Is College Worth It in 2026? Plus, How to Split Solo 401(k) Contributions to Save More

15:22Elizabeth Ayoola:Subject to approval and eligibility. Built cards are issued by Column N.A., member FDIC, pursuant to license for MasterCard International Incorporated.

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17:12Elizabeth Ayoola:We are back and answering your money questions to help you make smarter financial decisions. This episode's question comes from a listener via text, and it's for those who are entrepreneurs or aspiring ones. It's about solo 401ks. Here's the question. Hello, nerds. I just opened a self 401k, and I was wondering how I should contribute to the employer 401k, an employee contribution. Should I contribute an equal amount as an employee and employer to maximize the benefits? If not, what ratio would you recommend?

17:47Sean Pyles:To help us answer this listener's question on this episode of Smart Money, we're joined by Ryan Sterling, Wealth Advisor at NerdWallet Wealth Partners, a wholly owned subsidiary of NerdWallet. Ryan, welcome back to Smart Money. Thanks for having me. It's good to be here.

17:59Elizabeth Ayoola:Let's start with the basics, Ryan. Not everybody is familiar with what a solo 401k is. It's also known as a self-employed or individual 401k. So run us through what it is and how it works. Solo 401k plan or individual 401k is a retirement plan for solopreneurs. So a big issue that a lot of solopreneurs have is, hey, you know, my friends that work at bigger companies, they have a 401k through their company. They get all these retirement benefits. What do you have for us who are self-employed? And, you know, if you're going to kind of go the full 401k route, there's a lot of regulatory concerns.

18:35There's, you know, you got a partner with a big 401k provider. So the solution is to offer solopreneurs a solo 401k plan. And as the name suggests, it's a 401k plan that just has one participant, you as a solopreneur. And not only that, but there are actually a lot of tax advantages that you get as a solopreneur that people who are W-2 employees at big companies actually don't get. Can you outline some of those? You get to have two different contributions. So the first one is just like people at any big company, you get to put$24 ,500 as an employee contribution into the plan. Here's where it gets better is that as a solopreneur, once you finish doing the$24 ,500, you can then do what's called an employer contribution where you can take some of the profits as the employer and contribute that to the plan.

19:35So the maximum that you can do is$72 ,000. So again, it's a very large amount. Now, you have to have enough income to be able to support that. But to the extent that you do, you can put away$72 ,000 on a pre-tax basis versus, again, someone who's a W-2 employee that might be constrained to$24 ,500.

19:57Sean Pyles:And can you contribute even more if you're over 50 and going this route? Yes. If you're over 50, there's something called a catch-up contribution. So instead of the$24 ,500, you can do$32 ,500. So instead of the$72 ,000, you can do$80 ,000. That's pretty nice. But again, like you said, you have to have that income from your company to be able to hit that amount. That's exactly right. So that's where it's important to work with a CPA. There are a lot of nuances involved. But I think the general takeaway should be as a solopreneur, you get the$24 ,500. But you should have in your mind that you can do more as the employer.

20:30Elizabeth Ayoola:And maybe as your business grows, too, you can contribute more. But Ryan, I also want to just quickly clarify because you keep throwing the term solopreneur out there. Does this include gig workers? Do you have to be an incorporated business? who is eligible for these solo 401ks? If you're a gig worker, 1099 income, you qualify. If you are an S Corp, you also qualify. So you don't need to go the full LLC converting to S Corp in order to do it. You can basically say, hey, I'm starting a business and I'm working part-time and I'm generating some self-employment income and you qualify for a solo 401k.

21:08Now, you do have to be careful if you are working at a company that has a 401k plan and you want to do the solo 401k, you have to be mindful of the employee portion. So that's the$24 ,500. So between both your W-2 and your self-employment income, you can do$24 ,500. So for example, if you do$20 ,000 in your 401k, you can do$4 ,500 as the employee portion in the solo 401k. But you can still do the employer contribution.

21:43Sean Pyles:Are there any other differences between solo 401ks and workplace 401ks beyond being able to contribute as the employer in a solo 401k? Yeah, I mean, I think that's the big nuance. And I think that's the big advantage that as a solopreneur, you can do both the employee and the employer. So that's where, once again, you just have to be mindful of the fact that if you're working at a W-2 job and you max out your 401k, your W-2, then you're really constrained to just the employer portion that you can do for your solo 401k. Okay. And this might be helpful for our listener because they're wondering about whether to contribute a certain amount as the employee and a certain amount as the employer.

