How S Corps can use a Solo 401k for Retirement Planning

While working for yourself has many upsides, a downside for many people is that you give up corporate benefits, like retirement plans. But that doesn’t mean you’re without options–a Solo 401k offers high contribution limits and great flexibility.

To make it easy for Lettuce S Corp owners to invest in their retirement, we’ve partnered with Carry, who lets you easily launch a Solo 401k in minutes, and efficiently manage it. Even better, Lettuce customers can get a full year of a Solo 401k for only $29–that’s 90% off.

Take a look at our breakdown of what a Solo 401k plan is, who it’s right for, and how they work.

What’s a Solo 401k?

A solo 401k is a retirement account for people who are self-employed or are small business owners. Like any special tax-advantage account, there are rules and limits.

What makes Solo 401k plans great for an S Corp?

• You can contribute two ways, both as an Employee and your own Employer
• You can contribute up to $69,000 (or $76,500 if you’re over 50). This is much higher than a traditional plan as a W2 employee. How much you can contribute depends on your income (more below).
• You can use multiple contribution strategies. You can make pre-tax contributions (deductions) or post-tax contributions (Roth). If it’s pre-tax, the contribution is a tax deduction now. If it’s post-tax, you get to skip the taxes when you withdraw your money in the future.
• You have investment freedom. you can invest in any asset class, including alternative assets.
• Now, they’re easy. Thanks to our partnership with Carry and their exclusive pricing for Lettuce customers.

Who is eligible for a solo 401k?

If you’re eligible for an S Corp, you’re eligible for a Solo 401k. You need to be a business owner with no employees, unless it’s your spouse. There are no income limits or age limits. You also qualify even if you have a full-time job and you can make contributions to both your 401k at work and also to your Solo 401k.

How do I contribute as an Employee and an Employer?

The total solo 401k contribution limit for 2024 is $69,000 (or $76,500 you’re over 50), which covers contributions you make as the employee of your business, and as your own employer. Each type of contribution has its own rules and limits. Carry makes it easy for you to create a strategy on how you want to classify your funds, and Lettuce makes it easy to ensure you get the right tax benefits from them. 

Employee contributions

• Type: Pre-tax, Roth post-tax, or both.
• Limit: $23,000 in 2024 (or $30,500 if you’re over 50).
  • Note that your Employee limit exists across any 401k contribution you made as an employee this year, including to another plan maybe as a W2 employee.

Employer contributions

• Type: Pre-tax only.
• Limit: Up to 25% of your compensation* with a $46,000 maximum
  • *Here, “compensation” is defined as your net-adjusted self-employment earnings or W-2 income. Or, your income after your deductions
  • If the business is incorporated (no LLC or S Corp), you can only take ~20%
  • Together, this helps you hit the $69,000 maximum for an individual (or $76,500 if you’re over 50). 

Example:

Let’s take a look at an example strategy that aims to maximize the retirement contributions for an S Corp that makes $200,000 in revenue.

Example, Maximizing Post-Tax Contributions

• Total S Corp Revenue: $200,000
  • Expenses (example): - $20,000
  • Net compensation: $180,000
• Post-Tax Employee Contribution: $23,000 (max)
• Pre-Tax Contributions: $45,000 (max 25% of Net Compensation)
• Total Retirement Contributions: $68,000
• Total Taxable Income: $135,000

By reducing their taxable income from $180,000 to $135,000, this S Corp owner is saving ~$15,000 in taxes, and scaling up the amount they’re saving for retirement. In addition, the Post-Tax contribution of $23,000 can be converted through a mega backdoor Roth so there will be no taxes on its growth when its withdrawn.

When is the contribution deadline?

You can make contributions until the federal tax filing deadline–March 15 for S-Corps, Multi-Member LLCs, and Partnerships, and April 15 for C-Corps, Sole Props. That means that you can estimate your contributions as you go, and then make a final contribution before your taxes are due.

When can you withdraw?

Just like any 401k plan, you can take qualified distributions from your solo 401k without any penalties when your turn 59½ (not 59, and not 60). You can make early withdrawals, but they’re subject to a 10% penalty on top of the income tax on whatever you withdraw.

How do I get started?

Setting up a Carry Solo 401k is easy.

• Lettuce customers have access to a special pricing for your first year–only $29. Just login to your Lettuce dashboard for your special sign-up link.
• From there, Carry will walk you through an easy and simple 401k set-up process. You’ll be able to choose the types of contributions you want to make, and calculate how much you can contribute for your business.
• Lastly, Lettuce will make sure you get all the tax savings you deserve from your contributions.

Soon, you’ll be putting away more than you could before and making the most of working for yourself.