Solo 401(k) and Retirement Plan Limits: 2025 and 2026

Every year the IRS adjusts retirement plan limits, and every year contractors either miss the increase or assume it is bigger than it is. Here are the actual figures for 2025 and 2026, and — more usefully — what actually governs how much you can put away, which for most business owners is not the limit at all.

Solo 401(k) limits: 2025 and 2026

For someone aged 60 to 63 in 2026, the enhanced catch-up stacks on top of the annual additions limit, taking the practical ceiling to $83,250.

The number that actually constrains you

Here is what the limit tables never tell you. In an S-corp, the employer contribution is calculated on your W-2 wages — not on business profit, not on distributions. So your salary sets the ceiling long before the IRS limit does.

At a $120,000 salary, the employer side caps out around $30,000. Adding the $24,500 employee deferral takes you to roughly $54,500. The $72,000 headline is not reachable at that salary no matter which plan you choose.

To actually hit $72,000 through employer contributions alone you would need W-2 wages near $288,000. Most solo contractors pay themselves a fraction of that.

The trade-off nobody explains properly

Every S-corp owner is told to keep salary reasonable but not excessive, because distributions escape payroll tax. That advice is correct and incomplete.

A lower salary saves roughly 15.3% in payroll tax on the shifted amount. But it also shrinks the 25% employer contribution you can make — and that contribution is a deduction against income taxed at your marginal rate, which for a profitable contractor is usually higher than 15.3%.

Push salary too low and you save payroll tax while losing a larger income tax deduction. The right salary is the one that satisfies reasonable compensation and supports the contribution you intend to make. Those two numbers have to be set together.

Solo 401(k) versus SEP-IRA at real salaries

A SEP-IRA allows employer contributions of up to 25% of wages, capped at the annual additions limit. A Solo 401(k) allows the same employer contribution plus the employee deferral.

At that $120,000 salary: SEP gets you about $30,000. Solo 401(k) gets you about $54,500. Same salary, same 25%, $24,500 more sheltered — because the deferral does not depend on wages.

The SEP’s advantage is timing. You can establish and fund one as late as your extended filing deadline, which matters if you are deciding after the year has closed. A Solo 401(k) generally has to exist by year end.

Deadlines that catch contractors out

• Plan establishment. A Solo 401(k) generally must be established by the end of the tax year to take deferrals for that year. Decide in November, not March.
• Employee deferrals must be elected and processed through payroll during the year. You cannot retroactively decide you deferred.
• Employer contributions can generally be made up to the extended filing deadline.
• Form 5500-EZ becomes an annual filing obligation once plan assets exceed $250,000. Missing it carries real penalties.

Where construction makes this harder

Contractors have uneven years in a way salaried business owners do not. Two consequences:

• A profit-sharing component gives you flexibility. You can contribute heavily after a strong year and lightly after a hard one, without the fixed obligation a defined benefit plan carries.
• Retainage and slow collections distort the picture. A profitable year on paper can be a tight year in the bank. Fund the plan against cash you actually hold, not against a P&L that includes money still sitting with the customer.

If you are over 45 and behind

A defined benefit or cash balance plan allows contributions well beyond the annual additions limit — sometimes several times it. The cost is a real annual funding obligation regardless of how the year went, plus an actuary.

For a consistently profitable owner in their fifties who started saving late, nothing else comes close. For a contractor with swinging cash flow, that fixed obligation needs careful thought before you commit.

The short version

For 2026 the headline numbers are $24,500 in deferrals and $72,000 in total additions, rising to $80,000 at 50 and $83,250 between 60 and 63. But your salary, not the limit, is what decides how much of that you can reach.

Set the salary and the plan in the same conversation. Deciding them separately is how contractors end up saving payroll tax and losing a bigger deduction.

Limits are indexed annually and confirmed here against the IRS announcements for each year. General information, not advice for your situation — talk to a CPA before acting on it.

Disclaimer: This content is provided for educational purposes only and is not legal, tax, accounting, or financial advice. Every situation is unique, so consult your own attorney, CPA, or financial advisor before making decisions based on this information.