22:21Sean Pyles:But from what you've laid out so far, Ryan, it seems like you have to contribute as the employee first up to that maximum, and then you go as the employer contributing. Is that correct? Or can you choose to contribute as the employer from the beginning? Yeah, it doesn't really matter all that much. I mean, it's still money that you're putting away. And whether you fill it up as the employee first or the employer doesn't really matter all that much. But if this listener has a W-2 job, that's then where you just want to be mindful of how you split it. And you actually might want to put more as the employer in that case, just to be careful.

22:54But, you know, if you're a solopreneur, you don't have a W-2 job and you want to put away, you know, 24 ,500, what I would personally recommend is filling up the employee portion first, because you get that 24 ,500. You don't necessarily have to worry about any sort of calculation that goes into how much you can put into the employer, because that's another important nuance to keep in mind is the employer portion, the amount that you can put in, you don't automatically get to put in an additional 47 ,500. to get to the$72 ,000, there's a calculation in place. So it's either contingent on if you're an S-corp, the W-2 income that you pay yourself, you can do 25%.

23:34So for example, if you do the$24 ,500 and then you pay yourself a$100 ,000 salary, you can do another$25 ,000. You're limited to that. That makes sense. And then for someone who is not an S-corp, there's someone where maybe they have an LLC, but they haven't converted to an S-corp, they're at 20 % of whatever they bring in. So if you bring in 100 ,000, then 20 ,000 is what you can do for the employer portion.

23:59Sean Pyles:Got it. So much simpler to contribute as the employee. It's way simpler because you get the 24 ,500 without really having to think about it. Where again, there is a calculation for the employer, which means you do want to work with the CPA because the CPA can help you kind of figure out what is that sweet spot of what you should be paying yourself to be able to maximize the solo 401k contribution versus some other considerations that could be tax advantageous or not in terms of increasing your income that you pay yourself. So there's a lot that goes into it. I would say that we work with a number of really good CPAs who basically tell our clients, this is what you should be paying yourself through payroll or salary in order to take the best advantage of solo 401k, while at the same time maximizing some other tax benefits.

24:44Elizabeth Ayoola:Ryan, as you outlined, the cap on what you can contribute as an employer and an employee is different. While working with a CPA, I think it's a great way to approach it. Not everyone is going to do that. So how should they think through then how to split these contributions? It goes back to what I was saying before. It's like, just take the$24 ,500 as the employee. And look, for a lot of people, that's a lot. It's hard to get up there, especially when you're first sorting out. So I think number one is that should be the first target is maxing out the employee at the$24 ,500. I think then when you start to say, okay, hey, I feel comfortable putting that in.

25:19I want to put more in. I think that's when the rough math is basically 20 % of your business profits, unless you're an S-corp. But if you're an S-corp, you probably have a CPA, so they can help you with that. But if you're not an S-corp yet, I would just kind of have that 20 % in mind. So if you're making profit$50 ,000, you know, an extra$10 ,000 could go into it. Now, I also want to keep in mind that while there are some tax advantages to being able to do the employer portion, you also have to live your life too. So the last thing you want to do is to put, you know, the$72 ,000 and feel really good that, you know, you got the maximum tax benefits, but then you're not able to grow your business because your capital constraints.

26:02So I'm a huge fan of these retirement plans. Again, for For solopreneurs who are making$200 ,000,$300 ,000,$400 ,000,$500 ,000 or more, great. All day long, max us out. But if you're getting started and you're trying to grow your solo business, your solo practice, yes, you want to be able to put away as much as possible, but you also have to keep in mind that you might want to grow your business and or have some free cash flow to live your life. So I would also put those constraints in there as well.

26:32Sean Pyles:So in that case, say someone is just a few years into starting their business and they do on a safe retirement, maybe they're considering a solo 401k or an IRA. Do you think either option is fine? I mean, of course, a solo 401k has a higher contribution limit, but do you think one might be better than another at maybe an earlier stage in someone's business? So a close cousin to the solo 401k is what's called a SEP IRA. And that was the popular kind of solopreneur retirement plan before solo 401ks. I would still say a SEP is a good option. It is constrained to a percentage of your profits. So you don't automatically get that$24 ,500 in the SEP.

