakes to Avoid
Mistake
What to Remember
Double reporting contributions
Don’t report the same contribution in multiple places where only one is required
Forgetting Roth isn’t deductible
Employee Roth Solo 401k contributions are never tax-deductible
Confusing employer Roth treatment
Deductible on the business return, but taxable on the personal return as an in-plan conversion
Missing deadlines
If your plan was opened by Dec. 31 of the prior year, you generally have until this year’s business tax filing deadline (plus extensions) to fund last year’s contributions
⚠️ Haven’t Opened a Plan Yet? You May Still Have Options
If you have not yet opened a Solo 401k plan, you may still have time to open one in the current year and make prior-year contributions — but generally only employer contributions and voluntary after-tax contributions would be available for that prior tax year, not employee salary deferral contributions (which typically require the plan to have been established by December 31st of that tax year).
Key Takeaways: Solo 401k Contribution Reporting
Topic
Key Point
Reporting depends on
Both contribution type AND business entity structure
Sole proprietorship
Schedule C Line 31 → Schedule 1, Line 16 for pre-tax; Roth not reported
S-Corp / C-Corp
W-2 Box 1 wages → Form 1120-S/1120 for employer contributions; W-2 Box 12 for employee Roth
Partnership
Schedule K-1, Line 14 Code A → reported in TWO places: Schedule 1, Line 16 AND Schedule K-1, Line 13, Code R
Voluntary after-tax / Mega Backdoor Roth
Not on your tax return — reported on Form 1099-R, Box 5, upon conversion
Employer Roth contributions
Deductible on the business return, but taxable as an in-plan conversion on Form 1099-R and your personal Form 1040
Form 5498
Never used for Solo 401k plans — it’s exclusively for IRAs
Form 5500-EZ
Informational only; required once plan market value exceeds $250,000
Record-keeping
Tracked through separate pre-tax, Roth, and voluntary after-tax holding accounts
Need Help Reporting Your Solo 401k Contributions?
Whether you need to calculate your contribution amount, complete a Mega Backdoor Roth conversion form, or request a Form 5500-EZ filing, My Solo 401k Financial is here to help you stay compliant and maximize your retirement savings.
Remember: This information is provided for educational purposes only. Always consult with qualified tax, legal, and investment professionals before making investment decisions with your retirement funds.
This is a question My Solo 401k Financial hears regularly, especially from prospective Solo 401kclients: can a Solo 401k be a safe harbor plan? The short answer is no — and understanding exactly why reveals some important truths about how a Solo 401k is fundamentally different from a traditional, full-time employer 401k plan. This guide breaks down the safe harbor rules, why they don’t apply to owner-only businesses, and what self-employed individuals need to know if they ever hire employees.
Watch: My Solo 401k Financial explains why a Solo 401k can never be a safe harbor plan
The Short Answer: No, a Solo 401k Cannot Be Safe Harbor
A Solo 401k plan is designed for a self-employed business owner or owner-only businesses with no full-time, non-owner common-law W-2 employees who work 1,000 hours or more in the business. Because of this fundamental design, a Solo 401k simply is not — and should never be structured as — a safe harbor plan.
ℹ️ Why This Comes Down to Who the Plan Covers
Whether a plan can be safe harbor comes down to one key question: does the plan cover common-law employees who need to be protected from unfair treatment, or is it strictly for the business owner(s) and their spouse(s)? A true Solo 401k, such as one offered by My Solo 401k Financial, falls into the second category — which is exactly why safe harbor rules don’t apply.
Who Can Be Excluded When Opening a Solo 401k?
When opening a Solo 401k plan, you can always exclude certain categories of workers from eligibility — which is part of why the plan stays in “owner-only” territory:
Worker Type
Can Be Excluded?
1099 contractors
✅ Always — regardless of hours worked
W-2 employees working under 1,000 hours/year
✅ Yes — part-time employees under the threshold
Employees under age 21
✅ Always — regardless of hours
Non-owner spouse working in the business
❌ Cannot disqualify the plan — spouse may participate
Who Can Participate in a Solo 401k?
From an eligibility perspective, a Solo 401k plan is for owner-only businesses and their respective spouses. A business may have multiple owners, and both owners don’t necessarily have to participate in the plan — but they would each be eligible to participate. A spouse can also participate in the plan, even if he or she is not an owner of the business — they simply need to be working in the same self-employed business and earning income from it.
What Is a Safe Harbor 401k, and Who Is It For?
Safe harbor 401k rules are designed for traditional, full-time employer 401k plans. Think of working for a large company like Microsoft, Best Buy, or the Coca-Cola Company — chances are, that employer’s 401k plan may be structured as a safe harbor plan.
That’s because traditional employer plans cover common-law W-2 employees — meaning non-owner employees. The government wants to ensure that a full-time employer plan does not unfairly benefit the business owners, officers, or highly compensated employees of the corporation sponsoring that plan.
⚠️ Safe Harbor Status Is Not Just a Label
One important point regarding safe harbor status: it’s not merely a label you can elect for marketing purposes. If a full-time employer 401k elects safe harbor status, it results in required contributions — typically mandatory employer contributions that must actually be funded for eligible employees.
Common Safe Harbor Contribution Formulas
Formula
Description
Required employer matching contribution
The employer matches a portion of eligible employee deferrals
Required employer non-elective contribution
Often structured as a profit-sharing contribution made to all eligible employees, regardless of whether they defer
A specific type of automatic-enrollment safe harbor formula, often called a “QACA safe harbor”
ℹ️ Vesting and Notice Rules Apply Too
These safe harbor contributions are required for eligible employees and are typically subject to specific vesting and notice rules. This is all part of an important plan design consideration for a full-time employer 401k with common-law employees — but it has no bearing whatsoever on a true owner-only Solo 401k.
To make sure a full-time employer plan doesn’t unfairly favor owners and highly compensated employees, many traditional 401k plans are subject to annual non-discrimination testing. Safe harbor status helps the employer avoid the headaches of this testing by requiring certain mandatory contributions to eligible employees.
Types of Non-Discrimination Testing
Testing Type
What It Measures
ADP Testing
Looks at employee elective deferrals — comparing highly compensated employees against rank-and-file employees
ACP Testing
Looks at matching contributions made to employees
Top-Heavy Testing
Looks at whether too much of the plan balance is concentrated among owners and key employees
💡 Why This Doesn’t Apply to a True Solo 401k
Because a Solo 401k cannot be used by non-owner employees (with the exception of a working spouse), there is no group of rank-and-file employees to compare against the owner. For this reason, a Solo 401k is not subject to non-discrimination testing — meaning the owner doesn’t need a safe harbor formula in the first place, since there’s nothing to test against. This is one of the simplifying advantages of operating a true owner-only Solo 401k.
Solo 401k vs. Safe Harbor 401k: The Key Difference
There’s really one key difference between a Solo 401k and a safe harbor 401k: the type of business each plan is designed for.
Feature
Solo 401k
Safe Harbor 401k
Designed for
Owner-only businesses with no full-time non-owner employees
Full-time employers with common-law W-2 employees
Non-discrimination testing
Not subject — no rank-and-file employees to compare
Subject to ADP/ACP/top-heavy testing unless safe harbor elected
Required contributions
None required — fully discretionary by the owner
Mandatory matching, non-elective, or QACA contributions
Contribution limits
High contribution limits for the owner(s)
Governed by overall plan and testing rules
Roth / Mega Backdoor Roth options
Yes — including voluntary after-tax Mega Backdoor Roth Solo 401k contributions
Varies by plan design
Participant loans
Available, depending on plan document
Available, depending on plan document
Alternative investments
Real estate, promissory notes, precious metals, cryptocurrency, private equity, trust deeds, and more
Typically limited to equities/mutual funds offered by the plan provider
💡 My Solo 401k Financial: A Pioneer in the Mega Backdoor Roth Solo 401k
My Solo 401k Financial notes that a true Solo 401k — like the one they offer — is designed to give business owners high contribution limits, Roth options, and the ability to make Mega Backdoor Roth Solo 401k contributions through voluntary after-tax Solo 401k contributions. In fact, My Solo 401k Financial was the first in the industry to offer the Mega Backdoor Roth Solo 401k and has processed thousands of Mega Backdoor Roth Solo 401k conversions for clients — all without the complexities of a traditional full-time employer 401k plan.
A Simple Way to Remember the Difference
In short: Solo 401k means an owner-only retirement plan. Safe harbor 401k means an employee-inclusive 401k design that helps satisfy testing rules for full-time employer 401k plans.
What If Your Self-Employed Business Hires Employees?
This is a question My Solo 401k Financial gets often: what if my self-employed business hires part-time or full-time employees after I’ve already opened my Solo 401k? This requires careful, ongoing review.
ℹ️ You Can Open a Solo 401k Even with Part-Time Hires
You can open a Solo 401k plan even if you have full-time W-2 employees who work under 1,000 hours. The eligibility concern arises specifically from an ongoing perspective — meaning you have to keep monitoring employee hours and tenure over time, even after the plan is already established.
Two Key Employee Thresholds to Watch
Scenario
Threshold
Required Action
Full-time hire, age 21+
1,000+ hours in 12 consecutive months
Must close the Solo 401k plan
Long-term part-time employee
500–999 hours for two consecutive 12-month periods
Must close the Solo 401k, transfer to an IRA, or convert to a full-time employer 401k (with the option of safe harbor)
⚠️ The Long-Term Part-Time Employee Rule
If you hire a part-time W-2 employee after opening your Solo 401k plan, and that individual works two consecutive 12-month periods with hours falling between 500 and 999 hours each period, that individual may be considered a long-term part-time employee. This requires you to close the Solo 401k plan, transfer it to an IRA, or convert it to a full-time employer 401k — with the option to also convert that new plan into a safe harbor plan if it makes sense for the business going forward.
