For the growing ranks of small business owners and solo practitioners, navigating the landscape of retirement savings plans can be daunting, yet the opportunities for significant tax-deferred growth are substantial. Many, however, may not be fully capitalizing on these options, often defaulting to simpler but potentially less optimal choices. This complexity was recently unpacked by Dan LaRosa, Director of Corporate Retirement Plans at Ritholtz Wealth Management, in a discussion on the “At The Money” segment with Barry Ritholtz on April 29, 2026.
LaRosa, a Qualified Plan Financial Consultant (QPFC) and Accredited Investment Fiduciary (AIF) overseeing more than $400 million in various plans, highlighted the primary options available: the SEP IRA and the solo 401(k). While the SEP IRA is often the first recommendation from CPAs due to its simplicity, LaRosa noted that the solo 401(k) can frequently be a superior choice, especially when considering features like the Mega Backdoor Roth. For those still seeking further tax deferral opportunities after maximizing these, a defined benefit cash balance plan can be a suitable next step.
Unlocking Higher Contribution Limits
A critical insight shared by LaRosa concerns the often-misunderstood contribution limits. While the employee deferral limit of $24,500 aggregates across all plans an individual participates in, the overall retirement plan limit of $72,000 applies to each plan. This means that an individual with a full-time employer 401(k) and a separate side hustle or solo gig can potentially contribute an additional $72,000 to a solo 401(k) or SEP, provided their income supports it.
The method to reach this $72,000 maximum varies significantly by plan type:
- SEP IRA: Contributions are entirely employer-based, allowing up to 20% of net income. To max out at $72,000, a net income of approximately $360,000 is required.
- Solo 401(k): Only a portion of the contribution is tied to income, offering greater leverage. An income of about $235,000 to $240,000 can enable a solo 401(k) to reach the $72,000 maximum.
- Mega Backdoor Roth (via Solo 401(k)): Described by LaRosa as a “cheat code,” this feature allows an individual with a net income of $72,000 to contribute the entire amount as Roth contributions to their solo 401(k).
Strategic Trade-offs Based on Income and Objectives
Choosing between a SEP IRA and a solo 401(k) is not a one-size-fits-all decision, according to LaRosa. It hinges on an individual’s income level and specific retirement objectives. For those with lower or variable incomes, the solo 401(k) offers greater flexibility, allowing for maximized contributions even in less prosperous years. If Roth contributions are a priority, the solo 401(k) with its Mega Backdoor Roth feature is unparalleled, enabling up to $72,000 in Roth contributions annually.
Conversely, if an individual’s income is consistently high—exceeding $353,000 to $360,000—and tax deferral is the primary goal over Roth contributions, a SEP IRA can effectively achieve the objective of putting away $70,000-plus per year. LaRosa emphasized, “the lower your income is, the more powerful the solo 401(k) is. You’re just going to have a lot more flexibility with your contributions.”
Employee Considerations and Administrative Burdens
The presence of employees significantly impacts plan eligibility and administrative requirements. A solo 401(k) is designed for owners and their spouses or partners, not for non-owner W-2 employees. LaRosa clarified that a solo K can accommodate multiple partners and their spouses, with each individual potentially contributing up to $72,000, as long as there are no non-owner employees. Once a W-2 employee becomes eligible, the plan ceases to be a solo K, complicating the owner’s ability to maximize contributions without also contributing for the employee.
For SEP IRAs, the eligibility requirement is the “three-of-five rule”: an employee who has worked three out of any five years and earned more than a nominal amount (around $700-$750) becomes eligible. This mandates that the employer provide the same percentage of compensation to eligible employees as they do for themselves, which can quickly become expensive.
In terms of administration, SEP IRAs are notably simpler, requiring only a few forms for setup and no annual maintenance or filings. Owners merely need to track their contributions. Solo 401(k)s, while offering greater flexibility, come with more administrative duties, most notably the requirement to file Form 5500 once the plan’s total assets reach $250,000.
The insights from Dan LaRosa underscore that while the array of retirement plans for small business owners and solo practitioners can appear complex, understanding the nuances of each option—from contribution limits and income thresholds to employee eligibility and administrative overhead—is key to strategically maximizing tax-deferred savings and building a robust retirement portfolio.