27:11So there's a really good chance with a SEP that you can't put away as much. Now, historically speaking, the reason people did SEPs instead of solo 401ks is SEPs were just a lot easier to set up. Where there was a little bit more admin with solo 401k, a lot of the big brokerage firms have made it very easy to open solo 401ks now. So what I've seen over the last couple of years, it used to be four, five, six, maybe 10 years ago, SEPs were the popular option. Now I would say that I would say 70, 80 percent of the time we're seeing solo 401ks.

27:44Elizabeth Ayoola:Oh, wow. So I'm old school. Am I left behind? I use a SEP IRA and it works perfectly fine for me. I know, Sean, that you recently started a business, of course. And Ryan, do you have a business? Do you guys use retirement accounts? And if so, which ones do you use? Yeah, it's a great question. So when I first started my business, I did zero retirement accounts. Why? Because I wanted to grow the business. So I wanted to take advantage of some of these options. At the same time, it goes back to I didn't want to be capital constrained. And by the time we got to the point where I started maxing out my retirement, we actually had employees at that point.

28:20So I was no longer a solopreneur. So that's where we had a more traditional 401k plan. I will say if you have a SEP and the SEP is working for you, by all means, SEPs are great. There's nothing wrong with a SEP. It's a very, very, very close relative to the solo 401k. I would say where I've seen people go from a SEP to a solo 401k, it really is that point where it's like, gosh, I'm so flush with cash right now. And I just, I really want to be able to put more into it. When you're self-employed, you can structure your pay to minimize the amount of payroll taxes you have to pay. That's through an S-corp.

29:00But there's a puzzle pieces at play, and there's kind of this mosaic you have to put together of how little do I want to pay myself to avoid the payroll taxes? But the less you pay yourself, the less you can put into your SEP. So then it becomes a, well, wait a second. If I do a solo 401k, I get the$24 ,500 automatically. But what you might be able to do is pay yourself intentionally a lower salary to pay less in payroll taxes. But with a solo 401k, you can still get that$24 ,500, whereas a SEP, you're going to be able to put in far less because of the percentage of your salary that you can contribute.

29:38Yeah.

29:39Sean Pyles:And Elizabeth, a benefit of you having this set is that it doesn't have the same contribution limit, doesn't share a contribution limit with your workplace 401k.

29:47Elizabeth Ayoola:Yes, exactly.

29:47Sean Pyles:Whereas if you had the solo 401k, you would have that combined contribution limit on the employee side. That's a great point.

29:52Elizabeth Ayoola:Absolutely.

29:53Sean Pyles:I want to talk about investment options in solo 401ks. A benefit of workplace 401ks is that they're often loaded up with different target date funds that are pretty easy to just get into. Is that accessible in a solo 401k or how might people decide what investment options might be best for them if they don't have access to a target date fund? Yeah, in a solo 401k, I mean, you're going to open it up at a brokerage firm like a Charles Schwab, for example. And then, I mean, you have a wide array of investment options, which is a good thing and a bad thing. So why is it a good thing? It's a good thing because you have more investment options.

30:24So you're not just constrained to the investments in the 401k plan. Why is it potentially a bad thing? Well, it's a bad thing because there are a ton of options. So there are more ways to make mistakes. The clients we work with who have solo 401ks, we're managing the investments for them. So that kind of alleviates that concern. For someone who's going at the solo, you definitely have to make sure that you're researching investments and that you have an allocation that is aligned with your long-term goals and objectives. and you're probably going to want to make it pretty similar to what the target date funds are in terms of the allocations.

31:01But again, depending on who you are and how you see it, it's either an advantage or a disadvantage.

31:05Elizabeth Ayoola:I know we touched on this earlier. We talked a little bit about tax benefits, but I want us to go a little deeper into that because that's one of my favorite aspects of retirement accounts. Can you talk us through the tax benefits of a solo 401k, Ryan? The big one is that you're able to defer taxes on it. So if you make a pre-tax contribution, and let's say you do the full$72 ,000, that's$72 ,000 that you're not being taxed on this year. So let's say you're a solopreneur and you have a blowout year, and you're in the top marginal tax brackets. And let's say you live in a place like New York or California.

31:40Well, by putting$72 ,000 in, you basically get up$30 ,000 plus tax benefits. So you pay$30 ,000 less in taxes than you would otherwise. In addition, that money grows tax deferred. So when it's invested, any sort of capital gains or dividends in the account will not be taxed. Now, in the future, when you take the money out, that is going to be taxable. So you do pay taxes at some point in time, but the benefit is you get to delay or defer the taxes. Now, there's also the option to do a Roth solo 401k. Now, with the Roth solo 401k, you don't get a tax deduction upfront. So that$72 ,000, that's still going to be income that you're going to pay taxes on.

