Published on Taxman Associates | Reading time: 8 minutes
If you’re a business owner, freelancer, or independent contractor, you have access to one of the most powerful retirement savings tools available: the Solo 401(k). And if you’re a high-income earner looking to save even more, combining it with a Cash Balance Plan can unlock retirement contributions that dwarf what W-2 employees can achieve.
In this guide, we’ll break down how these plans work, who they’re best for, and real-world examples of the tax savings they can generate.
What is a Solo 401(k)?
A Solo 401(k), also called a one-participant 401(k) or individual 401(k), is a retirement plan designed for business owners with no employees (other than a spouse). It works like a traditional 401(k), but you get to contribute as both the employee and the employer.
Key Benefits of a Solo 401(k)
- Higher contribution limits: You can save significantly more than with a SEP IRA or traditional IRA
- Flexible contributions: Choose between pre-tax and Roth contributions
- Loan provisions: Borrow up to $50,000 from your plan
- Catch-up contributions: If you’re 50 or older, contribute even more
- Extended deadlines: Under SECURE 2.0, sole proprietors can establish and fund a Solo 401(k) by their tax filing deadline (without extensions)
2025 Contribution Limits
You can contribute in two ways:
Employee Deferrals (Your salary deferral as the employee)
$23,500
Age 50–59 or 64+ Catch-Up: +$7,500
Age 60–63 Enhanced Catch-Up: +$11,250
Employer Contributions (Profit-sharing as the employer)
Up to 25% of W-2 compensation
OR approximately 20% of net self-employment income
Total Combined Limit
$70,000
$77,500 (Age 50+)
$81,250 (Age 60–63)
New for 2025: Enhanced Catch-Up for Ages 60–63
Thanks to SECURE 2.0, individuals aged 60–63 can now contribute an extra $11,250 in catch-up contributions (instead of the standard $7,500).
This means you can defer up to $34,750 as an employee, bringing your total combined Solo 401(k) contribution limit to $81,250 for 2025.
Key Insight
The beauty of the Solo 401(k) is that you’re wearing two hats. As the employee, you can defer up to $23,500 of your income. Then, as the employer, you can contribute an additional ~20% of your net self-employment income. This dual-contribution structure is what allows you to save so much more than traditional retirement accounts.
Real-World Example: Solo 401(k)
Sarah, Freelance Marketing Consultant
Net Self-Employment Income: $150,000
Age: 42
Her Solo 401(k) Contributions:
- Employee deferral: $23,500
- Employer contribution (20% of net SE income): $25,586
- Total contribution: $49,086
Tax Savings:
At a 24% marginal tax rate, Sarah saves approximately $11,781 in federal taxes this year alone. Plus, all of that money grows tax-deferred until retirement.
Who Should Consider a Solo 401(k)?
A Solo 401(k) is ideal if you:
- Are self-employed (sole proprietor, freelancer, independent contractor)
- Own a business with no employees (except possibly a spouse)
- Want to save more than the SEP IRA limit (~$66,000 for 2025)
- Want the flexibility of Roth contributions
- Are looking for loan provisions or creditor protection
Important Deadlines (Under SECURE 2.0)
For sole proprietors and single-member LLCs:
- Plan establishment: By your tax filing deadline (April 15, without extensions)
- Employee deferrals: By April 15 (no extensions allowed)
- Employer contributions: By your tax filing deadline including extensions (October 15 if you extend)
Note: S-Corps and partnerships must establish the plan by December 31 of the tax year.
Taking It to the Next Level: Cash Balance Plans
If you’re a high-income business owner and the Solo 401(k) limits still aren’t enough, a Cash Balance Plan might be your answer.
What is a Cash Balance Plan?
A Cash Balance Plan is a type of defined benefit pension plan that allows for significantly higher contributions than a Solo 401(k) alone.
It is particularly beneficial for:
- High-income professionals (doctors, lawyers, consultants, business owners)
- Those aged 50+ looking to catch up on retirement savings
- Business owners with predictable, high income
- Anyone wanting to save $100,000+ per year for retirement
How Much Can You Contribute?
Typical ranges:
- Under 40: $90,000 – $120,000
- 40–49: $120,000 – $180,000
- 50–59: $180,000 – $250,000
- 60+: $250,000 – $350,000+
Actual limits depend on actuarial calculations based on your age, income, and years until retirement.
Real-World Example: Solo 401(k) + Cash Balance Plan
Dr. Michael, Specialist Physician (Private Practice)
Age: 62
Net Business Income: $600,000
His Retirement Strategy:
- Solo 401(k) employee deferral (with enhanced catch-up): $34,750
- Solo 401(k) employer contribution: $46,500
- Cash Balance Plan contribution: $235,000
- Total annual contribution: $316,250
Tax Savings:
At a 37% marginal tax rate, Dr. Michael saves approximately $117,013 in federal taxes in a single year.
Important Considerations for Cash Balance Plans
- Requires annual actuarial calculations and administration (higher costs)
- Must make consistent contributions each year (typically 3–5 year commitment)
- Best suited for stable, high-income businesses
- Setup and ongoing administration costs: $2,000 – $5,000+ per year
- Not ideal if you plan to hire employees soon
Solo 401(k) vs. Cash Balance Plan
Best For
Solo 401(k): Most self-employed individuals
Cash Balance Plan: High-income earners aged 45+
Maximum Contribution
Solo 401(k): $70,000 ($77,500 age 50+)
Cash Balance Plan: $100,000 – $350,000+
Setup Complexity
Solo 401(k): Simple
Cash Balance Plan: Complex
Annual Costs
Solo 401(k): $0 – $500
Cash Balance Plan: $2,000 – $5,000+
Flexibility
Solo 401(k): High
Cash Balance Plan: Lower
Common Questions
Can I have both a Solo 401(k) and a Cash Balance Plan?
Yes. Many high-income earners max out their Solo 401(k) first, then layer on the Cash Balance Plan.
What if I have a W-2 job and a side business?
Your employee deferral limit is shared across all 401(k) plans, but you can still make employer contributions based on self-employment income.
Can I do a Mega Backdoor Roth with a Solo 401(k)?
Yes, if your plan allows after-tax contributions and in-plan Roth conversions.
What happens if I hire employees?
Your Solo 401(k) would need to transition to a regular 401(k) plan and be offered to eligible employees.
Getting Started
- Determine your eligibility
- Choose a provider (Fidelity, Vanguard, Charles Schwab, E-Trade)
- Establish your plan
- Calculate your contributions with your CPA
- Consider a Cash Balance Plan if earning $300,000+
The Bottom Line
Solo 401(k)s offer business owners and self-employed individuals a powerful way to save for retirement while reducing current-year taxes.
For higher incomes, adding a Cash Balance Plan can unlock six-figure annual contributions not possible with other retirement vehicles.
Don’t leave money on the table. The tax savings and retirement security are too significant to ignore.
Disclaimer:
This article is for informational purposes only and does not constitute tax, legal, or financial advice. Consult with a qualified tax professional before implementing any retirement planning strategy.
About Taxman Associates:
We provide tax preparation, planning, and consulting services for individuals and businesses with complex tax situations.