Maximize Your Tax Savings: The Ultimate Guide for Gen Y and Gen Z Solopreneurs Using a Combo Solo-K and Solo-DB Plan

In the fast-paced world of solopreneurship, Gen Y and Gen Z entrepreneurs are rewriting the rules of wealth creation. These digital natives are scaling businesses, raising revenue, and amassing wealth faster than any previous generation. But with great success comes great responsibility—especially when managing your tax bill.

Suppose you’re an ultra-high-income solopreneur looking to keep more of what you earn. In that case, it's time to explore the powerful tax benefits of combining a Solo 401(k) (Solo-K) with a Solo Defined Benefit (Solo-DB) plan. This dynamic duo can help you supercharge your retirement savings while slashing your tax liabilities.

Why Solopreneurs Need a Strategic Tax Plan

Let’s be real: running a successful business is hard enough without the IRS taking a massive cut of your profits. For solopreneurs generating significant income, the tax burden can feel overwhelming. But here’s the good news: with the right strategy, you can legally shield a substantial portion of your earnings from Uncle Sam.

The Power of the Solo-K

The Solo 401(k) is a retirement game-changer for solopreneurs. Unlike traditional IRAs, which cap contributions at modest levels, a Solo-K lets you stash away much more. In 2024, you can contribute up to $22,500 as an employee and an additional 25% of your net earnings as an employer. If you’re 50 or older, add another $7,500 in catch-up contributions, bringing your total potential savings to $66,000.

But that’s just the beginning.

Supercharge with the Solo-DB Plan

Let’s talk about the absolute powerhouse: the Solo Defined Benefit plan. If you’re earning a high income, the Solo-DB allows you to sock away up to $300,000 or more annually, depending on your age, income, and retirement goals. These contributions are tax-deductible, so you can significantly reduce your taxable income while building a hefty retirement fund.

The Solo-DB is designed to provide a specific retirement benefit, offering the stability of a pension with the flexibility you need as a business owner. The ability to contribute such large amounts can be a game-changer, especially if you're looking to accelerate your savings or catch up after years of focusing on growing your business.

The Ultimate Combo: Solo-K + Solo-DB

When you combine the Solo-K and Solo-DB, you unlock a dual advantage. The Solo-K provides flexibility with higher contribution limits and a Roth option, while the Solo-DB allows massive tax-deductible contributions. Together, these plans enable you to maximize your retirement savings and minimize your tax liabilities—a win-win for any ultra-high-income solopreneur.

Real-World Example: The $1.4 Million Gen Y Family Business

Let’s say you and your spouse are running a successful Gen Y family business with an annual net income of $1.4 million. Both of you can participate in these qualified plans, so the tax-saving potential is substantial.

• Solo-K Contributions: You can contribute up to $66,000 (if 50 or older) to your accounts, totaling $132,000.
• Solo-DB Contributions: Depending on your age and income, you might contribute $250,000 each to your Solo-DB plans. That’s another $500,000 in contributions.

In this scenario, you’re looking at a combined $632,000 in tax-deductible contributions. This strategy could reduce your taxable income from $1.4 million to $768,000, significantly lowering your tax bill while allowing you to build substantial retirement savings.

The Power of Pre-Tax Compounding and Investment Flexibility

One of the most compelling benefits of the Solo-K and Solo-DB combo is the power of pre-tax compounding. By contributing to these plans, you’re saving on taxes today and allowing your investments to grow tax-deferred. Over time, this compounding effect can lead to substantial wealth accumulation.

Both the Solo-K and Solo-DB offer considerable investment flexibility. You can choose from various investment options, including stocks, bonds, mutual funds, and alternative assets like real estate, crypto, or private equity. This flexibility allows you to tailor your investment strategy to your risk tolerance and financial goals, maximizing potential returns.

A Word of Caution: The Complexity of Adding Employees

While the Solo-K and Solo-DB plans are highly effective for solopreneurs, there’s an important caveat: adding W-2 employees to your business becomes more complex and costly. Once employees are involved, you must meet specific nondiscrimination requirements, provide comparable benefits to eligible employees, and navigate a more intricate administrative process. This can significantly increase the cost and complexity of maintaining these retirement plans.

Legacy Planning and Beyond

Another often overlooked benefit of this strategy is its power in legacy planning. The substantial assets you accumulate in these plans can be strategically passed on to your beneficiaries, ensuring your wealth is preserved for future generations. Plus, these plans generally offer protection from creditors, adding an extra layer of security to your hard-earned wealth.

Take Action: Don’t Leave Money on the Table

If you’re serious about keeping more of your money and securing your financial future, it’s time to take action. Setting up a combo Solo-K and Solo-DB plan requires careful planning, but the rewards are worth the effort. Consult with a financial advisor who understands the unique needs of high-earning solopreneurs, and start building a tax-efficient retirement strategy today.

The path to financial freedom isn’t just about making more money—it’s about keeping more of it. With the right combination of retirement plans, you can do just that. Don’t let the IRS take more than their fair share. Leverage the power of the Solo-K and Solo-DB plans to secure your future and maximize your wealth.

Final Thoughts

In the world of Gen Y and Gen Z solopreneurs, the smart ones aren’t just focused on growth—they’re focused on strategy. By integrating a Solo-K and Solo-DB plan into your financial playbook, you’re not just planning for retirement but a future where your money works as hard as you do. Just remember, as your business grows and you add employees, you must reassess these strategies to ensure they continue to serve your best interests.

Donald F. Morgan is a full-time financial advisor, serial entrepreneur, lifelong amateur economist, and political scientist. He is often seen on television news and quoted in publications as diverse as The Financial Times, US News and World Report, and Spokane Journal of Business. He and his wife Violet produced and directed a local television talk show, and he has had a column in the Coeur d’Alene Press. His views are his own.