32:25But the money that goes into a Roth grows tax-free. So any interest or capital gains grows tax-free. And then when you take it out in the future, you're not taxed on it. So what's the right choice? Do you do the traditional solo 401k or do you do the Roth? It all depends on the income bracket that you're in right now. So I would say that if you are someone where you're having that amazing year and you're in the top marginal bracket and you live in a high-tax state, taking the pre-tax and being able to defer those taxes, that's really powerful because there's a good chance in the future that you're not going to be in the top marginal tax rates.

33:02If you're in a lower tax bracket, but your business is growing pretty quickly, there's a chance you're going to be in higher tax brackets later on. So you might want to take advantage of the Roth because that tax deduction isn't necessarily as important. That money can grow tax-free. And then when you take it out in the future, it's not taxable. So there are a lot of tax benefits. It's very similar to a 401k, but you just have to make the choice. Do I want to get the tax deduction now and have tax deferred growth? Or do I not care about the tax deduction now, but I'm going to get tax-free growth and when I take it out in the future, I'm not going to be taxed.

33:34Sean Pyles:The decision that you just outlined around whether to go Roth or traditional with a solo 401k is a lot how people consider this when it comes to their own workplace 401ks or working with even a traditional or Roth IRA. Are there any other unique tax considerations that people should consider with a solo 401k when they are deciding traditional or Roth, or is it pretty much the same across the board with these different accounts? Yeah. I mean, I think, again, it just goes down to, are you in a higher tax bracket now, or are you going to be in a higher tax bracket in the future? Now, we don't know.

34:04There are no future facts, so we have zero clue what tax brackets are going to be in the future. I will say, though, if you are a top marginal earner right now and you're in a high tax state, I feel like it's probably a pretty safe bet that you're in the highest tax bracket that you're ever going to be in. So you get the benefit from doing the traditional pre-tax today and paying taxes in the future.

34:29Elizabeth Ayoola:Well, Ryan, you work with people every single day with their finances. I'm sure you work with people who have a solo 401k. Are there any common mistakes that you see people making when it comes to these accounts? The big mistake I see people making is that they get over enthusiastic about it and they put too much into it. Look, I'm a fan of taking advantage of all of these amazing tools and tax breaks. However, it's like I was saying before, if you're putting 72 ,000 into this and you can't live your life or you don't have as much money to invest in your business or you're feeling cash constrained, that's a problem.

35:05So it's one of those where it's like, yes, we wanna be able to take advantage, but let's also put this in the context of other spots in your financial plan and other financial goals that you have. I think the other big one too is going back to that traditional versus Roth. I'm a big fan of Roths. However, one thing I do see is that the Roth is so ingrained in people's heads. And to be honest, like a lot of accountants as well, where it's you're trained to think of the Roth, like I want to pay less when I take it out in the future. And especially when I see people who are getting up there in tax brackets, they still have this mindset of the Roth.

35:44And what we have to oftentimes remind them of is that, hey, like you're in a pretty high tax bracket right now. You get a massive deduction for putting in the traditional portion right now. And at some point in the future, you're likely going to be in a lower tax bracket and you can do Roth conversions then. There's one other thing too that you have to be mindful of is that when solo 401ks get beyond 250 ,000, you have to file a form. It's called a 5 ,500 form. It's not a hard form to complete. However, if you don't do it, the penalties can be punitive. So it's one thing to be mindful of when you have a solo 401k is you do kind of have to be mindful of the fact that as this grows, there are going to be some reporting requirements that you're going to have to think about and adhere to.

36:36And again, they're not hard, but the penalties for not following them are very steep.

36:41Sean Pyles:I want to go back to your point, Ryan, about figuring out how much you can contribute to these accounts while still growing your business and living your life. How do people determine what amount might be right for them? It's a good question. And it's my favorite answer. It depends. It depends. I mean, it's one of those things where a married couple and they have goals to buy a home and one of the spouses has a traditional W-2 job. Another spouse has a solo 401k and they want to buy a house in the next couple of years. But they put 72 ,000 into the solo 401k and then that delays their ability to make a down payment.

