Is College Worth It in 2026? Plus, How to Split Solo 401(k) Contributions to Save More

Summary

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NerdWallet's Smart Money Podcast – May 7, 2026

Episode Summary: “Is College Worth It in 2026? Plus, How to Split Solo 401(k) Contributions to Save More”

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Episode Overview

In this episode, hosts Sean Pyles and Elizabeth Ayoola dive into two of today’s most pressing personal finance questions: Is college still a worthwhile investment for the class of 2026, given rising costs, debt, and new challenges like AI? And for entrepreneurs, what’s the smartest way to contribute to a solo 401(k) plan for maximum retirement savings? The show features data-driven analysis, actionable advice, and real-life experience from NerdWallet experts and guest advisor Ryan Sterling.

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1. Is College Worth It in 2026?

[Segment Begins 02:45]

Guests:

• Ana Helhosky (NerdWallet News)
• Erin El Isa (NerdWallet Data Writer)

The Shift in Perception

• Contradictory Views:
  – 70% of Americans believe college isn’t as important as before to earn a good living, but 65% still view a four-year degree as a smart financial move.
  — “People hold competing beliefs all the time, right?...A four-year degree being a smart financial move is generally true…But…it's not the only path to success.” (Erin, 04:20)

• Rise of Trades:
  – 75%+ say trade jobs are more secure than office jobs, largely due to concerns over AI automating white-collar roles.
  — “So, ‘learn a trade’ seems to be the new ‘learn to code’. ...AI is more capable of automating office and tech-based work than hands-on physical labor like the trades.” (Erin, 05:10)

• AI’s Impact:
  – 2 in 5 high schoolers say AI influences their job/career goals; 39% consider college alternatives because of AI innovation.

College Affordability & The “Broken” System

• Student Debt Concerns:
  – 78% agree the federal student loan system is broken, but federal loans are still the preferred option over private lenders due to interest rates, payment flexibility, and forgiveness eligibility. – 2026 grads entering a four-year public college might accumulate about $43,500 in student loans over five years (typical graduation timeline).

• Graduation Timelines:
  – Only 44% of college students graduate in four years; 57% take five, making costs and debt higher.

Minimizing Student Debt

• Key Strategies:
  – Start at community colleges or in-state public universities unless you get major scholarships. – “Take out only what you need...I would have taken out only what I needed for school and basic living expenses.” (Erin, 10:02) – Keep applying for scholarships throughout college, not just at admission. – Parents: Focus on guiding your child toward financial decisions but realize they will make their own mistakes.

Upcoming Student Loan Repayment Changes (Effective July 1, 2026)

• Repayment Plans Streamlined:
  – Two new plans for federal loans starting July 1:
  - Tiered Standard Plan: 10–25 years based on loan amount (e.g., $50,000 = 20 years) with lower payments for larger balances, but more interest paid over time. - Repayment Assistance Plan (WRAP): Income- and family size-based payments (1–10% of AGI, minus $50 per dependent), minimum $10/month, 30-year forgiveness, and an interest subsidy.

  — “[With WRAP] regardless of your payment, your principal balance will go down by at least $50 a month. And then, yes, after 30 years…any remaining balance will be forgiven.” (Erin, 12:21)

Hosts Reflect: Is College Personally “Worth It”?

• Sean: “100%. I learned so much. I made some amazing friendships and it got me the job I have today. So thank you, college…Although I still am paying off my student loans, which I resent.” (Sean, 13:07)
• Elizabeth jokes about starting a “Forgive Sean’s student loans” campaign.

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2. Solo 401(k) Contributions for Entrepreneurs

[Segment Begins 17:13]

Featured Guest:

• Ryan Sterling (NerdWallet Wealth Partners)

Solo 401(k) Basics

• Who’s Eligible?
  – Any self-employed individual, including gig workers, S corps, and side hustlers with 1099 income. – “You can basically say, ‘Hey, I’m starting a business and I qualify for a solo 401(k).’” (Ryan, 20:45)

• Contribution Limits (2026 figures): – Employee: Up to $24,500 (or $32,500 if age 50+ via catch-up). – Employer: Additional up to $72,000 (total between both roles).

  — “The maximum that you can do is $72,000. …You have to have enough income to be able to support that. …But you can put away $72,000 on a pre-tax basis…” (Ryan, 19:04)

  – For S Corps: Employer portion is 25% of W2 income.
  – For others: 20% of business profits.

• If you have a W-2 and a solo gig:
  – Employee limits ($24,500) are shared between jobs; employer portions are separate.

Strategy: How to Split Contributions

• “...Fill up the employee portion first. …You get that $24,500, you don't necessarily have to worry about any sort of calculation that goes into how much you can put into the employer...the employer portion...there's a calculation in place.” (Ryan, 22:33)

• When cash flow is limited:
  – Prioritize the employee portion; only increase employer contributions as business profits rise.