Bottom Line on Ongoing Eligibility
If your self-employed business does not have any full-time W-2 employees, and does not have any common-law W-2 employees who work between 500 and 999 hours over two consecutive 12-month periods, then you don’t have to worry about safe harbor rules at all — your Solo 401k remains a true owner-only plan.
Key Takeaways: Solo 401k and Safe Harbor Rules
Topic
Key Point
Can a Solo 401k be safe harbor?
No — never. A Solo 401k is for owner-only businesses, and safe harbor is for full-time employer plans with common-law employees
Who can participate
Business owner(s) and their working spouse(s) — non-owner full-time employees disqualify the plan
Non-discrimination testing
Not applicable to a Solo 401k — there’s no rank-and-file employee group to test against
Safe harbor contributions
Mandatory employer matching, non-elective, or QACA contributions — only relevant to full-time employer plans
Hiring full-time employees
1,000+ hours in 12 months requires closing the Solo 401k
Hiring part-time employees
500–999 hours over two consecutive years triggers the long-term part-time employee rule
Mega Backdoor Roth
Available in a true Solo 401k — My Solo 401k Financial pioneered this strategy in the industry
Ready to Open a True Owner-Only Solo 401k?
Whether you’re just starting out as a self-employed business owner, planning to bring on a spouse, or simply want to understand how Solo 401k eligibility works as your business grows, My Solo 401k Financial can help you set up a plan with maximum flexibility — including the Mega Backdoor Roth strategy, participant loans, and alternative investments.
Remember: This information is provided for educational purposes only. Always consult with qualified tax, legal, and investment professionals before making investment decisions with your retirement funds.
If you’re considering a promissory note investment inside your Solo 401k or self-directed IRA, one question comes up again and again: does the note actually need to charge interest? This guide answers that question directly — and covers everything else you need to know about structuring a compliant promissory note, setting a fair interest rate, avoiding usury law violations, and staying clear of prohibited transactions.
Watch: My Solo 401k Financial explains why a promissory note must always charge a fair interest rate
The Short Answer: Yes, a Promissory Note Must Charge Interest
Promissory notes are one of the most common ways to document a private investment — also known as a private loan — where a Solo 401k makes an investment in a third party. Whether the promissory note investment is made through a self-directed Solo 401k or a self-directed IRA, the answer to “does a promissory note need an interest rate?” is a clear yes.
⚠️ The Interest Rate Cannot Be Zero
The interest rate listed on a promissory note cannot be zero. If you invest in a promissory note and charge zero interest, that investment is not going to benefit the Solo 401k plan — and benefiting the plan is the entire point of making the investment in the first place.
Why the Plan Must Benefit from Every Investment
Anytime you invest Solo 401k funds — whether in equities, real estate, or promissory notes — it has to be done with the intention of growing the retirement plan. Congress created retirement plans, including Solo 401k plans, specifically so individuals could save for retirement. If you don’t charge a fair interest rate that benefits the plan, the plan simply won’t grow, defeating the entire purpose of the investment.
ℹ️ The Plan Must Benefit — Not the Borrower
A promissory note investment should be made with the intent of growing the Solo 401k plan — not necessarily to help the borrower. Of course, the borrower is helped indirectly by being able to access financing. But the interest rate charged needs to reflect what return the Solo 401k will earn — not be set artificially low as a favor to the borrower.
What Exactly Is a Promissory Note?
A promissory note is a promise by a borrower to repay money to a lender — in this case, the lender is the Solo 401k plan. It is a written instrument that acts as evidence of the investment and outlines the payment terms.
Required Elements of a Promissory Note
The promissory note must be drafted accordingly and include all of the following pertinent information:
Element
Details
Lender / Beneficiary
The Solo 401k plan, listed by name
Borrower
Name of the individual or company (e.g., hard money lender, construction company) — as long as not a disqualified party
Principal loan amount
The total amount being loaned to the borrower
Interest rate
Must be listed and cannot be zero
Repayment schedule
Monthly, quarterly, or annual — your choice, but it must be outlined
Maturity date
The date the loan must be repaid in full
Secured or unsecured
Whether collateral backs the note
Default provisions
What happens if the borrower fails to pay
💡 Sample Promissory Note Available
My Solo 401k Financial provides a sample promissory note on the Forms tab of their website that you can use as a starting point when drafting your own note. As the trustee of the plan, you’ll also want to sign the promissory note and put together a clear payment schedule outlining the amount of each payment and when it’s due.
Don’t Confuse a Promissory Note Investment with a Participant Loan
It’s important not to confuse a promissory note investment with a Solo 401k participant loan. They are entirely different concepts:
Feature
Participant Loan
Promissory Note Investment
Who borrows
You, the plan participant/trustee
An unrelated third party
Can it go to family?
N/A — it’s your own plan
No — cannot be you, your spouse, parents, or children
How Do You Determine the Right Interest Rate?
You typically want to charge an interest rate based on the borrower’s credit history. If the borrower has good credit, the interest rate should generally be lower than for a borrower with poor credit — because the odds of the note going into default increase as creditworthiness decreases.
Factors to Consider When Setting an Interest Rate
Factor
Why It Matters
Borrower’s creditworthiness
Better credit generally warrants a lower rate; weaker credit warrants a higher rate to compensate for risk
Secured vs. unsecured
Unsecured notes typically carry higher rates since there’s no collateral to fall back on
Collateral value
Higher-value, more liquid collateral can support a lower rate
Market interest rates
The note should reflect a return competitive with prevailing market conditions
Risk of default
Higher perceived risk should be compensated with a higher rate
Business vs. individual borrower
Business borrowers may carry different risk profiles than individuals
Loan-to-value ratio
A lower loan-to-value ratio (more collateral relative to loan size) supports a lower rate
State usury laws
The rate must comply with the legal maximum in the applicable state
💡 Typical Interest Rate Range
A typical interest rate charged on a promissory note generally falls between 8% and 15% — especially for unsecured notes. This range has even been seen applied to secured promissory notes in some cases. As always, a reasonable rate depends on the specific facts and circumstances of each individual loan.
Don’t Break Usury Laws — There’s a Ceiling Too
While the interest rate cannot be zero, it also cannot be set too high. You need to make sure you don’t break any usury laws, which are driven by your state of residence.
⚠️ Charging Too Much Interest Can Also Be a Problem
If you charge, for example, a 20% interest rate on a promissory note to an individual or business with good credit, state usury laws could come into play and flag that rate as excessive. The interest rate must be reasonable in light of the borrower’s risk profile — charging an unreasonably high rate just because you can isn’t a safe approach, and it can run afoul of your state’s usury limit.
How Must the Funds Flow? Critical Compliance Rules
Once you’ve documented the promissory note investment in writing, the funds need to be wired directly from the Solo 401k holding account to the borrower. This is a critical compliance point that My Solo 401k Financial emphasizes repeatedly.
Fund Flow Direction
Correct or Incorrect?
Solo 401k holding account → directly to borrower’s bank account
✅ Correct
Solo 401k holding account → your personal or business bank account → borrower
❌ Incorrect — treated as a taxable distribution
Borrower’s payments → directly to Solo 401k holding account
✅ Correct
Borrower’s payments → your personal account → Solo 401k
❌ Incorrect
⚠️ Funds Cannot Pass Through Your Personal or Business Account
It cannot be wired first to your business or personal bank account on the way to the borrower. If that happens, it will be treated as a taxable distribution — even if the funds eventually reach the borrower as intended. The flow of funds must go directly to the borrower’s bank account, with no detour through your own accounts.
ℹ️ Receiving Payments by Check
If the borrower makes a payment by check, they can mail the check made payable in the name of the Solo 401k, addressed to you as trustee. You then deposit those funds into the Solo 401k bank or brokerage account. As long as the payments flow directly to the Solo 401k holding account, they maintain their tax-deferred status — growing tax-deferred so you can reinvest those funds within the plan.
Can You Lend to a Family Member? Disqualified Person Rules
This is a special area of concern under the prohibited transaction regulations. You cannot invest in a promissory note to a family member — even if the Solo 401k plan receives a favorable interest rate and the note is fully and properly documented.
Who Is a Disqualified Person?
Person / Entity
Disqualified?
The Solo 401k participant (you)
✅ Yes
Your spouse
✅ Yes
Your parents and grandparents
✅ Yes
Your children and grandchildren
✅ Yes
Any business you own or control
✅ Yes
An unrelated friend’s business (where you are not an employee or owner)
✅ Permitted
⚠️ Even Helping Your Child Buy a Home Doesn’t Qualify
A Solo 401k cannot invest in a promissory note to your child — even at a market interest rate, even if fully documented, and even if your intention is simply to help your child with their first home purchase. Unfortunately, this type of transaction is not allowed and would constitute a prohibited transaction.
💡 Lending to an Unrelated Friend’s Business Is Allowed
By contrast, a Solo 401k can invest in a promissory note to an unrelated friend’s business. For example, if a friend has a business and approaches you for financing, you can invest your Solo 401k funds in a promissory note to that friend’s business — as long as you are not an employee or owner of that business. You’ll still want to document the note properly and charge an interest rate that benefits the plan.
How Can a Promissory Note Be Structured?
A Solo 401k promissory note can be structured in different ways, and you get to decide what works best for your situation:
Structure Option
Description
Interest-only with balloon payment
Fixed interest-only payments throughout the term, with the full principal due as a final balloon payment
Principal and interest
Regular payments that include both principal and interest throughout the loan term
You can also decide how often payments are made — monthly, quarterly, or annually — and that schedule needs to be clearly outlined on the promissory note itself.
💡 Example: A Properly Structured Promissory Note
Suppose a Solo 401k plan invests in a promissory note worth $100,000 to an unrelated party. The note lists the principal amount of $100,000, along with the agreed-upon interest rate. The funds flow from the Solo 401k bank or brokerage account directly to the borrower, and the borrower then makes payments directly back to the Solo 401k plan. This type of structure is very common because the Solo 401k receives a stated, predictable return and all loan terms are clearly documented in writing.
