A Solo 401(k) is a powerful tool for the self-employed to lower their yearly taxes while saving for retirement. Small business owners (contractors, entrepreneurs, etc) can contribute up to $72,000 in 2026, reducing the total income the IRS can tax. This can meaningfully lower their tax bill and may even push them into a lower tax bracket.
Key Takeaways
- A Solo 401(k) can be set up by anyone who owns or makes decisions for their own business and does not have employees. It can cover multiple business owners and their spouses.
- The self-employed are both their own employee and employer in a Solo 401(k) plan, and can contribute up to the $72,000 total limit in 2026 ($70,000 in 2025).
- By making pre-tax contributions, savers lower their taxable income for the year. The IRS taxes those contributions and their investment earnings when the money is withdrawn in retirement.
- A Solo 401(k) calculator can help you find out how much money you can contribute each year based on your business entity type.
How Much Can You Put in a Solo 401(k)?
Any entrepreneur with their own business is considered both their own employee and employer by the IRS. This allows business owners to combine the overall employee and employer 401(k) contribution limit for up to $72,000 in 2026.
Employer contributions are added to a Solo 401(k) often via profit sharing, up to the limit (assuming your earnings enable you to max it out).
Learn how ShareBuilder 401k can support you and your business with a Solo 401(k).
| 401(k) Limits | 2025 | 2026 |
|---|---|---|
| Employee contribution limit | $23,500 | $24,500 |
| Annual limit per individual | $70,000 | $72,000 |
| Age 50+ catch-up amount | $7,500 | $8,000 |
| Age 60-63 catch-up amount | $11,250 | $11,250 |
How a 401(k) Lowers Taxes for Business Owners
401(k)s are retirement accounts that let savers grow their money with special tax benefits. Unlike regular taxable investment accounts, contributions and earnings in a 401(k) are only taxed once. Certain 401(k) expenses are also tax deductible for businesses.
Employee Contributions (Elective Deferrals)
Employee elective deferrals are the type of contribution you can make as your own employee of your business. There are two main employee contribution types:
- Pre-tax (traditional)
- Post-tax (Roth)
Savers making employee contributions choose when their contributions are taxed, either upfront with a Roth 401(k) or later at withdrawal in retirement with a pre-tax 401(k).
Contributions made pre-tax also have an added benefit of lowering your taxable income today, which can be beneficial if you expect a lower tax rate in retirement.
Pre-tax (Traditional) 401(k):
- Contributions reduce taxable income today
- Taxes are paid on withdrawals in retirement
- Often used by those who expect a lower tax rate later
Roth 401(k):
- Contributions are made after-tax
- Qualified withdrawals are tax-free, including earnings
- Often used by those who expect their tax rate to stay the same or increase in retirement
Roth 401(k) versus Traditional (Pre-tax) 401(k)
| Roth 401(k) | Traditional 401(k) | |
|---|---|---|
| Contribution Tax Treatment | Contributions are made with after-tax dollars. No tax break today. | Contributions are made pre-tax, lowering your taxable income today. |
| Withdrawal Tax Treatment | Qualified withdrawals in retirement are tax-free (after age 59 ½ and 5 years after account has been opened). | Withdrawals are taxed as ordinary income in retirement; early withdrawals may incur a 10% penalty. |
Many savers choose to contribute to both, creating tax flexibility in retirement. It’s a good idea to consult with a tax professional and also double check that your provider allows Roth contributions before making employee elective deferrals.
Employer Contributions (Profit Sharing)
Employer contributions, aka employer profit sharing contributions, allow you to contribute as an employer up to the IRS annual contribution limit. You can generally contribute up to 25% of your W-2 compensation (or for Sole Proprietors, ~20% of net self-employment income).
Note that profit sharing contributions must always be made pre-tax and are 100% tax deductible.
