When an independent business owner tells a CPA, “I’m maxing out my 401(k),” there is an important follow-up question: Which part of it?
By Jeff Herman
For an eligible business owner with no common-law employees other than a spouse, a one-participant or Solo 401(k) can provide considerably more planning flexibility than the name might suggest.
The reason is simple: The business owner wears two hats.
The IRS treats the owner as both an employee and an employer for purposes of the plan. That means contributions can potentially be made in both capacities.
Lever #1: The Employee Deferral
The first component is the one most people recognize.
As an employee, an owner may make an elective deferral into the 401(k).
For 2026, the elective-deferral limit is $24,500. Participants age 50 or older may qualify for additional catch-up contributions, and a higher catch-up limit applies for participants ages 60 through 63.
That employee limit, however, does not necessarily represent the maximum amount that can ultimately be directed into the plan.
Lever #2: The Employer Contribution
The business can also contribute as the employer.
IRS rules generally allow employer nonelective contributions subject to compensation, entity type, and other plan limitations. Calculations for a self-employed individual differ from those for an incorporated business because earned income must account for certain deductions.
For 2026, total annual additions to a participant’s defined-contribution account generally cannot exceed the lesser of 100% of compensation or $72,000, excluding eligible catch-up contributions.
This distinction comes up frequently in my conversations with CPAs. A business owner who has reached the employee-deferral limit may still have additional contribution capacity through the employer side of the plan.
This option can sometimes slip through the cracks.
Lever #3: Profit-Sharing Plan Design
“Profit sharing” is sometimes discussed as a third retirement-savings lever, although technically it is generally an employer contribution within a defined-contribution plan.
In other words, the client’s retirement contribution strategy does not necessarily end with the amount withheld as an employee contribution.
Why This Matters to a CPA
Consider a successful independent professional who is generating high annual income but contributing only the employee maximum to a retirement account.
If no one looks at the business and retirement plan together, additional opportunities can easily go unnoticed.
That is why the CPA can play such a strategic role in the client’s retirement plan. You already know:
- How the business is structured.
- What the owner earns.
- Whether profitability is consistent.
- Whether cash flow appears sufficient.
- What other retirement arrangements may exist.
- Whether the owner is looking for additional long-term planning opportunities.
Those facts can tell you when it may be worth bringing an investment advisor into the conversation.
One Important Caveat
A Solo 401(k) is intended for a business owner with no common-law employees other than a spouse. Once eligible employees enter the picture, additional participation, testing, and compliance requirements can apply.
The IRS is also clear that a one-participant 401(k) is not a special category of retirement plan. It is a 401(k) subject to the applicable rules and requirements.
That is why plan design should follow the facts, not the other way around.
The primary message for CPAs: “Maxing out the 401(k)” may not tell you the whole story. When a profitable business owner wants to save more, it may be worth asking whether all of the available retirement-plan levers are actually being used.
If you have a business-owner client who is contributing the employee maximum but may not be using the full flexibility of the plan, let’s talk. Together, we can review the current structure and determine whether the business has additional retirement-saving capacity.
For some owners, “maxing out the 401(k)” is only the beginning of the conversation.