Key Takeaways: Promissory Notes and Interest Rates
Topic
Key Point
Does it need interest?
Yes — the rate cannot be zero; it must benefit the Solo 401k plan
How to set the rate
Based on borrower creditworthiness, collateral, loan-to-value, and market conditions
Typical range
Generally 8%–15%, especially for unsecured notes
Rate ceiling
Must comply with state usury laws — too high a rate can be a legal violation
Fund flow
Must go directly between the Solo 401k and the borrower — never through your personal/business accounts
Who can’t borrow
You, your spouse, parents, grandparents, children, grandchildren, or any business you control
Documentation
Must be a signed, written instrument outlining all key terms
Structure options
Interest-only with balloon, or principal + interest; monthly, quarterly, or annual payments
Ready to Structure Your Solo 401k Promissory Note Correctly?
Whether you need a sample promissory note template, guidance on setting a compliant interest rate, or help opening a self-directed Solo 401k that allows promissory note investments, My Solo 401k Financial is here to help.
Remember: This information is provided for educational purposes only. Always consult with qualified tax, legal, and investment professionals before making investment decisions with your retirement funds.
Watch: How solopreneurs unlock Solo 401k participant loans by restating their Fidelity plan documents
Short answer: Fidelity’s basic Solo 401k plan does not allow 401k participant loans.
But that doesn’t mean you’re stuck. If you already hold a basic Fidelity Solo 401k — or you’re
comparing your options before opening one — you can upgrade (“restate”) your plan documents to those
provided by My Solo 401k Financial and unlock participant loans, the Mega Backdoor Roth, alternative investments, and SECURE Act tax credits —
all while keeping your account right where it is at Fidelity.
Below is the comparative blueprint: why Fidelity’s basic plan blocks loans, how a restatement resolves it, and the
exact process to fund and execute your Solo 401k participant loan.
Key takeaway: A restatement is not a new plan and it does not shut down your existing plan.
Your plan simply continues — now governed by IRS-approved documents that enable Solo 401k loans, the Mega Backdoor Roth, and more.
First, Are You Eligible for a Solo 401k?
Before discussing loans, start with eligibility. A Solo 401k — also called a one-participant
plan or owner-only plan — comes down to two fundamental requirements:
1. Self-Employment Income
You must report earned self-employment income on your taxes. How you report it depends on your entity type:
Business Tax Treatment
Where the Income Is Reported
Sole Proprietor
Schedule C earned self-employment income
S-Corp or C-Corp
W-2 wages from the business
Partnership
Line 14 of the K-1 you receive from the business
2. No Full-Time Non-Owner, Non-Spouse W-2 Employees
You cannot have any non-owner, non-spouse, full-time W-2 employees working for any business owned by you or your
spouse. For this purpose, a full-time W-2 employee is one working 1,000 hours per year with a year of
service, or 500 hours per year for two consecutive years.
Example: You and your spouse can both work in the business as W-2 employees and still qualify.
Only a non-owner, non-spouse full-time W-2 employee would prevent a solopreneur from establishing a Solo 401k.
Why Fidelity’s Basic Plan Blocks 401k Loans
Being eligible lets you open a Solo 401k — but there are big differences between the basic plans
offered by discount brokerages like Fidelity and an individually designed Solo 401k offered by My Solo 401k Financial. Fidelity’s basic prototype plan documents simply don’t allow many of the
advanced features.
Feature
Fidelity Basic Plan
My Solo 401k Financial
Participant (401k) Loans
Not Allowed
Allowed
Alternative Investments (real estate, crypto)
Not Allowed
Allowed
Mega Backdoor Roth Contributions
Not Allowed
Allowed
In-Plan Roth Conversions
Not Allowed
Allowed
$1,500 in SECURE Act Tax Credits
Not Allowed
Allowed
Form 5500-EZ Filing Support
Not Provided
Included
The Fix: Restate Your Plan Documents
You’re not stuck with those basic Fidelity documents. The process to upgrade is called a restatement.
Importantly:
You are not setting up a second plan.
You are not shutting down your Fidelity plan and starting over.
Your plan continues — now governed by My Solo 401k Financial’s IRS-approved documents.
Those upgraded documents enable Solo 401k loans, Mega Backdoor Roth contributions, alternative
investments, and the ability to claim SECURE Act tax credits. Want the deeper mechanics on after-tax dollars? See our
detailed guide on the Mega Backdoor Roth using a Solo 401k plan.
How the Process Works
Replace the documents. We prepare your restated documents to upgrade your plan within the same business day when you sign up.
Open new accounts. You’ll open new accounts — which can stay at Fidelity. These are called non-prototype or investment-only accounts, used by Fidelity for people who bring their own plan documents. We help you open them as part of onboarding.
Transfer cash and assets. Move the cash and assets from your existing basic plan into the new accounts governed by the upgraded documents. Assets can transfer in kind — you don’t have to sell your investments.
Important: From Fidelity’s perspective, your existing account is still governed by their plan
documents. That’s why you open the new non-prototype account — moving the assets there is how Fidelity recognizes
your plan is now governed by My Solo 401k Financial’s documents.
Solo 401k Loan Rules at a Glance
A Solo 401k loan lets the solopreneur access money in their Solo 401k — for any purpose —
without taxes or penalties, as long as the loan stays within the required terms and is paid back on schedule. We prepare
all the required loan documents.
Loan Term
Detail
Maximum Amount
50% of the balance, not to exceed $50,000
Interest Rate
Prime plus 1% — or a comparable CD rate plus 2%
Repayment Term
5 years (longer if used to purchase your primary residence)
Payment Frequency
Monthly or quarterly — equal payments of principal and interest
Prepayment
Allowed early with no penalty
Repaid To
The same Fidelity account from which the funds were withdrawn
Example: With $120,000 in your Solo 401k, you can borrow the full $50,000. With $60,000 in the account,
you could borrow up to $30,000 (50% of the balance).
Hassle-Free Document Preparation
When you let us know you want to take a loan, we prepare the amortization schedule and all required loan documents —
in one business day. You then repay according to the schedule, with the option to prepay early
with no penalty, back into the same account from which the funds were withdrawn.
Flat Fees and SECURE Act Tax Credits
My Solo 401k Financial charges a flat fee regardless of your account value: $650 initial cost
(a $525 establishment fee plus the first $125 annual fee), then a $125 annual fee starting twelve months
later. That covers ongoing support — including preparing required loan documents and electronic Form 5500-EZ filing
for clients who notify us in a timely fashion.
We were the first provider to offer a Solo 401k plan enabling Mega Backdoor Roth contributions, and the
first to enable solopreneurs to claim tax credits under the SECURE Act: $500 per year for three
consecutive years ($1,500 total). Because it’s a tax credit — a dollar-for-dollar reduction in tax
liability, not just a deduction — it more than covers our fees for the first seven years.
Did you know? Even added up across the first seven years, the flat fees wouldn’t amount to the full $1,500
in available SECURE Act tax credits. Learn more about how an individually designed Solo 401k plan works.
Ready to Unlock 401k Loans in Your Fidelity Solo 401k?
Whether you already have a basic Fidelity plan or you’re just getting started, My Solo 401k Financial can
restate your documents — often the same business day — so you can take a Solo 401k loan, make Mega Backdoor Roth contributions, and invest in alternative assets.
Remember: This information is provided for educational purposes only. Always consult with qualified tax,
legal, and investment professionals before making decisions with your retirement funds.
Watch: My Solo 401k Financial breaks down the 2026 Solo 401k contribution limits by age
If you are a high-income business owner or solopreneur, the Solo 401k offers the highest contribution limits of any defined contribution plan available to the self-employed. The reason is simple: in the words of the IRS, you are both the employee and the employer, which gives you access to multiple contribution buckets and total control over how much you set aside.
Below is a complete breakdown of the 2026 Solo 401k contribution limits by age, including employee deferrals, employer contributions, catch-up and super catch-up contributions, the overall limit, and how the Mega Backdoor Roth strategy unlocks far more Roth savings than a standard Roth IRA.
Who Is Eligible for a Solo 401k?
A Solo 401k is an owner-only plan. You qualify if you meet both of these requirements:
You are self-employed — reporting earned self-employment income (Schedule C for a sole proprietorship, W-2 wages for an S-corp or C-corp, or line 14 of a K-1 from a partnership).
You have no non-owner, non-spouse full-time W-2 employees working for any business owned by you or your spouse. Full-time generally means an employee age 21+ working 1,000+ hours in a year, or 500+ hours for two consecutive years.
The Three Contribution Buckets
An advanced Solo 401k plan — like the one offered by My Solo 401k Financial — gives you three ways to contribute:
1. Employee Contributions
Also called salary deferrals, these can be made pre-tax or Roth and are subject to the annual employee deferral limit (plus catch-up contributions if you are age 50+).
2. Employer (Profit-Sharing) Contributions
Because you are also the employer, you control these contributions — unlike a 401k at a day job, where employer contributions are typically discretionary.
3. Voluntary After-Tax Contributions
This third bucket is the foundation of the Mega Backdoor Roth strategy. You first make a voluntary after-tax contribution, then transfer those dollars to a Roth Solo 401k or a Roth IRA.
2026 Solo 401k Contribution Limits by Age
The table below shows how the 2026 Solo 401k contribution limits change with age. Catch-up and super catch-up contributions are above and beyond the overall §415(c) annual additions limit.
Age Group (as of end of 2026)
Employee Deferral
Catch-Up
Total Employee Limit
Overall Total Limit
Under Age 50
$24,500
—
$24,500
$72,000
Age 50–59 (and 64+)
$24,500
$8,000
$32,500
$80,000
Age 60–63(super catch-up)
$24,500
$11,250
$35,750
$83,250
Figures assume sufficient self-employment compensation to justify the contributions. The overall limit reflects the §415(c) annual additions limit plus applicable catch-up contributions.