37:18things like things like that there's more research coming out uh called it the middle class uh trap and that is there's a whole bunch of people out there that are millionaires and they're millionaires because they've accumulated so much in their retirement accounts with a retirement account rich but they have zero liquidity everywhere else so what that means is um if you want to take a mini sabbatical, if you want to maybe retire early, if you have an unexpected disruption where maybe you do lose your job and you're going to be out of work for a year, that the money in retirement account, yeah, that's great, but doesn't really help you all that much.

37:57So we're huge advocates of maxing out all those retirement plans. Don't get me wrong. However, you know, when we underwrite financial plans for our clients, you know, we have to look at, you know, what are some of these goals? And, you know, sometimes there are things that are right to do, but they're in conflict or provide tension to some of these other life goals. So that's where it's like, what's the answer? The answer is depends. And it's very specific to the clients with the individual.

38:20Sean Pyles:And that's why you work with a financial advisor who can help you do this. That's right.

38:24Elizabeth Ayoola:Well, I can't let you go, Ryan, without talking about one of my favorite topics. And that is saving for retirement. And I know not everyone is able to do that. But I find the data interesting that I come across about how entrepreneurs are saving for retirement or the lack thereof. According to a 2025 Wealth Rabbit small business retirement report that I came across, the most common amount entrepreneurs between the ages of 45 and 55 has saved for retirement was$50 ,000. And it also found that one in five business owners don't have any savings at all. So can you quickly talk about the importance of saving for retirement as an entrepreneur?

39:03Elizabeth Ayoola:And I sometimes hear people are relying on hopefully selling their business during retirement, and that's their retirement plan, which sounds pretty scary to me. I agree. And as someone who's a small business owner myself, there's a lot of hopium involved. And I will say you don't start a business if you're not optimistic, right? You have to have a certain amount of optimism to be able to take the plunge and to go into business on your own. So you're kind of wired that way to begin with. I know I certainly was. And I mentioned that in the first couple of years, I actually didn't contribute to a retirement plan because I was getting my business up and running.

39:39And that was more important to me. That said, the second that I could, I did. And I really focused on that. I want all the solopreneurs listening to this podcast to have an enormous amount of optimism. But it's also important to hedge. And I think putting money into a retirement account is a great hedge just in case things don't go the way that you think they're going to go. I think another important point, I was talking to someone recently about this, you know, there's a saying that we overestimate what we can do in a year and underestimate what we can do in a decade. That is so true with building wealth.

40:11So what, you know, when we look at financial plans for our clients and when we look at someone who's in their late thirties or so and trying to get to financial independence in their, you know, mid fifties to early sixties, it's actually not that heroic in terms of what you have to do in order to reach those goals. but you have to be consistent. You have to make sure that you're investing. But I would say for any solopreneur out there, it's you have to think about planning for retirement and you have to diversify outside of your business. And once again, I just want to repeat myself. It's so important to land this point is that it doesn't require anything heroic today.

40:49Even if you are able to put 10, 15, 20, get to the 24 ,500, that does move the needle significantly over time.

40:59Sean Pyles:All right. Ryan, I think that's a great place to leave it. Thank you so much for coming on and talking with us about all this today. Yeah. Thank you so much.

41:05Elizabeth Ayoola:And once again, Ryan is a wealth advisor with NerdWallet Wealth Partners. If you yourself are considering working with a financial planner like Ryan, then visit nerdwalletwealthpartners.com. Of course, we're going to include a link to that in today's episode description.

41:20Sean Pyles:And that's all we have for this episode. Remember that we're here to answer your money questions, so please send them to us. You can text us or leave us a voicemail on the Nerd Hotline at 901-730-6373. That's 901-730-NERD. You can also email us at podcast at nerdwallet.com or leave us a comment on Spotify or YouTube.

41:39Elizabeth Ayoola:Join us next time to hear about managing finances with an HSA. Follow Smart Money on your favorite podcast app. That could be Spotify. It could be Apple Podcasts, iHeartRadio. We don't really care where it is. Just follow us and you can automatically download new episodes.

41:54Sean Pyles:Here's our brief disclaimer. We're not your financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances.

42:04Elizabeth Ayoola:This episode was produced by Tess Vigeland. Hillary Georgie helped with editing. Eve Krogman mixes our audio and our video. Huge thank you to NerdWallet's editors for their help.

42:13Sean Pyles:And with that said, until next time, turn to the nerds.

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