Solo 401(k): How the Self-Employed Can Shelter $70,000 or More
Picture a Provincetown tradesman clearing $180,000 a year running his own business. Steady work, decent savings habits, no retirement plan. Every April he writes a check to the IRS for an amount that makes him wince, and then he doesn’t think about it again until next April.
That client is making a roughly $17,000 annual tax mistake. Repeated every year for the rest of his working life, with the savings invested instead of paid out, it compounds into a seven-figure mistake.
The fix is called a Solo 401(k), and it’s the single most powerful retirement tool available to the self-employed. Most sole proprietors we meet either don’t know about it or have defaulted to a SEP-IRA because someone told them it was simpler. The simplicity isn’t worth the tradeoff.
What a Solo 401(k) actually is
A Solo 401(k) is a regular 401(k) plan with one participant: you. If you have a spouse who works in the business, two participants. You’re both the employee and the employer, which means you make contributions from both pockets.
As the employee, you can defer up to $24,500 of your self-employment income into the plan (2026 limit). That deferral comes out pre-tax if you choose Traditional, or after-tax if you choose Roth. Yes, a Solo 401(k) has a Roth option. Most advisors don’t mention this.
As the employer, you can contribute up to 20% of your net self-employment income (for sole proprietors) or 25% of W-2 compensation (for S-corp owners) as profit-sharing. This is additive to the employee deferral.
Combined, the 2026 cap on all contributions to a single defined contribution plan is $72,000, which rises to $80,000 if you’re 50 or older (the $8,000 catch-up sits on top of the $72,000 cap). If you’re 60 to 63, the SECURE 2.0 “super catch-up” of $11,250 replaces the standard catch-up, taking the total to $83,250 for 2026.
For a sole proprietor clearing $180,000 net: roughly $24,500 employee deferral + about $33,500 employer profit-sharing (the 20% applies to net self-employment income after the self-employment tax adjustment) = about $58,000 sheltered from current-year tax. At the 24% marginal federal rate that income level lands in, that’s roughly $14,000 in federal tax savings, plus about $2,900 more from Massachusetts’s 5% income tax.
Why not a SEP-IRA?
The SEP-IRA is the default because it’s easy to set up: one form, one custodian, done. But a SEP has no employee deferral pocket. Everything is employer contribution, capped at 20-25% of income. That means for most self-employed clients earning under $300,000, a Solo 401(k) will shelter substantially more.
The SEP also doesn’t allow a Roth contribution, doesn’t allow participant loans, and, critically for the backdoor Roth strategy, counts against you in the IRS pro-rata calculation when you convert. A Solo 401(k) doesn’t.
A SEP still has a place. For clients with very high, lumpy income who don’t want plan administration complexity, it’s defensible. But for most self-employed professionals on Cape Cod, the Solo 401(k) is strictly better.
Setup
We set these plans up for clients through Charles Schwab, the same custodian that holds our client accounts: no setup fee, no annual plan fee, and a broad investment menu of ETFs, mutual funds, individual stocks, and bonds. Keeping the plan at Schwab means it sits alongside the rest of the household, where we can actually manage it. If you are setting one up on your own, Fidelity offers a comparable no-fee plan. Vanguard exited the Solo 401(k) business in 2024; those accounts transferred to Ascensus, which charges a small per-fund annual fee.
You’ll need:
- An EIN for your business (free from the IRS, takes 15 minutes)
- A Solo 401(k) plan document (the custodian provides this)
- A business checking account to fund from (many of our clients keep this at Seamen’s Bank or another Cape community bank for ease of transfers)
Establish the plan by December 31 of the year you want it to count for. SECURE 2.0 gives a first-year sole proprietor until the tax filing deadline to set up and fund, but the employee-deferral mechanics are cleaner when the plan exists before year-end, so do not cut it close.
If you have any employees other than a spouse, a Solo 401(k) stops being “solo” and you need a different plan structure. That’s a conversation for your specific situation.
One important coordination issue
If you also have a W-2 job with its own 401(k), the $24,500 employee elective deferral is a household limit across all your 401(k)s. You don’t get to defer $24,500 in each. The employer profit-sharing side is separate per plan, so you still benefit meaningfully, but the deferral side has to be coordinated.
We see this all the time with clients who consult on the side or run a seasonal business while holding a primary job. The math is worth running before the year ends.
Who this is for
Anyone self-employed with consistent net income, especially clients earning $100,000 or more where the contribution limits start to matter. Especially powerful for older clients who have runway to compound: a 55-year-old contributing $80,000 per year for a decade will retire with a meaningfully different outcome than the same client putting $8,600 a year into an IRA.
And uniquely valuable alongside the backdoor Roth, because a Solo 401(k) absorbs the pre-tax IRA money that would otherwise tangle up the pro-rata rule.
If you want help setting one up
Contact Long Point Wealth Management. We set these plans up for our self-employed clients through Charles Schwab: plan document, account opening, funding mechanics, investment selection, and coordination with your tax preparer on the contribution timing. There’s no cost to open the plan, and the ongoing administration is simple.
The right time to do this is before year-end. Aim to have the plan established by December 31; employer contributions can then be funded up to your filing deadline. If you’re self-employed on Cape Cod and want to run the numbers for your situation, reach out.
If you are self-employed and have never run these numbers, the difference is usually larger than you expect. The consultation is a conversation, not a sales call.
This article reflects the views of Long Point Wealth Management as of the date written. It is intended for educational purposes and should not be construed as personalized tax, legal, or investment advice. Retirement plan selection depends on individual circumstances; consult a qualified tax or retirement professional before implementing any strategy discussed.