Under Age 50
For 2026, the employee deferral limit is $24,500, and the overall §415(c) annual additions limit (employee + employer + voluntary after-tax) is $72,000.
Age 50 and Older (But Not 60–63)
Once you reach age 50, you can make an additional $8,000 catch-up contribution. This is a type of employee contribution, made directly to either the pre-tax or the Roth account. That brings the employee limit to $32,500 and the overall total to $80,000.
Example: A 55-year-old solopreneur with ample self-employment income could defer $24,500 as an employee contribution, add the $8,000 catch-up, and use employer and voluntary after-tax contributions to reach the $80,000 overall total for 2026.
Age 60 to 63 — The Super Catch-Up
Thanks to the SECURE Act 2.0, individuals who are age 60 to 63 as of the end of 2026 can make a larger super catch-up contribution of $11,250 instead of $8,000. This raises the employee limit to $35,750 and the overall total to $83,250.
Important — Roth Catch-Up Rule for High Earners: Under the SECURE Act 2.0 “Rothification” rule, high earners with more than $150,000 in W-2 wages for the prior year (2025) must designate their catch-up contributions as Roth — they cannot make them pre-tax. This applies specifically to W-2 wages (box 3). If your business is taxed as a sole proprietorship or partnership and you do not pay yourself W-2 wages, you are not forced into Roth catch-up contributions, even if your self-employment compensation exceeds $150,000. Please see https://mysolo401k.net/mycommunity/mandatory-roth-solo-401k-catch-up-contributions-begin-in-2026-what-self-employed-individuals-and-employers-need-to-know/
Mega Backdoor Roth: Supersize Your Roth Savings
The voluntary after-tax limit is dramatically higher than standard Roth limits. For 2026, a solopreneur with a plan that allows voluntary after-tax contributions can contribute 100% of self-employment compensation up to $72,000 as a voluntary after-tax contribution, then transfer those dollars to a Roth Solo 401k or a Roth IRA. That is almost ten times the $7,500 Roth IRA limit for 2026.
This two-step process — voluntary after-tax contribution followed by a transfer to a Roth account — is the Mega Backdoor Roth strategy. If you are age 50+ and want your catch-up dollars to be Roth, note that those go directly to the Roth account rather than through the after-tax bucket.
Day Job 401k + Solo 401k Side Hustle: How the Limits Interact
Many people have a day job 401k and a Solo 401k for a side business. Here is the general rule:
Employee Contributions Aggregate Per Person
The employee deferral limit (including catch-up contributions) applies at the person level. If you max out employee contributions at your day job, you cannot make additional employee contributions to your Solo 401k.
Employer & Voluntary After-Tax Apply Per Plan
Even if you’ve maxed out employee deferrals at day job 401k plan, you can still make employer and voluntary after-tax contributions to your Solo 401k. The $72,000 overall limit applies at the plan level and is not reduced by contributions to a day job 401k.
Example: You have a 401k at your day job and at least $72,000 of self-employment compensation. With a Solo 401k that allows voluntary after-tax contributions, you could still make a $72,000 voluntary after-tax contribution to the Solo 401k and transfer it to a Roth account — a full Mega Backdoor Roth.
The 403(b) Exception: If your day job plan is a 403(b) rather than a 401k, the rules are stricter. All contributions to the 403(b) — employee and employer — combine with your Solo 401k contributions and together cannot exceed the overall limit. This is because the participant is deemed to control their own 403(b).
Ready to Maximize Your 2026 Solo 401k Contributions?
Whether you’re aiming for the full $72,000 overall limit, the $11,250 super catch-up, or a Mega Backdoor Roth, My Solo 401k Financial can help you set up the right plan.
Remember: This information is provided for educational purposes only. Always consult with qualified tax, legal, and investment professionals before making decisions with your retirement funds.
The name “Solo 401k” often leads people to assume the plan is strictly limited to a single individual. But that assumption is incorrect. This guide answers one of the most common questions self-employed business partners ask: can two business owners open and share a Solo 401k? The short answer is yes — and this post explains exactly how it works, including eligibility rules, contribution limits, separate holding accounts, and the powerful Mega Backdoor Roth Solo 401k strategy available to multi-owner businesses.
Watch: My Solo 401k Financial explains whether two business owners can open and share a Solo 401k plan
The Short Answer: Yes, Two Business Owners Can Share a Solo 401k
A Solo 401k is often described as a retirement plan for a one-person business. But what if the business has two owners? The answer is yes — two business owners may participate in the same Solo 401k plan, but only if the business does not have non-owner, full-time W-2 employees who must be covered under the plan (also known as common-law W-2 employees).
ℹ️ “Solo” Refers to the Business Type, Not the Headcount
The key to understanding this rule: Solo 401k does not always mean only one person can participate. It means the plan is for an owner-only business — and an owner-only business can have multiple owners, including a spouse-owner or spouse-employee.
Other Names for the Same Plan
A Solo 401k plan is designed for self-employed individuals or owner-only businesses. It’s often called by different names that all refer to the same plan type:
Alternate Name
Individual 401k
One-Participant 401k
Self-Employed 401k
Individual K
Solo K
Uni-K
Regardless of the name used, the Solo 401k can cover more than one person in specific situations — including a business owner and spouse, two spouses who both work in the business, two business partners, or multiple owner-employees, depending on the business structure.
Eligibility Rules for a Multi-Owner Solo 401k
As long as the business does not employ any non-owner, full-time W-2 employees who are age 21 or older and work 1,000 hours or more in the business, two (or more) owners can open a Solo 401k together.
Who Can Be Excluded from Eligibility Counts?
Worker Type
Excluded from Solo 401k Eligibility Count?
1099 contractors
✅ Always excluded, regardless of hours worked
W-2 employees under age 21
✅ Excluded, even if they work 1,000+ hours
Spouse (employee, non-owner)
✅ Excluded from disqualifying the plan — and may participate
Non-owner W-2 employee, 21+, under 1,000 hrs/year
✅ Excluded — plan remains eligible
Non-owner W-2 employee, 21+, 1,000+ hrs/year
❌ Disqualifies the plan — must be covered, which a Solo 401k cannot do
The Spousal Exception
One important exception: a spouse who is working in the business does not have to be an owner of the business in order to participate in the plan. This is known as the spousal exception, and it’s one of the most powerful planning opportunities available — allowing both spouses to maximize their own retirement contributions under the same plan.
How Are Funds Held When There Are Two Owners?
A Solo 401k is a defined contribution plan that requires separate participant accounts for each participant — and for each source of funds. Even with just one participant, the plan typically uses three separate holding accounts:
Holding Account Type
Purpose
Pre-Tax
Traditional pre-tax employee and employer contributions
Roth
Roth Solo 401k contributions and converted funds
Voluntary After-Tax
Used specifically for the Mega Backdoor Roth Solo 401k strategy
💡 Example: Two-Participant Plan = Six Holding Accounts
When two spouses (or two business partners) are both self-employed in the same business, the business sponsors one Solo 401k plan — but each participant has their own three separate holding accounts (pre-tax, Roth, and voluntary after-tax). That means a two-participant plan typically has a total of six holding accounts — three for each participant — even though it remains just one plan.
Maximizing the Mega Backdoor Roth with Two Owners
The voluntary after-tax holding account is what’s used for the Mega Backdoor Roth Solo 401k strategy. The process works in steps: you first make a voluntary after-tax Solo 401k contribution into the voluntary after-tax holding account, and then convert those funds to the Roth Solo 401k (or Roth IRA).
💡 Example: Doubling Household Mega Backdoor Roth Contributions
Both spouses (or business partners) can each make their own voluntary after-tax Solo 401k contribution into their respective holding account. If the maximum voluntary after-tax contribution for the tax year is $72,000 per person, that means both participants could each contribute $72,000 — for a combined household total of $144,000 — and then convert those amounts to their respective Roth Solo 401k funds. That’s a significant way to maximize household retirement savings using the Mega Backdoor Roth strategy across two owners in the same plan.
How Are Contributions Calculated for Each Owner?
Each owner’s contribution limit is calculated separately under the Solo 401k plan, based on that owner’s own compensation or self-employment income. The plan allows for employee contributions, employer contributions, and voluntary after-tax contributions — and one owner’s contribution amount has no impact on what the other owner can contribute.
ℹ️ One Owner Can Contribute While the Other Doesn’t
Contribution amounts are not impacted by the other owner’s contributions. In fact, in a given year, one owner may contribute to the plan while the other owner does not — both scenarios are perfectly acceptable under a single shared Solo 401k plan.
Worked Example: S Corp with Two Owners
Consider an S corporation with two business owners, each receiving W-2 wages from the business. If Owner A receives $100,000 of W-2 gross wages, here’s how their contribution would be calculated:
Contribution Type
Calculation
Amount
Employer profit-sharing contribution
25% × $100,000 W-2 wages
$25,000
Employee contribution
2026 dollar-for-dollar maximum (not a percentage)
$24,500
Total pre-tax contributions
$25,000 + $24,500
$49,500
⚠️ Where Each Contribution Reduces Taxable Income
The $25,000 employer profit-sharing contribution reduces taxable income on the S corporation side, since it’s an employer contribution. The $24,500 employee contribution reduces taxable income on the personal Form 1040 tax return. In this example, the individual could still make an additional Mega Backdoor Roth Solo 401k contribution on top of these amounts, provided they have enough earned income to support it.
Because each owner’s contribution is calculated independently based on their own W-2 wages or self-employment income, two owners with different compensation levels will simply have different contribution maximums — but both remain part of the same single Solo 401k plan.
One Plan, One Fee — Even with Two Owners
A common question: if two members of the same S Corp (or domestic partners) both participate, do they need two Solo 401k plans? The answer is no — it’s considered just one Solo 401k plan.
