Retirement planning is one of the most effective strategies to reduce taxable income while securing financial stability. Let’s consider the case of a married filing jointly (MFJ) couple in California to illustrate how retirement plans like a Solo 401(k) and a cash balance plan can provide significant tax savings.
Scenario:
Doctor spouse earns $400,000 annually through an S-Corp.
Second spouse earns $100,000 as a W-2 employee.
The couple’s total household income is $500,000, placing them in the 37% federal tax bracket for 2025 and subject to California’s top state tax rate of 13.3%.
Due to their high income, they do not qualify for the Qualified Business Income (QBI) deduction.
Start with a Solo 401(k): A Must-Have for Independent Professionals
The Solo 401(k) is a powerful tool for independent professionals to save for retirement and reduce taxable income. Compared to a SEP IRA, many enjoy higher contribution limits and the option for Roth contributions, making it a better choice for long-term planning. Avoid SEPs if you plan to do Roth conversions, as the pro-rata rule can create complications.
2025 Contribution Limits:
Employee Contribution: Up to $23,500 (or $31,000 if age 50+). (Source: IRS)
Employer Contribution: Up to 25% of net earnings, with a combined total limit (including employee contributions) of $70,000. (Source: IRS)
Total Contribution: $70,000 (or $77,500 with catch-up contributions for those aged 50 and over).
Example: The doctor spouse contributes $23,500 as an employee and $46,500 as an employer, maximizing the Solo 401(k) with $70,000 in pre-tax contributions.
Recommended Provider: MySolo401k.net specializes in flexible and affordable Solo 401(k) setups for independent professionals.
Adding Your Spouse to the Solo 401(k): Double the Savings Potential
If your spouse can legitimately work for your medical S-Corp, adding them to your Solo 401(k) plan can double the contribution potential. This strategy is particularly effective for high-income households looking to maximize tax-deferred savings.
Example:
The doctor spouse contributes $23,500 as an employee and $46,500 as an employer, reaching their $70,000 limit.
The second spouse earns $30,000 from the S-Corp and contributes $23,500 as an employee and $7,500 as an employer (25% of their earnings), totaling $31,000.
Combined Contributions: $101,000 in pre-tax savings, significantly reducing taxable income.
Adding a Cash Balance Plan: Advanced Tax Savings
For high-income earners, pairing a Solo 401(k) with a cash balance plan provides an opportunity to defer even more income. These plans are defined benefit plans that allow contributions well beyond 401(k) limits, depending on age and income.
Example: The doctor spouse contributes $70,000 to a cash balance plan, bringing the total pre-tax retirement contributions to $140,000.
Recommended Provider: Emparion offers tailored cash balance plan setups to maximize contributions for high-income earners.
Tax Impact
By reducing their taxable income by $140,000, the couple saves significantly:
Federal Taxes Saved: $140,000 x 37% = $51,800.
California State Taxes Saved: $140,000 x 13.3% = $18,620.
Total Tax Savings: $51,800 + $18,620 = $70,420.
Additional QBI Deduction Impact
Before these contributions, the couple’s high income disqualified them from the QBI deduction. By lowering their taxable income, they regain partial eligibility, potentially adding another $10,000 to $20,000 in federal tax savings depending on their adjusted taxable income.
Key Takeaways
Start with a Solo 401(k): High contribution limits, Roth options, and simplicity make it an essential first step.
Add Your Spouse to the Plan: Maximize savings by doubling contributions if your spouse can work for your S-Corp.
Add a Cash Balance Plan: For those with higher income, this plan allows significant additional tax-deferred contributions.
Leverage Professional Providers: Use trusted services like MySolo401k.net and Emparion for optimal setups.
Plan Strategically: Contributions not only lower taxable income but may also unlock additional deductions like QBI.
Need Help Planning?
At Ken Eremita CPA, Inc., we specialize in tax and business strategies for independent professionals. Let us create a tailored plan that maximizes your tax savings while securing your financial future. Contact us today to get started! This blog breaks down the best retirement plans for independent professionals, including Solo 401(k)s and cash balance plans. Real-life scenarios and tax strategies show how to maximize your savings while maintaining cash flow.
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