Updated for 2025 and 2026 IRS Limits
When I first moved from the corporate world into self-employment, I suddenly lost access to the traditional 401(k) I’d always relied on.
Like a lot of new business owners, I needed a retirement plan that worked even when I was a team of one. That’s when I discovered the Solo 401(k) — and I’ve been recommending it to self-employed clients ever since.
If you run a small business or side hustle here in Branson (or anywhere, really), this plan can give you big-company retirement benefits without big-company complexity.
What Is a Solo 401(k)?
Here’s the deal…
A Solo 401(k) — also called an Individual 401(k) — is a retirement plan designed for business owners with no full-time employees other than a spouse.
If that’s you, the Solo 401(k) lets you contribute in two different ways:
- As the employee
- As the employer
This double-role setup is where the real power comes from.
Who Qualifies?
You’re eligible if:
- You have self-employment income (LLC, sole prop, S-Corp, side gig, etc.).
- You have no full-time W-2 employees working for you.
- A spouse working in the business can also participate.
That’s it. No complicated hoops to jump through.
2025 & 2026 Contribution Limits
The key to success here is understanding how much you can contribute. IRS limits have increased significantly since earlier years, which is great news for small business owners looking to reduce taxable income.
Employee Contribution (2025)
- Up to $23,500
- If age 50+, add a $7,500 catch-up
- Ages 60–63 qualify for a special “super catch-up” of $11,250 under SECURE 2.0
Employer Contribution (2025)
- Up to 25% of compensation, depending on business structure
- Total employee + employer contribution capped at $70,000 (before catch-up)
2026 Preview
- Employee deferral rises to $24,500
- Total max contribution increases to $72,000 (before catch-ups)
These numbers make the Solo 401(k) one of the most generous retirement plans available to a one-person business.
Example: How a High-Earning Consultant Can Use a Solo 401(k) to Significantly Reduce Taxes
I work with a lot of consultants who have one great year and suddenly realize the IRS would like a pretty large slice of it. A Solo 401(k) can soften that blow in a big way.
Meet Sarah, a Self-Employed Consultant
Sarah runs a one-person consulting business. She brings in $300,000 a year and pays herself a W-2 salary of $160,000 through her S-Corp (a pretty common setup).
She has no full-time employees, so she qualifies for a Solo 401(k).
Here’s how the numbers play out in 2025:
Step 1: Employee Contribution
Sarah defers the maximum as the “employee”:
- $23,500 (employee contribution limit for 2025)
- She’s 52, so she also adds the $7,500 catch-up contribution
Total employee contribution: $31,000
Step 2: Employer Contribution
As the “employer,” her S-Corp can contribute up to 25% of her W-2 wages:
- 25% × $160,000 salary = $40,000
Step 3: Total 2025 Solo 401(k) Contribution
Employee ($31,000) + Employer ($40,000) = $71,000 contributed
She nearly maxes out the $70,000 standard limit and uses catch-up to inch even higher — all fully tax-advantaged.
Step 4: What This Means for Taxes
This is where consultants get excited.
- Her $31,000 employee deferral reduces her personal taxable income.
- Her $40,000 employer contribution reduces her S-Corp’s taxable income.
- If her effective tax rate is 32–35%, she’s saving around $22,000–$25,000 in taxes just by using this one strategy.
And she’s simultaneously building a massive retirement nest egg.
Why this strategy works so well
High-earning consultants usually hit a point where additional deductions get harder to find. But the Solo 401(k) scales beautifully with income, especially for S-Corp owners.
Sarah essentially shifted $71,000 of taxable income into a tax-favored retirement account — and it only took a few payroll adjustments and proper planning before year-end.
Why Business Owners Love This Plan
Let me break it down…
1. Big tax advantages
You can significantly reduce your taxable income in high-earning years. Many small businesses use this as a strategic cash-flow and tax-planning tool.
2. Flexibility
You decide how much to contribute each year based on how your business performed. Some years you max out, some years you pull back — and that’s perfectly normal.
3. Easy setup and low cost
Most major custodians (Vanguard, Fidelity, Schwab, etc.) offer low-fee Solo 401(k)s. You can be the plan trustee as long as you don’t have full-time staff.
4. A spouse can double the impact
If your spouse works in the business, they get their own set of limits, potentially doubling the tax-deferred savings opportunity.
Deadlines You Need to Know
This is where people often get tripped up:
Plan Setup Deadline
You generally must establish your Solo 401(k) by December 31 of the year you want to make contributions.
Employee Contributions
Must be elected by December 31 (even if not deposited yet).
Employer Contributions
Can be made up to your tax-filing deadline, including extensions.
This gives you breathing room to see how the year shakes out before making employer contributions.
Common Mistakes to Avoid
Here’s a quick list of “don’ts” I’ve seen over the years:
- Hiring a full-time employee without realizing it disqualifies the plan
- Paying yourself irregularly as an S-Corp and then scrambling to make contributions
- Ignoring plan administration once assets exceed $250,000 (when Form 5500-EZ becomes required)
- Confusing Solo 401(k) limits with traditional IRA limits — they’re dramatically higher
When a Solo 401(k) Makes the Most Sense
If you’re a:
- Consultant
- Freelancer
- Real estate professional
- One-person creative business
- Owner-operator with a spouse involved in the business
…then this is likely the best retirement plan available to you.
And if you’re trying to balance taxes, retirement savings, and business cash flow, the Solo 401(k) gives you more control than any other plan.
Want Help Setting One Up?
If you want a second set of eyes on whether a Solo 401(k) fits your situation — or you need help with contribution calculations, S-Corp payroll planning, or tax strategy — our Branson CPA firm is ready to help.