💡 My Solo 401k Financial’s Flat-Fee Structure
Many competitors charge double the fees when there are two participants in the plan — essentially two separate setup fees, even though it’s the same business and the same plan. My Solo 401k Financial takes a different approach: when both spouses or both owners are self-employed in the same business, opening the plan results in just one fee — one plan, one annual fee — since both participants are working under that same self-employed business.
Can Each Owner Take a Participant Loan?
Yes — each owner in a multi-owner Solo 401k can take their own participant loan, but the loan amount must be calculated based on that owner’s own respective funds in the plan. Owners cannot “piggyback” off of each other’s account balances to increase their borrowing limit.
Participant Loan Feature
Details
Loan basis
Calculated separately, based on each owner’s own balance in the plan
Payment frequency
Quarterly or monthly, fixed payments of principal and interest
Where payments go
Back into the owner’s own Solo 401k bank or brokerage account
Standard term
5 years (extendable to 15 or 30 years for a primary residence purchase)
Credit check
None required — you’re borrowing from your own Solo 401k plan
ℹ️ Still Just One Plan, One Fee
Even though each owner can independently access their own participant loan, the plan is still considered just one Solo 401k plan — and each owner is only being charged for that one plan. This is quite different from competitors, who will often charge all the fees associated with a two-participant plan as if it were two separate plans.
What Happens If You Hire Employees Later?
It’s important to think ahead about what happens after your Solo 401k is already established. If the business later hires employees, the first step is identifying whether those new hires are W-2 employees or 1099 contractors.
⚠️ The Long-Term Part-Time Employee Rule (Secure Act)
If a new hire is a W-2 employee who works for two consecutive 12-month periods and meets the hours threshold, the business may need to close the Solo 401k plan down. Under the Secure Act, this rule was reduced to a two-year lookback. If this situation applies to your business, you would need to close the plan — so monitoring employee hours and tenure proactively is essential for any multi-owner Solo 401k.
What If Each Owner Has a Separate Business?
Things change if each owner is self-employed in their own separate business rather than the same shared business. In that case, the two owners would generally each need to evaluate their own business for Solo 401k eligibility independently — rather than sharing one plan together.
Watch Out for Controlled Groups and Affiliated Service Groups
Before opening a Solo 401k, you must also confirm that the business is not part of a controlled group or affiliated service group — a designation that can create complications for plan eligibility across multiple businesses.
⚠️ Example: Owning Two Businesses Can Disqualify the Solo 401k
Suppose you own two businesses. Business One has two owners and no non-owner full-time W-2 employees — so on its own, it would qualify for a Solo 401k. However, if you also own Business Two, and Business Two does employ full-time W-2 employees, that can be a problem. Because of how controlled group and affiliated service group rules work, you may not be able to open a Solo 401k for Business One — even though Business One alone has no disqualifying employees — simply because Business Two has them. Anytime you’re involved in multiple businesses, pause and work with your CPA or with My Solo 401k Financial to determine eligibility before opening a plan.
Don’t Confuse Solo 401k Rules with Full-Time Employer 401k Rules
A Solo 401k is practically similar to a full-time employer 401k plan — but not in all cases, especially regarding contribution amounts, calculations, and deadlines. The contribution rules and deadlines for a Solo 401k are distinct from those governing a traditional employer-sponsored plan, so it’s important not to apply employer-plan logic directly to a Solo 401k situation.
Pre-Opening Checklist for Two Owners
Before two owners open a Solo 401k together, they should confirm the following:
Checklist Item
Both owners are owners in the business and actively working in it (have earned income)
The business does not employ any non-owner, full-time W-2 employees who are eligible
The business is not part of a controlled group or affiliated service group
The plan document includes desired features (Mega Backdoor Roth, participant loans, alternative investments)
Awareness of the $1,500 auto-contribution tax credit (separate from other startup tax credits)
ℹ️ Don’t Confuse the Auto-Contribution Credit with the Tax Credit
Many CPAs and tax professionals tend to lump the auto-contribution tax credit together with other plan startup tax credits, but they are two separate credits. The Solo 401k plan only qualifies for the auto-contribution credit — a way the government subsidizes the cost of maintaining a Solo 401k plan over time, up to $1,500. To qualify, your income generally needs to be earned income — not passive income, capital gains income, or Social Security income.
Already Have a Solo 401k? How Restatement Works
If you already have an existing Solo 401k plan — whether as a single owner or with a partner — and want to switch providers, you don’t need to start from scratch. This process is called a restatement.
What Is a Restatement?
A restatement means you simply change from your current Solo 401k provider to a new provider, such as My Solo 401k Financial. Key facts about restating a plan:
You can typically keep the same EIN number that was already issued for the plan
You can keep the same plan name
Because you are not closing the plan — only changing providers — a restatement does not trigger having to issue a distribution-related form
You will need the original plan’s effective date (found in the existing plan’s adoption agreement)
💡 Example: Restating a Solo 401k from Fidelity
My Solo 401k Financial regularly restates Solo 401k plans that currently sit at Fidelity. The process involves opening new, non-prototype, investment-only brokerage accounts at Fidelity under the My Solo 401k Financial plan, and then internally transferring the existing securities and cash from the old Fidelity Solo 401k account to the new Fidelity brokerage account. The plan can also work with other brokerage firms or banks — including Interactive Brokers, Schwab, or any institution willing to work with the plan provider.
One Plan with Maximum Flexibility
When drafting a Solo 401k plan, My Solo 401k Financial drafts it for maximum flexibility under the law — including the Mega Backdoor Roth strategy, the ability to invest in alternative investments and equities, real estate, and participant loans. Unlike providers who charge separate fees for separate features, a flat fee covers all services included under the plan.
Key Takeaways: Two Business Owners and the Solo 401k
Topic
Key Point
Can two owners share a plan?
Yes — as long as the business has no eligible non-owner, full-time W-2 employees
Holding accounts
Each owner gets 3 separate accounts (pre-tax, Roth, voluntary after-tax) — 6 total for two owners
Contributions
Calculated separately per owner based on their own compensation — independent of each other
Mega Backdoor Roth
Both owners can each use the strategy, potentially doubling household after-tax contributions
Fees
One plan, one flat annual fee at My Solo 401k Financial — even with two participants
Participant loans
Each owner can borrow independently, based only on their own account balance
Multiple businesses
Controlled group / affiliated service group rules may disqualify an otherwise-eligible business
Switching providers
A restatement keeps the same EIN and plan name — no plan closure required
Ready to Open a Solo 401k for You and Your Business Partner?
Whether you’re opening a new Solo 401k with a spouse or business partner, or restating an existing plan from another provider, My Solo 401k Financial can help you set up the right plan structure with maximum flexibility — including the Mega Backdoor Roth strategy, participant loans, and alternative investments.
Remember: This information is provided for educational purposes only. Always consult with qualified tax, legal, and investment professionals before making investment decisions with your retirement funds.
One of the most powerful features of a Solo 401k is the ability to borrow from your own retirement plan without triggering a taxable distribution. This is known as a Solo 401k participant loan, and it gives self-employed individuals access to cash when they need it — without cashing out their retirement savings. But exactly how much can you borrow? This guide breaks down the participant loan limits, repayment rules, interest rates, and everything else you need to know.
Watch: My Solo 401k Financial explains exactly how much you can borrow from your Solo 401k
What Is a Solo 401k Participant Loan?
A Solo 401k can be a powerful retirement account for the self-employed because it allows the plan participant to borrow from their own Solo 401k — just like borrowing from a full-time employer’s 401k plan. This is referred to as a Solo 401k participant loan.
Having access to a participant loan can be crucial: it allows you to access needed cash without having to take a taxable distribution. As long as the loan is properly documented and repaid according to IRS rules, it will not be treated as a taxable distribution.
⚠️ Not All Solo 401k Plans Allow Participant Loans
Before you can borrow, you need to confirm that your Solo 401k plan document actually allows for participant loans. A Solo 401k from My Solo 401k Financial does allow for participant loans. However, basic plans offered by brokerage firms such as Fidelity or Schwab, or big banks like Chase, Wells Fargo, and Bank of America, generally do not allow for Solo 401k participant loans.
How Much Can You Borrow? The 50% / $50,000 Rule
If your plan allows for participant loans, the maximum you may borrow is 50% of your total Solo 401k balance, up to a maximum of $50,000.
ℹ️ Vesting Never Applies to a Solo 401k
It’s worth noting that your funds are always fully vested inside a Solo 401k plan. Vesting refers to when funds can be accessed, and it typically applies to full-time employer 401k plans — where you may have to work a certain number of years before you can access or borrow from those funds. Vesting never applies to Solo 401k plans, so as a self-employed plan owner, you can immediately borrow against your full balance (subject to the limits below).
Borrowing Examples Based on Plan Balance
Solo 401k Balance
50% of Balance
Maximum You Can Borrow
$20,000
$10,000
$10,000
$40,000
$20,000
$20,000
$100,000
$50,000
$50,000
$120,000
$60,000
$50,000 (capped)
$250,000+
$125,000+
$50,000 (capped)
⚠️ The $50,000 Cap Is a Hard Ceiling
Even if your Solo 401k is worth more than $100,000, the maximum you can still borrow is $50,000. You cannot go over that threshold. For example, 50% of a $120,000 balance is $60,000 — but the maximum you can actually borrow is still capped at $50,000.
Can I Borrow My Entire Solo 401k Balance?
A common question: can I borrow the entire balance in my Solo 401k plan? The answer is no. A Solo 401k participant loan is not the same as withdrawing your account balance. The standard limit is 50% of your Solo 401k balance, or $50,000 — whichever is less.
💡 Exceeding the Limit Has Consequences
If you borrow more than the allowed amount, that excess can cause the loan to be treated as a taxable distribution — subjecting it to income tax and potentially an early withdrawal penalty. Always confirm your exact limit with your plan provider before requesting funds.
What If I Already Have an Outstanding Loan? Multiple Loan Rules
A Solo 401k plan from My Solo 401k Financial allows for multiple loans — but you cannot exceed the aggregate $50,000 limit. This is not $50,000 per loan; it is $50,000 in aggregate for the plan — even if you are the owner of multiple Solo 401k plans.
How the Calculation Works for a Second Loan
If you already have an outstanding Solo 401k participant loan, calculating how much more you can borrow becomes a bit more complex. The $50,000 limit must be reduced by the highest outstanding loan balance during the one-year period before the new loan. Here’s the calculation process:
Step
What to Calculate
1
Identify the highest outstanding loan balance during the 1-year period before the new loan
2
Subtract the outstanding balance on the day of the new loan
3
The result is reduced from the $50,000 aggregate limit to determine what’s still available to borrow
ℹ️ Why the Multiple Loan Rule Exists
In plain English: you generally cannot keep paying off and immediately re-borrowing the full $50,000. Prior loan activity during the last 12 months will reduce how much you’re allowed to borrow on a new loan. There is no prepayment penalty — you can pay your loan back sooner than the scheduled time period — but paying it back early doesn’t mean you can immediately re-borrow the full $50,000 again. My Solo 401k Financial performs this calculation for clients regularly, since Congress created Solo 401k plans for individuals to save for retirement, not to use as a revolving “piggy bank.”
How Long Do You Have to Pay Back a Solo 401k Loan?
Solo 401k participant loans typically have to be paid back over a 5-year period. There is one notable exception built into the IRS code:
Loan Purpose
Maximum Repayment Period
General purpose
5 years
Purchase of primary residence
Up to 15 or even 30 years
Loan payments must be made periodically — either monthly or quarterly — over the applicable 5, 15, or 30-year period, on a fixed schedule. Each payment consists of both principal and interest.
💡 You Pay Yourself Back — Not a Bank
When you make your scheduled loan payments, you are paying back your own Solo 401k plan — not a bank, brokerage firm, or My Solo 401k Financial. This makes sense, since you’re borrowing from your own 401k. Both the principal and interest portions of every payment go directly back into your own Solo 401k.
What Interest Rate Applies to a Solo 401k Loan?
A Solo 401k participant loan must charge an interest rate. The rate is generally based on one of the following:
Rate Option
Structure
Option 1
Current prime rate + 1 point
Option 2
Competitive CD rate + 2 points
The good news: both the interest and principal go back into your own Solo 401k plan — not to a bank, brokerage firm, or plan provider.
Who Qualifies to Borrow from a Solo 401k?
To open a Solo 401k plan and access a participant loan, you must be self-employed. A Solo 401k plan is designed for owner-only businesses that do not employ any non-owner, full-time W-2 employees working 1,000 hours or more.
Eligibility Exceptions
Exception
Details
Spousal exception
Your spouse does not have to be an owner in the business. They can work in the business and even participate in the same Solo 401k plan as you
Contractors excluded
You can always exclude contractors hired by your business. Note: contractors can open their own separate Solo 401k plan, since Solo 401k plans are for owner-only businesses including sole proprietorships and 1099 contractors
Under-21 exclusion
You can exclude anyone under age 21 from participating in the plan, regardless of how many hours they work
What If I Don’t Have Enough Funds in My Solo 401k to Borrow?
If you don’t have enough funds in your Solo 401k plan to borrow the amount you need, you can always transfer an IRA or a former employer plan into the Solo 401k. Once those funds are transferred, they are considered Solo 401k funds — and you can then borrow against those rollover funds, up to the maximum of $50,000.
ℹ️ How My Solo 401k Financial Helps with This Process
For clients of My Solo 401k Financial, the process works as follows:
They help you open a Solo 401k plan that already includes the participant loan language
They help you open the holding accounts for the Solo 401k (such as bank or brokerage accounts)
They help you transfer former employer plan or IRA funds into the Solo 401k by preparing the applicable transfer forms
When it’s time to borrow, they prepare the loan documents for your signature and provide instructions to access the funds
Example: Using Fidelity Investments to Hold Solo 401k Funds
Many clients of My Solo 401k Financial utilize Fidelity Investments to hold their Solo 401k plan funds. While Fidelity offers its own basic Solo 401k plan, that plan does not allow for participant loans. However, Fidelity will provide what’s referred to as a “company retirement, investment-only, non-prototype” brokerage account for Solo 401k plans offered by providers like My Solo 401k Financial — whose plan document does allow for participant loans.
Here’s how the funds flow in this scenario:
The Solo 401k funds are held at Fidelity
My Solo 401k Financial prepares the loan documents
My Solo 401k Financial provides Fidelity’s wire directive so you can instruct Fidelity to wire funds from the Fidelity Solo 401k brokerage account to your personal bank account
The funds must flow directly from the Solo 401k to the participant’s personal bank account — since the participant is the one borrowing from the plan
💡 Once Borrowed, Funds Are No Longer “Solo 401k Funds”
Once you borrow from your Solo 401k plan, those funds are no longer considered Solo 401k funds. You can use them however you wish — including for improving a property you personally own or that your business owns. For example, if you have an investment property needing repairs before a sale, a participant loan can be used to fund those repairs.
How Do I Repay My Solo 401k Loan?
When you make your monthly or quarterly loan payments, you must repay the loan using after-tax personal funds — meaning money from your personal bank account. You do not repay the loan using business funds.
Repayment Detail
Requirement
Source of funds
Personal bank account (after-tax funds) — not business funds
Destination
Directly into the brokerage account holding the Solo 401k (e.g., at Fidelity)
Payment method
ACH — link your personal bank account to the Solo 401k brokerage account using the brokerage’s routing and account number
⚠️ Set Up ACH on the Bank Side
To set up scheduled loan payments, you’ll need the brokerage account’s routing number and account number (for example, the Fidelity brokerage account holding your Solo 401k). You input that information on your personal bank’s side to link the two accounts and enable scheduled ACH payments.
Ongoing Compliance Support from My Solo 401k Financial
My Solo 401k Financial is a Solo 401k plan document and compliance provider. They do not prepare corporate documents, corporate resolutions, or business tax returns. However, they do prepare Solo 401k informational returns, including:
Form
When It Applies
Cost
Form 5500-EZ
When the Solo 401k’s fair market value exceeds $250,000, or upon plan termination
Free, with timely request
Form 1099-R
When a distribution is made, or when processing a conversion (including the Mega Backdoor Roth Solo 401k strategy — converting after-tax Solo 401k contributions to a Roth Solo 401k or Roth IRA)
Free, with timely request
ℹ️ How to Request These Forms
My Solo 401k Financial does not have access to client funds, so timely notification is key. You can request Form 5500-EZ preparation via the online form on the Forms tab of their website. Similarly, conversion form requests for Form 1099-R reporting can be completed directly on their website. When you close your Solo 401k plan, a final Form 5500-EZ must also be filed — this is covered under their ongoing compliance services as long as it’s timely requested.
Key Takeaways: How Much You Can Borrow from Your Solo 401k
Topic
Key Point
Maximum loan amount
50% of your Solo 401k balance, or $50,000 — whichever is less
Vesting
Never applies to Solo 401k plans — your funds are always fully vested
Multiple loans
Allowed, but the $50,000 limit is aggregate, not per loan
Repayment term
5 years standard; up to 15–30 years if used to buy a primary residence
Interest rate
Prime rate + 1 point, or competitive CD rate + 2 points
Who you repay
Your own Solo 401k — not a bank or My Solo 401k Financial
Not enough funds?
Roll over an IRA or former employer plan into the Solo 401k first, then borrow against it
Repayment source
Personal after-tax funds only — never business funds
Ready to Borrow from Your Solo 401k?
Whether you need to open a Solo 401k plan that allows participant loans, transfer funds from a former employer plan or IRA, or prepare your loan documents, My Solo 401k Financial can help you every step of the way.
Remember: This information is provided for educational purposes only. Always consult with qualified tax, legal, and investment professionals before making investment decisions with your retirement funds.
Investing a Solo 401k or self-directed IRA in a promissory note can be a powerful way to generate predictable interest income outside of the stock market. But like any investment, promissory notes come with real risks — and understanding those risks before committing retirement funds is essential. My Solo 401k Financial regularly addresses the disadvantages of promissory note investments in their live educational webinars. This blog post covers every major risk factor so that Solo 401k investors can make fully informed decisions.
Watch: My Solo 401k Financial breaks down the key disadvantages and risks of investing a Solo 401k in promissory notes
Promissory Notes in a Solo 401k: A Quick Overview
A promissory note is a written promise by a borrower to repay a loan to a lender. When a Solo 401k invests in a promissory note, the plan becomes the lender — loaning money to a qualified third-party borrower and receiving interest payments in return. This type of investment falls under the alternative investment category and is permitted in a self-directed Solo 401k plan, such as the one offered by My Solo 401k Financial.
ℹ️ Not All Solo 401k Plans Allow Promissory Notes
Standard Solo 401k plans offered by brokerage firms such as Fidelity, Schwab, or banks like Wells Fargo and Chase restrict investments to publicly traded securities. They do not allow alternative investments like promissory notes. A self-directed Solo 401k from a provider like My Solo 401k Financial is specifically designed to permit promissory note investments alongside real estate, precious metals, private equity, and cryptocurrency.
⚠️ Don’t Confuse Promissory Note Investments with Participant Loans
A Solo 401k promissory note investment — where the plan lends to a third-party borrower — is entirely different from a Solo 401k participant loan, where the plan participant borrows from their own plan. The rules, limits, and structure of each are distinct. My Solo 401k Financial has a separate webinar and resources covering participant loans for anyone who needs clarification on the difference.
