What Income Is Eligible to Be Contributed to a Solo 401k?

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A Solo 401k offers some of the highest contribution limits of any retirement plan available to self-employed individuals, with a total cap of $70,000 in 2025, or $77,500 if you’re age 50 or older.

But before you can take full advantage of those limits, it’s essential to understand what type of income qualifies. Solo 401k contributions must be based on eligible compensation, and not all income sources count.

In this article, we’ll break down:

By the end, you’ll have a clear understanding of how to determine your contribution limits based on the income you earn from your business. 

Eligible Income for Solo 401k Contributions

It’s a common misconception that any type of ordinary income can be contributed to a Solo 401k. While many income types are taxed at ordinary income tax rates, only active earned income from your business or self-employment qualifies for Solo 401k contributions.

To be eligible, income must be:

✅ Earned through services or work you perform, and

✅ Subject to self-employment tax (or payroll taxes if paid as W-2 wages from your own business)

W-2 income from a traditional employer — or any job outside your business — cannot be contributed to your Solo 401k.

Examples of eligible income include:

What’s Not Allowed?

Income that is passive or unearned is not eligible for Solo 401k contributions. These types of income are not subject to self-employment tax and do not reflect active work performed in your business.

❌ Examples of ineligible income include:

Rental Income vs Property Management Income

Rental income on its own is generally considered passive, which means it’s not subject to self-employment tax, and therefore not eligible for Solo 401k contributions. However, earned income from actively managing properties may qualify.

Eligible property-related income may include:

✅ Fees earned for managing rental properties owned by others

✅ W-2 wages or self-employment income you pay yourself as a property manager

✅ A reasonable salary you pay yourself for managing your own rental properties through a formal business entity

If you perform regular services like tenant placement, maintenance oversight, or rent collection, and are paid a fair market wage for those services, that income may be treated as earned compensation and qualify for Solo 401k contributions.

Can Rental Income Be Earned Inside a Solo 401k?

While you generally can’t contribute rental income to a Solo 401k, you can invest in alternative assets like rental properties if your Solo 401k provider allows self-directed investments.

All profits, including rental payments and capital gains, from your Solo 401k investments are tax-deferred (in a pre-tax Solo 401k) or tax-free (in a Roth Solo 401k). 

✏️ Hypothetical Example: If your Solo 401k owns a rental property that earns $1,200/month in rent, you don’t owe taxes on that rental income personally. If the property sells for a gain, the full profit remains inside your Solo 401k with no capital gains tax at the time of sale.

Investment Gains vs Investment anagement Income

Just like rental income, investment profits (such as stock gains or crypto trading returns) are considered passive and cannot be contributed to a Solo 401k.

However, if you’re paid to manage investments for others—such as running an advisory firm, fund, or asset management business—your earned fees or wages may qualify.

Eligible management income includes:

✅ Advisory fees or asset management fees from client accounts

✅ Salaries earned from managing portfolios on behalf of others

✅ Reasonable wages paid to yourself for running a registered investment business

📝 Note: Paying yourself a management fee to handle your own portfolio may be allowed if you do so through a legitimate business structure and the work meets IRS standards for earned compensation.

Final Thoughts

Understanding what qualifies as eligible income is key to maximizing your Solo 401k contributions. Only earned income tied to your business or self-employment counts while passive income like rent, dividends, or investment gains does not qualify. Structuring your compensation correctly can help you take full advantage of the 2025 contribution limits.

📌 Curious about other Solo 401k strategies? Check out our other articles to learn more about contribution rules, Roth options, and plan setup tips:

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Disclaimer:

The Carry Learning Center is operated by The Vibes Company Inc. (“Vibes”) and contains generalized educational content about personal finance topics. While Vibes provides educational content and technology services, all investment advisory services discussed on this website are provided exclusively through its wholly-owned subsidiary, Carry Advisors LLC (“Carry Advisors”), an SEC registered investment adviser. The information contained on the Carry Learning Center should not be construed as personalized investment advice and should not be considered as a solicitation to buy or sell any security or engage in a particular investment, accounting, tax or legal strategy. Vibes is not providing tax, legal, accounting, or investment advice. You should consult with qualified tax, legal, accounting, and investment professionals regarding your specific situation.

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