How to Determine the Amount You Can Contribute as an Employer
The calculation to determine how much you put into your 401(k) as an employer is based on two key variables:
- How much you have contributed as an employee
- Your business entity type
The type of entity you formed will be important in determining this calculation. If your business is structured as a corporation, you can make employer contributions up to 25% of W-2 earnings into the 401(k) plan.
Try our calculator to see your estimated Solo 401(k) contribution amount in seconds.
If you’re a Sole Proprietor, Single Member LLC, or Partnership, this percentage is based on your net Schedule C income. The IRS has information to help you get started. You’ll want to talk to your tax advisor before determining the final number.
An Example of How to Lower Your Taxes by $12,075 or More with Solo 401(k) Contributions
The amount you can tax defer into a Solo 401(k) will vary by your earnings and your tax rate. Here’s a hypothetical example of a 45-year-old Sole Proprietor:
Let’s assume her earnings are $200,000, and she has already made $23,000 in pre-tax contributions to her 401(k) as an employee. As her own employer, she can make additional employer contributions of $37,374 for a total of $60,374.
This will lower her taxes by $12,075, assuming an effective tax rate of 20% versus a person that doesn’t contribute to a retirement plan at all.
Example Solo 401(k) Saving and Tax Calculation Comparison
| With 401(k) Contributions | Without a 401(k) | |
|---|---|---|
| Earnings | $200,000 | $200,000 |
| Employee Contribution | $23,000 | $0 |
| Max Employer Contribution (Sole Proprietor) | $37,374 | $0 |
| Taxable Income | $139,626 | $200,000 |
| Taxes Owed (20% Effective Tax Rate) | $27,925 | $40,000 |
The owner that contributed pre-tax to their Solo 401(k) paid $12,925 less in taxes this year while saving $60,374 towards retirement. In actuality, the tax savings could be even greater depending on the effective tax rate of each individual. This example is not meant as tax advice.
When pre-tax 401(k) funds are withdrawn in retirement, they will be taxed with the exception of any Roth 401(k) savings. It’s a good idea to consult a tax advisor to discuss your specific situation, including other deductions you may qualify for.
A Smart Approach to Contributing to a Solo 401(k)
Again, since Solo 401(k) holders act as both employer and employee, there are two contribution opportunities. As an employee, contributors can set aside a fixed monthly amount that fits their budget throughout the year. Then, after year-end, they can make a single employer contribution that balances tax savings with retirement goals before the tax filing deadline.
Solo 401(k) Contribution Deadlines
Business entity type determines contribution deadlines for Solo 401(k) holders.
S-Corps and Partnerships typically face a March 15th deadline for employer contributions, while Sole Proprietors and Single Member LLCs have until April 15th.
See our Solo 401(k) Contribution Deadlines article for a full breakdown of employee and employer contribution and set up deadlines.
Solo 401(k) FAQs
Can a married couple have a Solo 401(k)?
Yes, a Solo 401(k) can cover any owners of a business and their spouses.
Can I start my own Solo 401(k)?
To start a Solo 401(k) plan, you must either own or make decisions for a business and not have any W2 employees.
How to open a Solo 401(k)?
You can open a Solo 401(k) by getting a quote from a qualified 401(k) provider. Try to find one that is also a licensed fiduciary who is legally required to act in your best interest.
Is a Solo 401(k) tax deductible?
Any business expenses involved in setting up ongoing administration, and employer-side profit sharing into a Solo 401(k) are 100% tax deductible. Contributions made as an employee are not separately tax deductible, although they do have other tax benefits.
Can I roll my 401(k) into a Solo 401(k)?
Whether a Solo 401(k) plan accepts rollovers depends on the plan’s provider. ShareBuilder 401k’s Solo 401(k) Saver and Solo 401(k) Plus plans both accept rollovers, which can greatly simplify your retirement planning.
Can I have both SEP IRA and a Solo 401(k)?
The short answer is yes, however you need to pay attention to contribution limits for both plans. A professional tax advisor will likely be needed to make sure both plans stay in compliance.