At-a-Glance: Disadvantages of a Solo 401k Promissory Note
#
Disadvantage
Risk Level
1
Borrower default risk
🔴 High
2
Difficult and costly collections if default occurs
🔴 High
3
Ponzi scheme and fraud exposure
🔴 High
4
Lack of liquidity
🟠 Medium–High
5
Collateral limitations and value risk
🟠 Medium–High
6
Pooled promissory note risks
🔴 High
7
Interest rate risk and inflation erosion
🟡 Medium
8
State usury law compliance
🟠 Medium–High
9
Prohibited transaction and disqualified person rules
🔴 High
Disadvantage #1: Borrower Default Risk
The most fundamental risk in any Solo 401k promissory note investment is the risk that the borrower simply stops making payments. A promissory note is only as strong as the borrower’s ability and willingness to repay — and no signed document can guarantee that payments will actually arrive.
Common Causes of Borrower Default
Default Cause
What It Means for the Solo 401k
Borrower personal financial hardship
Individual borrower can no longer afford payments; the Solo 401k may receive nothing
Business failure
If a business borrowed funds and shuts down, loan repayment may cease entirely
Late or sporadic payments
Irregular payments disrupt the Solo 401k’s cash flow and planned reinvestment strategy
Complete non-payment
The Solo 401k loses the entire invested principal if no payments are ever made and no collateral covers the loss
⚠️ Impact on Your Retirement
If the borrower defaults on a Solo 401k promissory note, the plan can take a significant financial hit — directly affecting the retirement savings the plan was designed to protect. This is why thorough due diligence on the borrower is essential before any funds are disbursed.
Disadvantage #2: Costly and Difficult Collections After Default
Even if a Solo 401k has legal rights to pursue a defaulted borrower, collecting on those rights is rarely simple or inexpensive. Several challenges investors face when trying to recover funds after a default:
Legal action is expensive: Pursuing the borrower in court requires attorney fees, court costs, and potentially lengthy delays — all of which reduce the net recovery for the Solo 401k
Winning a judgment is not the same as collecting: Even if the Solo 401k wins in court, actually collecting the judgment can be extremely difficult if the borrower has limited assets, files for bankruptcy, or refuses to cooperate
Uncertainty and stress: Prolonged legal proceedings create uncertainty about the plan’s financial position and can cause significant anxiety for the plan participant
Time delays: The collections process can take months or years, during which the Solo 401k‘s funds remain tied up and unavailable for reinvestment
💡 Mitigation Strategy
It is more advantageous to invest in secured promissory notes — backed by real estate or other tangible collateral — rather than unsecured notes. If the borrower defaults on a secured note, the Solo 401k has the legal right to claim the collateral (such as taking over the property), which provides a more direct path to recovery than litigation alone. However, even secured notes are not risk-free — see Disadvantage #5 below for collateral limitations.
Disadvantage #3: Ponzi Scheme and Fraud Exposure
Promissory notes are one of the most common vehicles used in Ponzi schemes targeting retirement accounts. Fraudsters deliberately target Solo 401k plans and self-directed IRAs for two key reasons:
IRAs and 401k plans represent a multi-trillion dollar industry — making them an attractive pool of funds for bad actors
Retirement funds typically cannot be accessed until retirement age, meaning account holders are less likely to notice or investigate problems until it is too late
How Promissory Note Fraud Works
Fraud Tactic
What Happens in Reality
Fake interest payment claims
The promoter claims interest is being paid or “reinvested,” but no funds are actually flowing back to the Solo 401k
False account statements
Investors receive fabricated account statements showing growth — while their actual funds have been stolen or misappropriated
New investor funds pay old investors
Classic Ponzi structure: early investors receive “interest payments” funded by new investors, creating the illusion of a legitimate investment
Delayed discovery
Because retirement funds are meant to stay invested long-term, fraud may go undetected for years — until the scheme collapses
⚠️ Red Flags of Promissory Note Fraud
Investors need to watch for these warning signs before funding any Solo 401k promissory note investment:
Returns that seem unusually high or “guaranteed”
Pressure to invest quickly without time to conduct due diligence
Vague, incomplete, or difficult-to-verify documentation
Promoters who cannot clearly explain how and where money is being deployed
Interest payments that are “reinvested” rather than delivered to the plan’s holding account
Third-party companies that pool investor funds into notes without transparency
Disadvantage #4: Lack of Liquidity
Unlike publicly traded stocks or bonds — which can be sold quickly and easily on an open market — a Solo 401k promissory note investment is illiquid. Once the plan funds a note, the money is effectively locked up until the borrower repays according to the note’s terms.
There are several scenarios where this lack of liquidity can become a serious problem:
Scenario
Liquidity Problem
A real estate opportunity arises
The Solo 401k wants to invest in a rental property, but the funds are tied up in a note that hasn’t matured yet — the opportunity may be missed
Business circumstances change
If the plan owner is no longer self-employed or must close the Solo 401k, the note cannot simply be cashed out
Plan closure required
The note must be sold to an unrelated party (which may be difficult) or transferred in kind to a self-directed IRA as a non-taxable direct rollover
Unexpected need for cash
There is no easy way to “sell” a note quickly — the Solo 401k must wait for maturity or find a willing buyer at fair value
ℹ️ Planning Around Liquidity
Solo 401k investors should carefully consider a note’s maturity date before funding — particularly if there is any possibility that the plan may need to be closed or that the funds might be needed for another investment. Keeping a portion of the Solo 401k in liquid assets alongside any promissory note investment is a prudent strategy.
Disadvantage #5: Collateral Limitations and Value Risk
Many Solo 401k investors assume that a secured promissory note — one backed by collateral such as real estate — eliminates the risk of loss. This assumption is dangerous. Collateral reduces risk but does not eliminate it.
Why Collateral May Not Fully Protect the Solo 401k
Collateral Risk Factor
What It Means for the Solo 401k
Collateral value decline
The property or asset securing the note may drop in value below the outstanding loan balance — leaving the Solo 401k with a loss even after claiming the collateral
Difficulty selling collateral
Real estate or business assets may be hard to sell quickly or at fair value, especially in a down market
Other liens on the property
If the property already has senior liens (e.g., a first mortgage), the Solo 401k’s lien may be subordinate — meaning it collects only after senior creditors are paid
Foreclosure or repossession costs
Claiming collateral through foreclosure or repossession proceedings is expensive, time-consuming, and not guaranteed to recover the full loan amount
⚠️ Collateral Does Not Make a Note Risk-Free
Solo 401k investors and self-directed IRA investors should not assume that collateral makes a promissory note risk-free. Before funding any secured note, the plan trustee should independently verify the collateral’s fair market value, confirm there are no senior liens, and assess how easily the collateral could be liquidated in a worst-case scenario.
Disadvantage #6: Pooled Promissory Note Risks
Pooled promissory notes as a particularly high-risk variation of note investing that Solo 401k investors need to understand carefully. In a pooled note arrangement, a third-party company (such as a hard money lender) combines funds from multiple investors — breaking the investment into portions, with each portion secured by the same underlying property or asset.
Specific Risks of Pooled Promissory Notes
Diluted collateral protection: If the borrower defaults, multiple investors compete for the same collateral. The Solo 401k‘s share of the property may be only a fraction of its invested amount.
Lack of transparency: Investors may not know exactly how their funds are being deployed or how the pooled structure is managed.
Elevated Ponzi scheme risk: pooled promissory notes are the structures most commonly associated with Ponzi schemes. A third-party company collects funds from many investors, uses new investor money to pay earlier investors, and eventually collapses when new investment dries up.
Unclear default recovery process: In the event of default on a pooled note, it may be unclear what percentage of the collateral the Solo 401k is entitled to claim — or whether the plan has any direct recourse at all.
💡 Recommendation from My Solo 401k Financial
Where possible, Solo 401k investors favor non-pooled, direct promissory notes — where the plan is the sole lender and has full visibility into the borrower, the loan terms, and the collateral. Pooled arrangements introduce layers of complexity and counterparty risk that can be difficult to evaluate or manage.
Disadvantage #7: Interest Rate Risk and Inflation Erosion
Because most Solo 401k promissory notes carry a fixed interest rate determined at the time of funding, they expose the plan to two related risks: interest rate risk and inflation risk.
Risk Type
How It Affects the Solo 401k
Fixed rate locked too low
If prevailing interest rates rise significantly after the note is funded, the Solo 401k is locked into a below-market rate and misses out on better returns available elsewhere
Inflation outpaces the note rate
If inflation rises sharply, the “real” (inflation-adjusted) value of the fixed interest payments declines — meaning the Solo 401k’s purchasing power shrinks even as it receives payments
Long-term notes are most exposed
The longer the note’s term, the more time there is for rates or inflation to move against the Solo 401k’s fixed-rate position
ℹ️ How to Set the Rate Correctly
when structuring a Solo 401k promissory note, the interest rate should be set based on the borrower’s creditworthiness — similar to how a bank would price a loan. A higher-risk borrower should pay a higher rate to compensate the Solo 401k for taking on that additional risk. The rate must also comply with the applicable state’s usury laws (see Disadvantage #8 below). Setting a rate that is too low not only reduces returns — it may fail to outpace inflation over the life of the note.
Disadvantage #8: State Usury Law Compliance
One risk is frequently overlooked by Solo 401k investors is state usury law compliance. Usury laws are state-level regulations that set maximum permissible interest rates on loans. These laws apply to Solo 401k promissory note investments just as they apply to any other private loan.
Consequences of Violating Usury Laws
Violation Consequence
Impact on Solo 401k
Penalties against the lender
The Solo 401k may face financial penalties for charging an above-limit interest rate
Loss of right to collect interest
In some states, charging a usurious rate causes the lender to forfeit the right to collect any interest at all — leaving only the principal recoverable
Enforcement complications
A usurious note may be difficult or impossible to enforce in the event of default — weakening the Solo 401k’s position considerably
⚠️ Usury Laws Vary by State and Transaction Type
Usury laws differ from state to state — and within each state, the applicable rate limit can also vary depending on the type of loan or the identity of the parties involved. As the trustee of the Solo 401k, it is the plan participant’s responsibility to understand the usury regulations in the relevant state before setting the interest rate on any note. Consulting a qualified legal professional familiar with private lending in the applicable state is strongly recommended.