Key Tips and Mistakes

• Don’t Over-Contribute:
  – Avoid going “too aggressive” on retirement savings if it severely limits your business growth or personal cash flow. – “If you're putting $72,000 into this and you can't live your life or you don't have as much money to invest in your business or you're feeling cash constrained, that's a problem.” (Ryan, 34:39)

• GET HELP:
  – Work with a CPA for contribution calculations, especially if your business legal structure is changing or you have multiple income streams.

• Reporting Alert:
  – Once solo 401(k) accounts reach $250,000+, you must file IRS Form 5500. Penalties for missing this are steep. (Ryan, 35:45)

Traditional vs. Roth Solo 401(k)

• Tax treatment is same as regular 401(k)s: – Traditional: Tax deduction now, pay tax later. – Roth: Pay tax now, tax-free withdrawals later. – Decision depends on current vs. expected future tax bracket.

SEP IRA vs. Solo 401(k)

• SEP IRAs were historically easier to set up but have lower contribution flexibility.
• Solo 401(k)s are now easy to open, with higher contribution potential.

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Memorable Quotes & Moments

• “Learn a trade seems to be the new ‘learn to code.’” — Erin, 05:10
• “I want all the solopreneurs listening...to have an enormous amount of optimism but it's also important to hedge. I think putting money into retirement account is a great hedge just in case things don't go the way that you think they're going to go.” — Ryan, 39:10

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3. Takeaways for Listeners

• On College:
  – College is still generally financially rewarding, but it’s no longer the default or only path; trade careers and alternative skills/education paths are more viable than ever. – To manage debt: Choose an affordable school, borrow conservatively, graduate on time, keep hunting for scholarships.

• On Solo 401(k)s for Entrepreneurs:
  – Max out employee contributions first; calculate (and get help for) the employer side. – Don’t compromise your business or liquidity just to maximize tax advantages—strike a balance. – Start saving for retirement early, but don’t worry if you need to prioritize business growth in the first few years.

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4. Key Timestamps

• 02:45 – “Is College Worth It?” Data & Discussion
• 04:20 – Competing beliefs on college value (Erin)
• 05:00 – The new security of trades vs. office jobs
• 08:23 – Breaking down the projected $43,500 student debt
• 11:16 – Student loan repayment changes starting July 1, 2026
• 13:07 – Hosts reflect: Was college worth it personally?
• 17:13 – Listener Question: Splitting solo 401(k) contributions
• 18:11 – Who can open a solo 401(k)?
• 19:02 – Employee vs. employer contribution limits
• 22:33 – Best order to contribute: Employee first
• 29:53 – Investment options in solo 401(k)s
• 31:18 – Tax benefits: Pre-tax vs. Roth contributions
• 34:39 – Biggest mistakes: Over-contributing at the cost of business/life
• 39:10 – Entrepreneurs’ need for retirement savings

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5. Action Steps & Advice

• If you’re college-bound in 2026, weigh cost, graduation timeline, and alternatives more than ever before.
• Entrepreneurs: Start with maximizing the employee deferral in a solo 401(k), then allocate employer contributions according to profit—but keep business and personal needs in view.
• Always consult a pro (CPA/advisor) if possible, especially as your business and net worth grow.

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For more listener questions or financial guidance, text or call the Nerd hotline at 901-730-6373, or email [e-mail].

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Transcript

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An increasing number of Americans think college is not as important as it used to be to earn a decent living. So it's only right that we ask the question, is college still a good investment?

[A]

Today we'll be using NerdWallet's 2026 high school grad analysis to help answer that question. Also, we'll be answering a listener's question about solo 401ks. Welcome to NerdWallet's Smart Money podcast where you send us your money questions and we answer them with the help of our genius nerds. I'm Sean Pyles.

[B]

And I'm Elizabeth Ayola. Later this episode, we're gonna be discussing solo 401k options for all the entrepreneurs out there. But first, our weekly Money news roundup where we break down the latest in the world of finance to help you be smarter with your money. Our news colleague Ana Helhosky is back to talk about the findings of the grad study. Welcome back, Ana.

[C]

Thanks, Elizabeth and Sean. So yeah, a new normal analysis of federal data shows that nearly half of 2026 high school grads will go to a four year college and and more than a third of those going to a public four year university will take on student loan debt. But while most people think college is worth it, they also think that the system is broken. So here to talk over the findings of that new study is Erin El Isa, data writer here at NerdWallet. Erin, welcome back to Smart Money.

[D]

Thanks for having me.

[C]

So the results of the new survey which was conducted by the Harris Poll in March, found that nearly 70% say college isn't as important as it used to be to earn a good living. Yet 65% still call a four year degree a smart financial move. How do you make sense of that tension?

