Solo 401(k) Contributions Can Save You $30,000+ in Taxes This Year

"“By putting $72,000 in, you basically get a $30,000-plus tax benefit.” The pitch is that a self-employed earner can shovel up to $72,000 into a Solo 401(k), skip tax on every dollar of it this year, and let it grow tax-deferred until withdrawal."

"“To save $30,000-plus on a $72,000 contribution, your combined federal and state marginal rate has to clear roughly 42%. That requires the 37% federal bracket plus meaningful state tax on top.” The claim is mathematically correct, but it only lands for a specific profile: a top-bracket earner in a high-tax state."

"“A $72,000 pre-tax Solo 401(k) contribution, fully deductible against ordinary income, removes that money from a combined marginal stack north of 50%. The first-year tax reduction is closer to $36,000. The host's number is, if anything, conservative for her.” This example assumes a high-income self-employed earner in California with additional Medicare-related exposure."

"“One more wrinkle the quote glosses over: You cannot just write a $72,000 check. The Solo 401(k) cap combines an employee deferral plus an employer profit-sharing piece tied to net self-employment income.” The contribution limit depends on net earnings and the required structure of the employee and employer components."

A Solo 401(k) can allow self-employed people to contribute up to a combined limit that includes an employee deferral and an employer profit-sharing amount tied to net self-employment income. Contributions can be deductible when made as traditional, reducing taxable ordinary income and allowing tax-deferred growth until withdrawal. The claim that $72,000 produces a $30,000-plus tax benefit depends on having a combined federal and state marginal tax rate above roughly 42%. High earners in high-tax states can see first-year savings around $36,000, while lower earners in no-income-tax states may save closer to $17,000. Contribution eligibility and the split between Roth and traditional must be calculated correctly to avoid over-contributing or mis-electing options.

Read at 24/7 Wall St.