Business ownership takes many levels. At some point, you will get to the stage in your business where you have a good grasp of your personal finances and basic retirement savings. But when it comes to maximizing your retirement as a business owner, you can never know enough - and what you don't know, costs you.
If you run your own business and don’t have employees, a Solo 401(k) is one of the best ways to save for retirement and save money on taxes. Here are some fun facts before we get started (using the 2025 retirement contribution limits):
The maximum you can contribute to a qualified retirement plan is $70,000 (or more if you're over 50).
$184,000 in W-2 salary from your C Corp or S Corp is the key. Any increase in salary after that does not help (for maximizing retirement savings). A 401k is the fastest way to max your retirement plan contributions.
$276,000 in W-2 income from your S corp is the minimum salary for a max SEP IRA contributions.
Your 401(k) contributions are determined by taking your employee contribution, plus an optional 25% of your W-2 or earned income (as adjusted).
You can add $7,500 for catch-up contributions if you are 50 years old or older.
What is a Solo 401(k)?
A Solo 401(k) is a retirement savings plan just for you (and your spouse, if they work for your business). Due to special tax rules, it allows you to contribute more than you would be able to with other comparable plans, like an IRA.
Since you're self-employed, you can put money into the plan in two ways:
As an Employee – You can save up to $23,500 a year (for 2025). If you're over 50, you can save even more.
As the Boss (Employer) – Your business can add up to 25% of your pay into the plan.
The total amount you can save in 2025 is $70,000 (or more if you’re over 50).
One of the best parts is that deferrals and contributions are optional every year, so you can cut back or supercharge as your cash flow and goals change.
You can almost double the contributions without increasing the salary by bringing your spouse into the mix as well.
With a SEP IRA, you would need to pay yourself a $188,000 salary to contribute $47,000 into your retirement plan as opposed to a $60,000 salary using a Solo 401(k) (with your spouse). That's a $19,584 difference in payroll tax, or said differently, $19,584 more in your pocket!
Why Use a Solo 401(k)?
✅ Cheap and Easy: Solo 401(k) plans are very cost effective. To compare, a company-sponsored plan will cost about $800 to $1,000 per year.
✅ Flexible (Supercharged) Contributions: You decide how much you set aside each year, and bringing in your spouse allows you to effectively double your max savings.
✅ Includes Roth Option: Using after-tax amounts, you can grow your money tax-free for later.
What’s the Catch?
You cannot use a Solo 401(k) if you have employees (besides your spouse). If you hire staff, you’ll need a traditional 401(k) plan instead, which has more rules and costs.
What’s this about a Roth 401(k)?
The Roth 401(k) is like a hybrid of a 401k and a Roth IRA. While you might be limited in contributing to a Roth IRA based on your earnings ($165,000 for single taxpayers) and the IRA contribution limits ($7,000, seriously!?), the Roth 401(k) has no income limitations.
You can defer up to $23,500 (or more with catch-up). And, as an added bonus, the employer contributions can also be designated as Roth contributions to supercharge your after tax savings.
How is it Different from a SEP IRA?
A SEP IRA is another retirement plan, but:
SEP IRAs require much higher salaries to reach the $70,000 maximum retirement savings for 2025,
They're better for last-minute tax savings, and
You must give the same % contribution to all employees (which costs more if you hire staff).
A Solo 401(k) is usually better for long-term planning and higher savings.
The Big Picture
If you are a solo business owner and want to:
Pay less in taxes
Save for retirement
Grow your money tax-free
Then a Solo 401(k) is a powerful tool.
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