[D]

So I mean, people hold competing beliefs all the time, right? So particularly when one of those beliefs is widely seen as common knowledge, a four year degree being a smart financial move is generally true. Based on the average earnings of someone with a degree versus someone without that post secondary education. But with so many college grads facing student loan debt, the potential impact of AI on white collar career prospects and and a tough entry level job market, many may see that while college can be a good investment, it's not the only path to success. Trade school programs can often be completed faster, cost a lot less money and point to a clearer career path than a bachelor's degree.

[C]

So over three quarters of Americans in your survey say that trade jobs are more secure than office jobs. What does that tell us about how people are thinking about the value of a degree right now?

[D]

So learn a trade seems to be the new learn to code. Right? It's that advice everyone's getting. So, so generative. AI in its current iteration is just a handful of years old, feels like it's been here forever, but it really hasn't. And it's already being cited as a contributor to layoffs. So think four, five, six years down the road when 2026 high school grads have become college grads. We can't know what impact it'll have on the broader job market and entry level options. What we do know right now is AI is more capable of automating office and tech based work than hands on physical labor like the trades. So I think this sentiment about trades being safer than office jobs is less a reflection on the intrinsic value of a college degree. Right. And more so the level of impact we think AI will have on different industries in the near future.

[C]

So as you say, with AI reshaping so many fields, it's harder for students to feel confident that a course of study is going to pay off after graduation. So how else is AI coming into play for students when it comes to considering college as well as specifically their career choices?

[D]

Yeah, so I am a mom of littles, and I really do not envy teens or their parents trying to navigate this right now. Hopefully it all gets figured out by the time I'm there. AI, of course it doesn't preclude young people from building strong careers, but in a rapidly changing environment, education and career decisions just, they're not as straightforward as they were when I graduated. That was in the wake of the 2008 recession. So like, you know, we all have our own battles. But this is particularly tricky. So in the study, I reference an external survey of high school students conducted by EAB. And the survey found that around two in five high school students say AI will influence the career or job they pursue. And 39% are considering a college alternative because of advances in AI technology.

[C]

Let's turn to actually paying for college. 78% of Americans agree that the federal student loan system is broken. If so many people think that it's broken, why are students still using it?

[D]

Well, I mean, assuming you can't pay for college through other means, right? Scholarships, grants, part time work, parental help, most will have to take on loans or Just forgo college. So your options for traditional loans are federal or private. Whether or not you agree that the federal student loan system is broken, it's still more appealing than private. Private loans originate with a bank or a lending institution rather than the federal government. They tend to have higher interest rates, less flexible payment plans, and they also won't be eligible for student loan forgiveness like pslf. Also, like federal student loans, they typ likely can't be discharged in bankruptcy. Some students will end up taking on both federal and private loans. But we do recommend you max out federal loans before turning to private.

[C]

Yeah, I would also have people consider the fact that we've seen federal student loan policy shift so much in the last few years. You're probably going to be paying off your loans for a long time. So having a federal student loan seems just in general, the better way to go. Now, the analysis of national center for Education Statistics data found that a typical high school graduate entering a four year public college in fall 2020, 2026 could take on $43,500 in student loans. And walk us through that number. What assumptions are baked in?

[D]

So we have that NCES data through the school year 2022, 2023, and that is data for the average student loan awards. We looked at the prior five years of data to figure out the average annual growth rate so we could project loans into the future. So this is a projection. It's an estimate grounded in what we've seen in recent years. Until I get that crystal ball that I have been asking for. For the purposes of this analysis, we assume a five year graduation timeline. So the 43,500 is the sum of five years of estimated student loans.

[C]

All right, so five years to graduate, not four. Why is that?

[D]

So there's 2025 research from the NCES that finds about 57% of college students graduate within five years, whereas only 44% graduate within five four years. So we are taking that longer estimate since it's more common. That said, one way to minimize student loans is to adhere to that standard four year graduation timeline.

[C]

Sure.

[D]

Now this is easier if you know exactly what you want to do and you don't deviate major, which isn't going to be the case for everyone, but it is a way to save money.

[C]

So what are the most effective strategies that students and parents can use right now to minimize how much that they're actually needing to borrow?

[D]

The best thing you can do to reduce the cost of college is to pick an affordable school. Right. Starting off at a community Community college or going to a public state university in your state of residence. Unless you get hefty scholarships from another school. But for graduating seniors, right, it's likely they already know where they're going and they just need to figure out how to minimize from here, my somewhat obvious advice that I did not take myself is to take out only what you need. So when I was in college I was given some not great advice. It's just take the max offer. Like you'll be making so much money after graduation, it'll be so easy to pay off, you're just going to be rolling in it. I did finally stop doing that my senior year and I was able to pay off my student loans within four years of graduation.

[C]

Oh wow.

