Do you have a retirement plan? You should. Investing in your future is the best way to ensure you will be comfortable during retirement. Today we’ll be talking about the benefits of consistent pre-tax investing using Solo and Safe Harbor 401(k)s to make this dream a reality.

The Power of Pre-Tax Investments

So, what makes pre-tax investments so powerful? It’s right in the name. When making pre-tax investments into a retirement account, you get to defer money from your W-2 wages before they’re even taxed.

While you’ll be taxed on your future distributions, having more money to invest in the beginning usually means more growth and a higher account balance over time. Plus, most people find themselves in a lower tax bracket during retirement, so the taxes taken out upon distribution tend to be lower than if they were taken out of the original contribution.

Solo 401(k) Plans

Let’s start with the simplest option, a Solo 401(k). These plans are available to freelancers, independent contractors, and anyone else that is self-employed.

Dual Contribution Feature

This plan allows you to make contributions as both the employee and the employer, so you can start out with larger tax-deferred investments.

2025 Contribution Limits

For 2025, the contribution limits are:

  • Elective contribution limit: 100% of earned income up to $23,500
  • Employer non-elective contribution limit: The lesser of $70,000 or 25% of your adjusted gross income
  • Catch-up contributions (age 50+): Additional $7,500

These base amounts increased from $23,000 and $69,000 in 2024.

Additional Benefits

The Solo 401(k) also comes with added flexibility, such as:

  • Requiring less paperwork to maintain
  • The ability to diversify your portfolio with more investment options
  • The ability to take out loans against your equity in the plan

Important Limitation

There’s one major stipulation though: You, as the owner, are the only one that can participate in the plan, and your business can’t have any employees working for it. The only exception being your spouse. This is a retirement plan with a lot of benefits, but just like the name suggests, you’ll have to fly solo.

Safe Harbor 401(k) Plans

If your business has other employees besides your spouse, a Safe Harbor 401(k) should be considered. These plans are a great way to get employees to contribute while reducing the administrative hurdles that come with other plans.

How It Works

Under this design, the employer sets up a fixed mandatory contribution that’s always 100% vested, meaning the employee owns your entire contribution as soon as it’s made.

Having these said contributions allows you to eliminate various testing requirements as well as the obligation of maintaining a vesting schedule. Plus, the amount of your matching contributions are fully deductible on your taxes.

Contribution Limits

Safe Harbor plans have the same contribution limit as a traditional 401(k):

  • 2025 contribution limit: $23,500
  • Catch-up contribution (age 50+): Additional $7,500

So, if you want a plan that requires less administration, this might be the one for you.

The Rule of 72

Now, why is early pre-tax investing a great idea? To answer that question, we can use the Rule of 72. This is a commonly used formula that estimates the number of years it takes to double an investment based on its given rate of return.

Simply divide the number 72 by your annual compounded interest rate, and it gives you a rough estimate of how long it will take that single investment to double.

Example

For example, if you make an investment into an account with an annual interest rate of 8%, you can divide 72 by 8 to calculate 9 years before your investment doubles.

This highlights why you want to start making regular contributions as soon as possible. More time and more contributions mean a faster trip to a comfy retirement.

Adjusting the Formula

It’s important to note that this works better for interest rates ranging from 6% to 10%. There’s an easy fix for this though. In case you have an interest rate outside that range, you can:

  • Decrease your 72 all the way to 69 for higher interest rates
  • Increase it to 74 for more conservative estimates

Stay Updated

Contribution limits are adjusted annually by the IRS for inflation. If you have any questions about these retirement strategies, please reach out to our office and we will be happy to help.