I enjoy being my own boss, especially after I learn how much American businesses are supported financially from the perspective of tax efficiency.

I was also happy to learn more about the awesome flexibility, options, and much higher limits of tax-advantaged savings available to a business owner rather than an employee.


What is my business?

Aside from my W2 day job (sometimes night, too, sometimes around the clock… 24 hour shift) as a radiology resident, I also receive 1099 income from my tutoring/consultation business, book royalties, and this blog (even though the bog is in the deep red in terms of net profit.)

Why do I want to learn about business owner tax-advantaged savings?

After I max out the 18k limit of 401k at my residency program and the 5.5k Roth IRA, I need more tax-advantaged saving space. I much prefer to put money in a tax efficient vehicles such as individual/solo 401k, SEP-IRA, SIMPLE IRA discussed in this post, than a taxable brokerage account (although I currently do have about $1,200 play money in a free, fee-less, mobile app called Robinhood).


Self-employed individuals and businesses employing only the owner, partners and spouses have several options for tax-advantaged savings: an individual 401(k) plan, a SEP IRA, a SIMPLE IRA or a profit-sharing plan. Each option has distinct features and amounts that can be contributed to the plan each year. Use the self-employed 401(k) calculator to estimate the potential contribution that can be made to an individual 401(k) compared to profit-sharing, SIMPLE or SEP plans for 2008.

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2015 and 2016 401 k Contribution Limits Deadlines

The business owner wears two hats in a 401(k) plan: Employee and employer.

Contributions can be made to the plan in both capacities.

The owner can contribute both:

Elective deferrals up to 100% of compensation (“earned income” in the case of a self-employed individual) up to the annual contribution limit:

  • 2015: $18,000 or $24,000 if age 50 or over; and

Employer non-elective contributions up to:

  • 25% of compensation as defined by the plan, or for self-employed individuals, see discussion below.
  • One can contribute to an IRA, move it into a 401(k) account, and contribute in-full to 401(k). However, not all of the contribution would be a deductible contribution.
  • 401(k) employer may make an in-kind contribution to the plan. All other rules still apply – i.e., a disqualified persons may not be securing the loan.
  • Employer matching or non-elective contributions are always made “pre-tax.”  Employers cannot make Roth contributions.


Vanguard i401k comparison
Get a larger/printable version by clicking on this comparison table.

solo 401k

Self-Employed Options for Tax-Advantaged Savings

2 thoughts on “Self-Employed Options for Tax-Advantaged Savings

  • October 7, 2016 at 7:38 am

    I’m a big fan of putting 1099 money into a Solo 401(k). I think most people don’t even realize that money that you earn from even simple things like driving for Uber or doing Postmates can be saved away in an self-employed retirement account.

    For a future high income earner, I think a Solo 401(k) makes the most sense because it allows you to still do a backdoor Roth in the future without messing with the pro-rata requirements.

    As an added benefit for myself, I can actually contribute the entirety of my side hustle income because my regular employer plan is a 457(b), rather than a 401(k). In other words, even if I max out my 457(b), I can still put up to 18,000 in 1099 income into a Solo 401(k) as my employee contributions (I haven’t quite figured out a way to make $18k in side hustle income, but it still allows me to put a good amount away).

    • October 8, 2016 at 7:47 pm

      totally agree. 401k for dog walking even, anything 1099.
      your plan sounds like a great plan, thanks for sharing!


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