Why Solo 401(k) Owners Should Max Out Employee Contributions First

Quick Read

• The Solo 401(k) ceiling sits astatine $72,000 successful combined contributions, but the way to get determination splits into 2 buckets with precise antithetic mechanics

• For a solopreneur without a abstracted W-2 job, the worker publication should beryllium maxed earlier anyone opens a spreadsheet for the leader side.

• The expert who called NVIDIA successful 2010 conscionable named his apical 10 AI stocks. Get them present FREE.

The Quote That Reframes Solo 401(k) Strategy

On NerdWallet's Smart Money Podcast occurrence Is College Worth It successful 2026? Plus, How to Split Solo 401(k) Contributions to Save More, the big laid retired a portion of proposal that cuts against however astir self-employed savers deliberation astir backing retirement. "You don't automatically get to enactment successful an further $47,500 to get to the $72,000. There's a calculation successful place."

The stakes for solopreneurs are concrete.

The Solo 401(k) ceiling sits astatine $72,000 successful combined contributions, but the way to get determination splits into 2 buckets with precise antithetic mechanics. Misread the rules, and you either underfund status during highest earning years oregon trigger IRS corrections for overcontribution. With the nationalist savings complaint compressed to 4.0% and CPI ostentation inactive moving supra the Fed's 2% people astatine a speechmaking of 330.3, each dollar parked wrong a tax-advantaged relationship matters much this twelvemonth than last.

The expert who called NVIDIA successful 2010 conscionable named his apical 10 stocks. Get them present FREE.

The Verdict: Fill the Employee Bucket First

The big is right. For a solopreneur without a abstracted W-2 job, the worker publication should beryllium maxed earlier anyone opens a spreadsheet for the leader side.

The worker bucket allows a level $24,500 publication careless of concern structure. As the big enactment it: "You get that $24,500 without truly having to deliberation astir it." No payroll calculation, nary S-corp predetermination required, nary CPA consult to fastener it in.

The leader bucket is wherever the complexity lives.

For an S-corp, the leader publication is capped astatine 25% of W-2 salary. For an LLC that hasn't elected S-corp treatment, the headdress drops to 20% of income, calculated aft the deductible information of self-employment tax. The host's worked example: "If you bash the $24,500 and past you wage yourself a $100,000 salary, you tin bash different $25,000."

Run that script successful existent life.

A advisor operating arsenic an S-corp who pays herself a $100,000 W-2 contributes $24,500 arsenic worker positive $25,000 arsenic employer, for $49,500 total. Reaching the $72,000 ceiling requires a overmuch higher salary, which successful crook means much payroll tax. That tradeoff betwixt FICA resistance and publication capableness is precisely what a CPA solves erstwhile they archer you, successful the host's words, "This is what you should beryllium paying yourself done payroll oregon wage successful bid to instrumentality the champion vantage of solo 401(k) portion astatine the aforesaid clip maximizing immoderate different taxation benefits."