A lot of financial "gurus" push the Solo 401(k) as a way to boost retirement savings. In fact we have mentioned the Solo 401(k) on our site as well.  It is an attractive choice because it offers the option of doing both employer and employee contributions. The max contribution amount in 2024 is $69,000 (not counting catchup contributions). Some plans offer a Roth option as well.  

If you are self employed, have no employees, and are not part of another business that has employees, a Solo 401(k) can be a great way to save a lot of money for retirement.

However, there is one dark secret with the Solo 401(k) - the obscure Form 5500.  Typically it will be the EZ variant (Form 5500-EZ) for self employed individuals doing a Solo 401(k).

From the IRS Form 5500-EZ Instructions:

Section 6652(e) imposes a penalty of $250 a day (up to a maximum penalty of $150,000 per plan year) for not filing returns in connection with pension, profit-sharing, etc., plans by the required due date.

Form 5500-EZ must be filed in the following circumstances:

1. The plan has assets worth more than $250k at the end of the year
   
   or
    
2. The plan was terminated

When one of those conditions is met, you have 7 months to file the form.  If you don't send it in, you won't hear from the IRS until the fines stack up to a sizable amount.  Form 5500-EZ does not go with your regular tax return, it is an independent filing. The form can be filed electronically at the EFAST site. 
 

Horror Stories about Surprise Penalties:

The Bogleheads forum is full of people getting surprise fines in the thousands from the IRS in relation to old / forgotten Solo 401(k) plans. I'm a regular Bogleheads reader and I highly recommend browsing the top threads every few days to see what the latest discussions are all about.

Here is a story on Reddit about someone getting a $31k fine, but they eventually got it cleared.  Seems like there are ways to wiggle out of paying if you follow the right process and stay on top of it. The IRS even has a page dedicated to helping tax payers with this specific type of penalty.
 

Why such High Penalties??

Prior to 2019 the fine was only $25/day.  As part of the Tax Cuts and Jobs Act the fine was increased 10x as a "claw back" to help balance out the tax cuts...  basically penalizing hapless self employed individuals.

Unfortunately the brokerages where most Solo 401(k)s are held (Vanguard, Fidelity, E-Trade, Schwab, etc) are very hands off about this as "your taxes" are "your problem"....   

Links:

• IRS One Participant Plans
• IRS 5500 Fix It Guide
• IRS Form 5500 Corner
• Form 5500 download and instructions
• EFAST site - where you can file Form 5500-EZ electronically