The Power of the Solo 401(k): How to Build Wealth and Cut Taxes Before Year-End
- Aureus Advisory Partners
- Oct 16
- 5 min read
If you are self-employed or operate an S-Corporation, the Solo 401(k) is one of the most powerful tools available to you. It lets you save aggressively for retirement while legally reducing your taxable income.
The best part? You do not need a big team or a corporate sponsor to take advantage of it. You only need your business, your income, and the right setup.
Here is how the Solo 401(k) works, why it beats other retirement options, and what you should do before December 31 to lock in the 2025 benefits.
1. What Is a Solo 401(k)?
A Solo 401(k) is a retirement plan designed specifically for self-employed individuals or business owners with no full-time employees.
It offers the same tax benefits as a traditional 401(k) but with more flexibility and higher contribution limits. You can contribute to the plan in two ways:
Employee deferral: up to $23,000 in 2025 ($30,500 if you are age 50 or older).
Employer contribution: up to 25% of your W-2 wages, for a combined total of $69,000 ($76,500 if age 50 or older).
This means you can shelter a large portion of your income while building long-term wealth inside your own business.
💡 Aureus Tip: You must establish your plan by December 31 to make employee contributions for that tax year. Employer contributions can be funded later, up to your filing deadline including extensions.
2. Why the Solo 401(k) Beats Other Retirement Plans
There are several retirement plan options for business owners, but few match the flexibility and tax advantages of a Solo 401(k).
💡 Aureus Tip: The Solo 401(k) is the only plan that lets you contribute both as the employee and employer, giving you more control over tax savings.
3. How the Solo 401(k) Reduces Taxes
Every dollar you contribute to your Solo 401(k) reduces your taxable income for the year.
Example: If you earn $120,000 in W-2 wages through your S-Corp and contribute $23,000 as an employee plus $30,000 as an employer, you have just reduced your taxable income by $53,000.
That could mean thousands of dollars in immediate tax savings while growing money for retirement.
You can choose between:
Traditional (pre-tax): Lowers your taxable income now, taxes the money later.
Roth (after-tax): No upfront deduction, but your withdrawals in retirement are tax-free.
💡 Aureus Tip: Many modern Solo 401(k) providers, including Rocket Dollar, allow you to open both traditional and Roth accounts under one plan.
4. Who Qualifies for a Solo 401(k)
To qualify, you must:
Have earned income from self-employment, such as a single-member LLC, S-Corp, or sole proprietorship.
Have no full-time employees other than yourself and your spouse.
You can still hire part-time or contract workers. The rule only restricts you if you have employees working 1,000 hours or more per year.
💡 Aureus Tip: If you later grow your team, you can convert the plan into a full 401(k) with employees.
5. How to Set It Up the Right Way
You can open a Solo 401(k) through financial institutions like Vanguard or Fidelity, or through specialized small-business platforms such as Rocket Dollar.
The setup process generally involves:
Registering your business (LLC or S-Corp).
Applying for an Employer Identification Number (EIN).
Selecting a Solo 401(k) provider.
Completing your plan documents before December 31.
💡 Aureus Tip: Choose a provider that offers easy payroll integration and digital plan administration. This keeps your compliance and recordkeeping simple.
6. Funding and Deadlines
Employee Deferrals: Must be made by December 31.
Employer Contributions: Can be made up to your tax filing deadline (April 15, or October 15 with extension).
💡 Aureus Tip: Make sure your plan documents clearly outline both deadlines and contribution types. Mistiming contributions is one of the most common errors business owners make.
7. Solo 401(k) and S-Corp Owners
If you are an S-Corp owner, you must run payroll to make employee contributions. The employer contribution is based on your W-2 wages, not your total distributions.
This means your reasonable salary directly impacts your retirement savings potential. The higher your payroll income (within reason), the more you can contribute as an employer.
💡 Aureus Tip: A year-end salary review is key. Adjusting your payroll before December 31 can open more room for tax-deductible contributions.
8. Roth Solo 401(k) Option
If your income is high and you prefer tax-free withdrawals later, you can open a Roth Solo 401(k). This version uses after-tax money, but all growth and qualified distributions are tax-free in retirement.
Many business owners choose to split their contributions between traditional and Roth portions. This builds flexibility for future tax planning.
💡 Aureus Tip: A Roth Solo 401(k) is not subject to income limits, making it a great option for high earners who are phased out of traditional Roth IRA eligibility.
9. Avoid These Common Mistakes
Missing the setup deadline (December 31).
Forgetting to run payroll for S-Corp employee contributions.
Not filing Form 5500-EZ once your plan exceeds $250,000 in assets.
Mixing personal and business funds for contributions.
Contributing more than IRS limits.
💡 Aureus Tip: Once your plan balance exceeds $250,000, you must file Form 5500-EZ annually. Your provider or CPA can handle this for you.
10. Why You Should Not Wait
The sooner you set up your Solo 401(k), the sooner you can start reducing your taxable income and building your retirement wealth. Even small contributions now can compound into significant growth over time.
Waiting until next year means losing an entire year of tax savings and investment potential.
💡 Aureus Tip: You built your business with long-term vision. Apply that same mindset to your retirement planning.
Final Takeaway
A Solo 401(k) is one of the most powerful tax and wealth-building tools available to business owners. It allows you to protect today’s earnings while investing for tomorrow.
If you want to maximize deductions, reduce taxes, and create long-term financial freedom, this is the move to make before December 31.
Ready to Take Action?
If you want to open a Solo 401(k) and make sure it aligns with your tax strategy, schedule a consultation with our team HERE.
Or explore trusted platforms that make setup simple: