Solo 401(k) Year-End Planning: Deadlines, Contributions, and Common Mistakes

As we close in toward the end of the year, many business owners are desperately looking for ways to lower their tax burden. One amazingly effective way to do that is to start a Solo 401(k), but navigating the various contribution limitations, rules, and deadlines in a 401(k) can be difficult and confusing, especially when you are trying to implement the 401(k) more than mid-way through the tax year.

Some common mistakes often made are 1) to establish a Solo 401(k) before checking to see if the sponsoring entity qualifies, 2) overcontributing to a 401(k), and 3) making a contribution too late. This article addresses qualification guidelines, limitations on contributions, and timing, but I recommend booking a time with a competent professional at KKOS Lawyers to make sure you cover all your bases.

Qualifying

Before jumping into deadlines and contribution limits, we first need to identify who qualifies for a Solo 401(k). This article focuses on the Solo 401(k) because the deadline for establishing a Safe Harbor 401(k) has already passed for Tax Year 2026.

The qualifications for establishing and funding a Solo 401(k) are fairly straight forward:

The applicant must have earned income from a trade or business

A 401(k) is a retirement plan sponsored by an employer on behalf of one or more employees in exchange for the employee’s services to the employer. Individuals who work a W-2 job for a larger company can participate in their employer sponsored plan, but are not qualified to set up their own Solo 401(k) solely by their earning W-2 income.

Further, in order to set up a 401(k), the individual must have earned income. This means the earnings come from services, retail, or manufacturing based businesses in which the applicant materially participates. Passive income earned from investments or rental properties does not qualify the applicant to participate in a Solo 401(k).

The business must be profitable or pay a salary to the owner if the entity is taxed as an S-Corp

The limitations set on 401(k) contributions are limited to the salary of the participant if the participant receives a salary, or the net income of the business if the sponsoring entity is a pass-through entity like an LLC or sole prop where the income is reported on either a partnership return (1065) or on the owner’s individual tax return (1040). Therefore, if the applicant’s business is not profitable and doesn’t pay a salary to the applicant or other parties, there would be no need to set up a Solo 401(k) because no contributions could be made.

The business must not employ any employees other than the business owner and the business owner’s immediate family

Specific rules for a Solo 401(k) include that the sponsoring entity must not have any employees other than the business owner and the business owner’s immediate family. If the sponsoring entity has employees other than these individuals, there is a chance it is disqualified from sponsoring a Solo 401(k).

By default, any employee paid by the sponsoring entity will disqualify it from participating in a Solo 401(k), but there are some exceptions. Here is a list of those exceptions:

• If the only employees are the business owner or the business owner’s immediate family.
• If all of the unrelated employees individually work less than 500 hours per year.
• If all of the unrelated employees work more than 500 hours, but less than 1,000 per year and have worked for the business for less than 3 years.
• If all of the unrelated employees work full-time (more than 1,000 per year) or part-time (less than 1,000 per year) and have worked for the business for less than one year.

If none of these exceptions apply, and the applicant has employees, the sponsoring entity does not qualify for a Solo 401(k).

If the applicant does qualify to set up a Solo 401(k), in order to fund it with employee contributions for 2026, it must be set up by year-end 2026. This means that the application must have been filled out, approved, the documents created for the 401(k) Trust, and an EIN applied for and received before December 31, 2026. Since the IRS offices generally close down the last week of the year, most Solo 401(k) providers require the application to be completed by December 15th at the latest.

Contributions

Contributions to a Solo 401(k) are limited, both in the amount a participant can put in and on when those contributions must be contributed.

The amount of the contribution is limited by 3 different restrictions and the most that can be put in is the lesser of the three calculations.

First, the overall limitation. All 401(k) contributions are limited by a maximum contribution of $72,000 if the participant is under the age of 50, $80,000 if between the ages of 50 and 59, or over the age of 64, and $83,250 if between the ages of 60 and 63 on December 31 of the contribution year. No matter what salary is paid or other factors come into play, this is the most any one participant can contribute to a 401(k) in 2026.

Second, the salary or earned income limitation. A participant who receives a salary can only contribute an amount to a 401(k) equal to that individual’s W-2 income, if salaried, or the net income of the sponsoring entity if the entity is disregarded for tax purposes and income is reported on either a partnership return (1065) or on the owner’s individual tax return (1040).

Third, the Traditional employee/employer limitation. As an employee contribution, a participant can contribute up to $24,500 if the participant is under the age of 50, $32,500 if between the ages of 50 and 59, or over the age of 64, and $35,750 if between the ages of 60 and 63 on December 31 of the contribution year. The sponsoring entity can then make an employer contribution of up to 25% of the participant’s salary or 20% of the pass-through income of the company if the entity is disregarded for tax purposes.

The following table is helpful to better understand how these limitations interact (participants under the age of 50):

These limitations are all statutory and there is no way to avoid them if a participant wants a tax deduction for the 401(k) contribution. However, if the participant is taking a salary between $33,000 and $180,000 and is thereby subject to the Traditional Limitation, there is a way to put more in the 401(k) through a Backdoor Roth 401(k). Mat Sorensen and Mark Kohler walk through that strategy in Mega Backdoor Roth Explained.

All contributions must be made by the tax deadline of the sponsoring entity (including extensions) or the date the tax return is filed, whichever is sooner. However, for S-Corporations and for all salaried persons, the amount the participant plans to contribute to the 401(k) must be included on the participant’s W-2, which is due on February 1, 2027.

Investing

Once the money is invested in the 401(k), the plan documents and custodian dictate what types of investments are allowed under the plan. I recommend establishing a Self-Directed Solo 401(k) so that the return on investment can be maximized. For a primer on how self-direction works, see Mat Sorensen’s complete beginner’s guide to self-directed IRAs.

Book a call with a KKOS Client Advisor to discuss setting up or reviewing a Solo 401(k) before the year-end deadline.