Can a Partnership Have a Solo 401(k)?
Uncover how individual partners can set up a Solo 401(k) using their self-employment income, separate from the partnership.
A Solo 401(k) is a retirement savings plan designed for self-employed individuals and small business owners who do not have full-time employees other than themselves and their spouse. It combines the benefits of both employee and employer contributions, allowing for substantial annual savings. This type of plan offers a tax-advantaged way to save for retirement. It is a suitable option for sole proprietors, independent contractors, and business owners with no common-law employees.
Eligibility for Solo 401(k) as a Partner
While a partnership cannot directly sponsor a Solo 401(k) for its partners as traditional employees, an individual partner can establish one based on their self-employment income from the partnership. A partner can contribute if they have self-employment income and the partnership does not employ any full-time common-law employees, other than the partners and their spouses. The Solo 401(k) is specifically for businesses where the only employees are the owner(s) and their spouse, which helps avoid complex rules associated with plans covering a broader employee base.
Self-employment income for a partner typically includes guaranteed payments for services and their distributive share of the partnership’s income. This income must be reported on Schedule K-1 (Form 1065) of the partner’s tax return. The ability for a partner to establish a Solo 401(k) hinges on their status as an owner-employee with self-employment earnings.
If a partnership has multiple partners but no other full-time employees, each eligible partner can participate in the same Solo 401(k) plan, with separate participant accounts. The plan is sponsored by the partnership, and each partner’s contributions are based on their individual self-employment income.
Calculating Partner Contributions
Contributions to a Solo 401(k) for a partner involve two components: an employee deferral and an employer profit-sharing contribution. For 2025, the employee deferral limit is $23,500, or 100% of net earnings from self-employment, whichever amount is less. Partners aged 50 and over can make an additional catch-up contribution of $7,500, increasing their employee deferral limit to $31,000 for 2025. For individuals aged 60-63, a special provision allows for an increased catch-up contribution of $11,250 in 2025, if the plan permits.
The employer profit-sharing contribution is generally calculated as up to 25% of the partner’s net earnings from self-employment. This “net earnings” figure is determined after deducting one-half of the self-employment taxes paid and the employee deferral contribution. The overall combined annual contribution limit for both employee and employer contributions in 2025 is $70,000. For those aged 50 and older, including catch-up contributions, the total limit can reach $77,500, or up to $81,250 for individuals aged 60-63. A partner’s Schedule K-1 (Form 1065), specifically line 14 Code A, is used to determine their net earned income for contribution calculations.
Establishing a Solo 401(k)
Establishing a Solo 401(k) involves several procedural steps. A distinct Employer Identification Number (EIN) is required for the Solo 401(k) plan itself, separate from the partner’s Social Security Number or the partnership’s EIN. This EIN identifies the retirement trust and is necessary for opening a bank or brokerage account for the plan. Applying for an EIN is a free process that can be completed online through the IRS website, typically yielding an immediate issuance.
The next step involves selecting a financial institution or plan provider that offers Solo 401(k) plans. Many brokerage firms and financial service companies provide these plans. These providers typically offer the necessary plan documents, which include a basic plan document and an adoption agreement. The partner must sign these documents to formally establish the plan.
After the plan documents are executed and the EIN is obtained, the investment account(s) for the Solo 401(k) must be opened under the plan’s new EIN. Contributions can then be made to these accounts. The deadline for establishing the Solo 401(k) plan to make employee deferrals for a given tax year is generally December 31st of that year. Employer contributions can typically be made up until the business’s tax filing deadline, including any extensions. For partnerships, this deadline is usually March 15th of the following year, or September 15th if an extension is filed.