Disadvantage #9: Prohibited Transaction and Disqualified Person Rules
One of the most serious compliance risks associated with Solo 401k promissory note investments is the risk of accidentally entering into a prohibited transaction. Every investment made with Solo 401k funds must be made for the exclusive benefit of the plan — and the borrower must not be a disqualified person.
Who Is a Disqualified Person?
Person / Entity
Disqualified?
You (the Solo 401k participant and trustee)
✅ Yes — cannot be the borrower
Your spouse
✅ Yes — prohibited
Your children (and their spouses)
✅ Yes — prohibited
Your parents
✅ Yes — prohibited
Anyone providing services to the Solo 401k
✅ Yes — prohibited
Unrelated third-party borrower
✅ Permitted (subject to due diligence)
⚠️ Consequences of a Prohibited Transaction
The consequences of a prohibited transaction in a Solo 401k promissory note are severe. At a minimum, the transaction is treated as a taxable distribution at the time it occurred. In the worst case, the entire Solo 401k plan is disqualified — meaning all assets become fully taxable going back to the year the prohibited transaction took place, even if the violation is not discovered until years later. There is no statute of limitations protection when the violation involves a prohibited transaction.
Key Takeaways: Solo 401k Promissory Note Disadvantages
Disadvantage
Key Takeaway
Borrower default
A note is only as strong as the borrower’s ability and willingness to repay — default can cause major losses to the Solo 401k
Costly collections
Pursuing a defaulted borrower is expensive, slow, and uncertain — even a court judgment may be uncollectible
Ponzi schemes
Retirement accounts are prime fraud targets; verify every borrower independently before funding
Illiquidity
Funds are locked until maturity — plan around the note’s term and keep a liquid reserve in the Solo 401k
Collateral limitations
Collateral reduces — but does not eliminate — risk; values can fall, and foreclosure is costly
Set a fair, credit-appropriate rate; long-term fixed-rate notes are vulnerable to inflation erosion
Usury laws
State laws cap permissible rates; exceeding the limit can cost the Solo 401k the right to collect interest and enforcement rights
Prohibited transactions
Never lend to a disqualified person; doing so can disqualify the entire Solo 401k and trigger full taxation of all plan assets
💡 Final Thought from My Solo 401k Financial
Investing a Solo 401k in promissory notes can be a powerful strategy for generating interest income and diversifying a retirement portfolio. But it must be approached with eyes wide open. Every Solo 401k investor thinking about promissory notes conduct thorough due diligence on the borrower, structure the note correctly, ensure the borrower is not a disqualified person, understand applicable state usury laws, and consult with a qualified tax advisor, financial advisor, or retirement plan specialist before funding any note. The goal is always to grow and protect the retirement nest egg — not to put it at unnecessary risk.
Have Questions About Solo 401k Promissory Note Investing?
My Solo 401k Financial hosts live daily webinars and Q&A sessions covering Solo 401k promissory note investments, prohibited transaction rules, due diligence best practices, and much more. If you are ready to open a self-directed Solo 401k that allows alternative investments — including promissory notes — get started today.
Remember: This information is provided for educational purposes only. Always consult with qualified tax, legal, and investment professionals before making investment decisions with your retirement funds.
Watch: A compliance and transaction guide to rolling your Solo 401k into an IRA
One of the most common questions self-employed savers ask is whether a Solo 401k (also called a self-employed 401k, owner-only 401k, or one-participant 401k) can be rolled into an IRA. The short answer is yes — but only once you have met a triggering event or qualify for one of the exceptions. In this guide, My Solo 401k Financial walks through exactly when a rollover is allowed, how in-kind transfers of alternative investments work, the reporting that follows, and a simple strategy to avoid mandatory tax withholding.
Quick Answer: Generally, you cannot move money out of a Solo 401k until you meet a triggering event. The key exceptions are: (1) funds you rolled into the plan, (2) voluntary after-tax contributions, and (3) reaching age 59½ — at which point all funds may be moved to an IRA.
First, the Foundation: Who Qualifies for a Solo 401k?
A Solo 401k is a 401k plan designed specifically for self-employed individuals with no non-owner, non-spouse, full-time W-2 employees. The rules refer to it as a one-participant plan. Eligibility comes down to two elements:
1. You Must Be Self-Employed
You demonstrate self-employment by reporting earned self-employment income on your taxes. How that income shows up depends on how your business is taxed:
Business Tax Structure
Where Earned Self-Employment Income Appears
Sole Proprietorship
Income reported on Schedule C of your Form 1040
S-Corporation or C-Corporation
W-2 wages you receive from the business
Partnership
Income reported on Line 14 of the K-1 you receive
2. No Full-Time W-2 Employees
You cannot have any non-owner, non-spouse, full-time W-2 employees working for any business owned by you or your spouse. A full-time W-2 employee is generally one working 1,000 or more hours per year (with a year of service), or 500 or more hours per year for two consecutive years.
Example: The owner and their spouse can both receive W-2 wages and work more than 1,000 hours per year without losing Solo 401k eligibility. The full-time employee rule does not apply to the owner or spouse.
The General Rule — and the Exceptions That Allow a Rollover
Generally, you cannot move money out of a Solo 401k until you have met a triggering event. However, there are important exceptions that allow funds to leave the plan and be rolled into an IRA:
Source of Funds / Situation
Can It Be Rolled Out to an IRA?
Funds you rolled into the Solo 401k
Yes — can be rolled out at any time (provided your plan like the MySolo401k plan allows it)
Voluntary after-tax contributions
Yes — can be rolled out at any time (provided your plan like the MySolo401k plan allows it)
You are over age 59½
Yes — all funds may be moved to an IRA
No triggering event met (e.g., under 59½, still working)
Generally no — funds must stay in the plan
So if you are over age 59½, you can move all funds out of the Solo 401k, including to an IRA. The process is simply to move the funds out — and you can move either cash or the assets themselves.
Example — In-Kind Transfer at the Same Custodian: Suppose you have a brokerage account at Fidelity for your Solo 401k holding all pre-tax dollars, and you also have an IRA at Fidelity. If you are over 59½, you could do an in-kind transfer from the Solo 401k brokerage account at Fidelity directly to your IRA at Fidelity — no need to liquidate.
Voluntary After-Tax Funds: Basis, Gains, and the Roth IRA Decision
Voluntary after-tax contributions — the engine behind the Mega Backdoor Roth — are made on an after-tax basis from your earned self-employment income. You do not receive a tax deduction for them the way you would with a pre-tax contribution.
When you later transfer those after-tax funds out of the plan, gains may have accrued in the after-tax account. You must transfer all the funds — the basis plus the gains. That creates a choice about where the gains go:
Where the Gains Go
Tax Result
Gains transferred to a Roth IRA
Taxable now — funds entering the Roth IRA must go in on an after-tax basis
Gains transferred to a pre-tax IRA
Stays tax-deferred; taxable later when withdrawn from the pre-tax IRA
Important: Most savers transfer funds out of the after-tax Solo 401k account right away to keep accrued gains small — which minimizes the taxable portion when the after-tax basis is moved to a Roth IRA. Alternatively, routing just the gains to a pre-tax IRA keeps them tax-deferred.
Transferring Alternative Investments In-Kind
You are not limited to moving cash. Once you meet a triggering event or qualify for an exception, you can transfer investments in-kind. The receiving account depends on what you hold:
Brokerage-Type Investments
If your Solo 401k holds a mutual fund in a brokerage account and you do not want to sell it, you can transfer that holding in-kind to a standard IRA.
True Alternative Investments
If instead you hold a true alternative investment — such as real estate or crypto, both supported by the My Solo 401k Financial Solo 401k plan — and you transfer it in-kind rather than selling, the receiving IRA must be able to hold that asset. That means a self-directed IRA at a custodian that allows the specific investment type, such as real estate or crypto.
Every Transfer Is Reportable on Form 1099-R
Regardless of what you transfer out — cash or an in-kind investment, taxable or non-taxable — the transfer out of the Solo 401k is reportable on Form 1099-R. Even a non-taxable pre-tax-to-pre-tax IRA rollover must be reported.
How We Handle It: My Solo 401k Financial prepares the required 1099-R reporting for customers at no additional charge. Because we don’t have access to your account, you (or your advisor) simply let us know about the transaction by submitting the applicable form at mysolo401k.net/forms. Submit it in a timely fashion — shortly after the transaction or by year-end — so we can issue the 1099-R by the following February.
A Smart Cash-Flow Move: Avoiding the 20% Withholding
Here is a planning point that often surprises people. If you take a taxable distribution directly from your Solo 401k, a mandatory 20% withholding applies — 20% of the distribution must be withheld and paid to the IRS by the 15th of the month following the distribution (via the EFTPS system).
By contrast, if you first move the funds to an IRA as a non-taxable direct rollover and then take the taxable distribution from the IRA, there is no mandatory withholding — withholding from an IRA is optional. And you don’t need a triggering event to take a distribution from an IRA.
Key Point: This is ultimately a cash-flow issue, not a tax-savings trick. You still report the same taxable distribution either way — you simply avoid prepaying the tax (and registering for EFTPS) by taking the distribution from the IRA instead of directly from the Solo 401k.
Ready to Roll Over or Set Up Your Solo 401k the Right Way?
Whether you’re moving funds to an IRA, exploring the Mega Backdoor Roth, or holding alternative investments, My Solo 401k Financial can help you structure it correctly — with 1099-R reporting handled at no additional charge.
Remember: This information is provided for educational purposes only. Always consult with qualified tax, legal, and investment professionals before making decisions with your retirement funds.
We help our clients take control of their retirement money. Our products and services provide our clients the freedom to invest their retirement savings in their own business as well as alternative investments such as real estate, private companies, promissory notes, precious metals, tax liens and equities. Learn more
