CLIENT KNOWLEDGE BASE

    The Solo 401k

    A solo 401(k), sometimes called an individual 401(k), lets an owner with no employees (other than family) save far more for retirement than with most other small-business plans. You wear two hats, employee and employer, which allows both salary deferrals and a profit-sharing deposit from the business.   A common misconception our team hears is "I'm a sole prop so it doesn't work".  WRONG!  This can be used in any entity type. 

     

    Higher 2025+ limits, expanded Roth options, and new Secure Act tax credits make the plan especially valuable compared to SIMPLE and SEPS.


    1. 1

      Contribution limits

      • Employee elective deferral: $23,500 dollars, either traditional or Roth.  This amount increases each year based on indexing by the IRS. 
      • Additional catch-up for participants age fifty or older: $7,500 
      • 2x Additional Special catch-up for ages sixty through sixty three: $11,250  (replaces the regular catch-up for those years).
      • Employer profit-sharing contribution: up to 25% of net self-employment income, or of W-2 wages for an S/C corporation.
      • Combined employee plus employer limit: $70,000 dollars per person, not counting any catch-ups.

      For a sole proprietor must reduce Schedule C earnings by one half of self-employment tax before calculating the twenty-five-percent employer share.
    2. 2

      Including your working spouse

      If your spouse earns compensation from the business, pay a reasonable wage or guaranteed payment. 

       

      Each spouse then receives a separate employee limit and a separate employer limit.  As an example, if you paid your spouse $25,000, the business would receive a $25k deduction.  Your spouse could then defer all $23,500 to a 401k, meaning your family pays NO taxes on this!

       

      Together you can shield as much as $140k (pretax or ROTH) before catch-ups, doubling the family’s tax favored savings.
    3. 3

      Roth moves inside a solo 401(k)

      • Roth elective deferrals. Direct part or all of the $23.5k employee limit to the Roth side of the plan.
      • ROTH Matching.  You can now make the employer MATCH portion a ROTH Contribution!  Thus, all $70k could be ROTH dollars vs traditional, setting you up for great long term tax free growth. 
    4. 4

      Secure act tax credits

      • Startup plan credit. Businesses with fifty or fewer employees can claim administrative costs up to $5k dollars per year for the first three years of a new plan.  This plan can likely qualify and given the cost efficiencies to set up, almost all of your costs would be offset. 
    5. 5

      Coordinating solo 401(k) & IRC 199A (QBI)

      Traditional solo 401(k) deposits lower both taxable income and QBI, while Roth deposits do not. Use this interaction to your advantage in high income years!
      • When taxable income sits just above the QBI phase-out threshold (about $192k single or $384k joint for 2025), traditional contributions can restore the full twenty-percent deduction.
      • If your taxable income is well below the threshold, Roth preserves the deduction while building tax-free retirement dollars.

       

      With the Spousal Loophole, done correctly, we can lower income by nearly $140,000 to get under the QBI limits and restore a BIG deduction!
    6. 6

      Set Up Timelines

      • Adopt the plan by December 31 of the contribution year to defer salary earned that year.
      • Fund employer contributions by the business tax-return deadline, including extensions.  For most this means you can make the Profit Share/Match up until 9/15 or 10/15.
    7. 7

      Putting it all together

      • A solo 401(k) allows up to $70k before catch-ups
      • Adding a working spouse can double the family limit.
      • Roth features now make these plans very attractive for those looking for long term, tax free growth!
      • Traditional contributions change QBI, Roth contributions do not, so revisit your mix each year.

       

      Interested in moving forward? Leaving your SEP behind? Contact your Project Manager for introductions to Plan Providers Anomaly works with. 
    If you still have a question, we’re here to help. Contact us