How to Turn Your Biggest Expense (Taxes) into Your Biggest Asset (Retirement Savings) in 2025

Taxes are often a solopreneur’s single largest expense, but with the right retirement plan, you can redirect a big portion of those dollars into long-term wealth. A Solo 401(k) is the only plan that lets you contribute both as the employee and the employer, giving you more ways to save while lowering your taxable income. Add in Roth and after-tax options, and this plan becomes a true tax-to-wealth engine.

In 2026, that means the potential to defer $24,500 as the employee and contribute up to a combined $72,000 when you add employer dollars. If you’re age 50 or older, catch-ups boost those limits even higher—with a new “super catch-up” for ages 60–63 introduced by SECURE Act 2.0.

Why the Solo 401(k) Is the Tax‑to‑Wealth Engine for Solopreneurs

Two contribution “buckets,” one massive limit

A Solo 401(k) plan allows a self-employed individual to save as both the employee and the employer. This makes the “Solo K” the most attractive retirement plan for those that want to sock away the most money for their golden years.

• Employee elective deferral: Up to $24,500 in 2026 (traditional or Roth). The catch‑up for age 50+ $8,000; if you’re 60–63, an additional catch‑up of $11,250 applies.
• Employer profit‑sharing: Add enough to bring your combined Solo 401(k) total to $72,000, $80,000 if you’re 50 or over, and $83,250 if you are 60-63.

For S corporations and LLCs taxed as S corporations, employer contributions are generally limited to 25% of W-2 compensation. Distributions do not count as compensation for this purpose.

Sole proprietors and single-member LLCs filing Schedule C use a slightly different calculation. Although the same 25% rule applies, required adjustments—such as deducting half of self-employment tax and the contribution itself—reduce the effective contribution rate to approximately 20% of plan compensation. To calculate contributions correctly and stay fully IRS compliant, taxpayers should follow the worksheets in IRS Publication 560.

Often beats a SEP IRA at higher incomes

Solo 401(k)s allow employee deferrals (SEPs don’t) and catch‑ups, so high earners can usually shelter more—especially with Roth options and plan loans when allowed. (If you’re planning on hiring employees, a SEP’s simplicity can be attractive, but pure contribution potential typically favors Solo 401(k) plans.

But remember, you cannot adopt a Solo 401(k) if you have non-owner employees, other than your spouse. 

You control the tax mix

Blend pretax (reduce this year’s income) and Roth (build tax‑free retirement dollars). Many solopreneurs also pursue the “Mega Backdoor Roth” by making after‑tax contributions up to the overall plan limit and then converting to Roth (in‑plan or to a Roth IRA) if the plan allows this feature. (IRA Financial will help you structure this correctly.)

“Mega Backdoor Roth” in a Solo 401(k)

When your employer’s plan allows after-tax contributions and in-plan Roth conversions (or rollovers to a Roth IRA), you gain a powerful way to maximize savings beyond the standard deferral limits. The IRS sets an overall annual contribution cap that includes employee deferrals and employer contributions. By adding after-tax contributions up to that limit, you can “fill the gap” between what you’ve already contributed pre-tax or Roth and the total allowed amount.

Once those after-tax dollars are in the plan, they can be converted to Roth, creating what’s often referred to as a “Mega Backdoor Roth” strategy. This allows high earners to accelerate the growth of their tax-free retirement bucket far more quickly than through annual Roth IRA contributions alone. Keep in mind, however, that plan documents must specifically permit after-tax contributions and conversions. As our client, we ensure this structure is properly established and compliant, so you can take full advantage of this advanced savings strategy.

Put simply, this strategy works in two steps: first, you put in after-tax money beyond your normal 401(k) contributions; second, you convert that money into Roth, where it can grow without tax. By repeating this each year, you can steadily build a much larger pool of tax-free retirement savings than most investors can through traditional contribution limits alone.

Advanced Tax Planning Angles to Discuss with Your CPA

• AGI & ACA subsidy targeting. Large pretax Solo 401(k) contributions can lower AGI, which for some clients helps with ACA premium credits; confirm with your tax pro.
• QBI (§199A) interactions. Pre‑tax contributions can reduce Qualified Business Income; in some cases, Roth deferrals may preserve more QBI while still funding retirement.
• Payroll design (S‑Corp). Setting a “reasonable salary” affects the 25% employer contribution ceiling.
• Roth catch‑up for high earners. Under SECURE 2.0, certain higher-income catch-up contributions must be made as Roth (after-tax). For contributions in 2026 (based on 2025 wages), the high-earner threshold is $150,000 in FICA wages from the employer sponsoring the plan; participants above this threshold must make their catch-up contributions on a Roth basis

Remember: IRA Financial is a plan administrator and custodian. We do not offer any financial advice. Consult with a qualified professional that can help you and your specific financial goals.

Set‑up Checklist: Turning Taxes into Savings in 10 Days or Less

1. Confirm eligibility (you and, optionally, your spouse; no full‑time W‑2 employees other than a spouse).
2. Choose plan options (Roth, after‑tax source, in‑plan conversions, loan feature).
3. Adopt the plan and open the plan trust account.
4. Set payroll/deferral elections (S‑Corp) or track Schedule C deferrals.
5. Fund employer profit‑sharing by your tax‑filing deadline (extensions allowed).
6. Enable after‑tax + conversion if doing Mega Backdoor Roth.
7. Track plan assets; file Form 5500‑EZ once you cross $250,000 in plan assets.

Pro move: We’ll model a Solo 401(k) vs. SEP IRA for your income pattern and entity type so you see the real after‑tax impact before you commit.

Quick FAQ

What you’ll get with IRA Financial

• Plan design for high earners (Roth + after‑tax + in‑plan conversions so the Mega Backdoor is actually usable).
• Compliance support (we keep you on the right side of 5500‑EZ and IRS rules).
• Expert, partner‑style guidance—clear answers, fast responses, and a structure that lets you Invest Freely. Retire Confidently.

Start here: Schedule a free Solo 401(k) strategy call. We’ll calculate your exact 2026 maximums and map the path to keep more of what you earn.