Solo Practitioner and Wish To Save More Pre-Tax?

A Solo 401k can be a very helpful retirement account registration for you. The reason is simple…

Combine Elective Deferral + Profit Sharing = Total Contribution

  • Under 50 years old: max contribution is $18,000 (elective deferral) + 35,000 (profit sharing) = $53,000 (total contribution)
  • 50 years or older: max contribution is $24,000 (elective deferral) + 35,000 (profit sharing) = $59,000 (total contribution)

Q     Why is this better than a SEP IRA?
A     A SEP IRA only allows a contribution of up to 25% of net income.

Let’s look at an example:

Solo practitioner, Phil, is a successful freelance software programmer with the following situation and objectives:

  • 35 years old
  • $140,000 annual net income
  • lower income taxes
  • save as much as possible in a retirement plan
  • flexibility to choose investments in retirement plan
  • low administration cost retirement plan


Investment Vehicle Elective Deferral Profit Sharing Total Contribution
Solo 401k $18,000 $35,000 ($140,000 * 25%) $53,000
SEP IRA $0 (not allowed) $35,000 ($140,000 * 25%) $35,000

A whopping $18,000 more!

If Phil was 50 years old or more that differential would increase by the elective deferral catch-up of $6,000 to $24,000!

The tax savings assuming an Federal effective tax rate of 25% would $13,250 investing for Phil’s retirement instead of being paid to the government…that’s $4,500 more in tax savings than a SEP IRA.

As is the case most of the time in investing and taxes, there are details to be aware of and follow. Contact us to setup a meeting.

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Luke has been part the finance world for 10+ years and it has helped him gain a wealth of knowledge to share with his clients. He is detail oriented personally and professionally. He is a movie enthusiast, a husband, a father, an information junkie, and being young at heart, he loves super heroes.