[D]

That said, looking back, I would have taken out only what I needed for school and basic living expenses and also keep applying for scholarships. So incoming students have the biggest pool of scholarships available to them. But there are plenty of scholarship options you may be eligible for throughout your college career. That's something your career services center at school can help you with. For my fellow parents, I mean like do your best, right, to guide your kid to make financially informed decisions about school. But they might not listen and that's okay. I you couldn't tell me anything when I was 18. You know, they're adults now. You can do your best to impart this hard won money wisdom, but ultimately they might need to make their own mistakes for this to sink in. Be there for emotional, if not financial support if they end up regretting some money moves along the way. And really try not to say I told you so. That might be tough, but try very wise advice.

[C]

Erin. So there are some major changes to student loan repayments starting July 1 for new borrowers. Can you explain a little bit about what's changing and who it's going to affect?

[D]

For federal student loans taken out on July 1 or later, there will be just two repayment plans. There's the tiered standard plan and the repayment assistance plan which is also known as rep. The existing standard plan we have now has a 10 year repayment term no matter how much you took out in loans. And the new tiered standard repayment plan for loans taken out in July or later will have a repayment term between 10 and 25 years based on the amount you took out. So as an example, if you take out $50,000 in student loans, your standard repayment would be 20 years. What this means is that those with higher student loan balances will have lower payments under the new standard plan than they would under the old plan. However, they'll also pay a lot more interest over time.

[C]

Now, that new repayment option, the Repayment Assistance Plan, bases payments on income and family size, and then any remaining balance is forgiven after 30 years. Who is Wrap best suited for?

[D]

Wrap may make the most sense for those with low incomes and high student loan balances. Minimum payments for most will be between 1 and 10% of AGI, or adjusted gross income, and then payments are then reduced by $50 a month for each dependent you have. The lowest possible monthly payment you can have under wrap is $10. And rap has an interest subsidy. So regardless of your payment, your principal balance will go down by at least $50 a month. And then, yes, after 30 years of payments, any remaining balance will be forgiven.

[C]

All right, again, Those changes start July 1st. Erin, thank you so much for joining us.

[B]

Thank you. And thank you, Ana, for educating us on the new analysis. And what is my verdict? Is college worth it? For me personally, yes. What about for you, Sean?

[A]

100%. I learned so much. I made some amazing friendships and it got me the job I have today. So thank you, college. Although I still am paying off my student loans, which I resent.

[B]

Ooh, forgive Sean's student loans. We need to start a campaign for that man.

[A]

Maybe I should start a GoFundMe or something. I'll send you the link, Elizabeth.

[B]

No. Why me first? Oh, my God. Kidding.

[A]

I mean, you're the one trying to free me from this debt, so we'll talk after this recording. Okay, well, up next, we answer Elizabeth answer's question about solo 401k options. Before we get into all of that though, a reminder listener, to send us your money questions. Maybe you are wondering whether you should actually take out student loans ahead of a career change that you're looking into or not at all. Whatever your money question, hit us up on the Nerd hotline. You can send us an [e-mail] Leave us a voicemail on the NERD hotline at 901-730-6373. That's 901-730-NERD. You can also drop us a comment on Spotify or YouTube in a moment.

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we are back and answering your money questions to help you make smarter financial decisions. This episode's question comes from a listener via text and it's for those who are entrepreneurs or aspiring ones. It's about solo 401ks. Here's the question. Hello nerds. I just opened a self 401k and I was wondering how I should contribute to the employer 401k and employee contribution. Should I contribute an equal amount as an employee and employer to maximize the benefits? If not, what ratio would you recommend?

[A]

To help us answer this listener's question on this episode of Smart Money, we're joined by Ryan Sterling, wealth advisor at NerdWallet Wealth Partners, a wholly owned subsidiary of NerdWallet. Ryan, welcome back to Smart Money.

[E]

Thanks for having me. It's good to be here.

[B]

Let's start with the basics. Ryan. Not everybody is familiar with what a Solo 401k is. It's also known as a self employed or individual 401k. So run us through what it is and how it works.

[E]

Solo 401k plan or individual 401k is a retirement plan for solopreneurs. So a big issue that a lot of solopreneurs have is, hey, you know, my friends that work at bigger companies, they have a 401k through their company, they get all these retirement benefits. What do you have for us who are self employed? And you know, if you're going to kind of go the full 401k route, there's a lot of regulatory concerns. There's, you know, you got to partner with a big 401k provider. So the solution is to offer solopreneurs a solo 401k plan. And as the name suggests, it's a 401k plan that just has one participant, you as a solopreneur. And not only that, but there are actually a lot of tax advantages that you get as a solopreneur that people who are W2 employees at big companies actually don't get.

[A]

Can you outline some of those?

[E]

You get to have kind of two different contributions. So the first one is just like people at any big company, you get to put 24,500 as an employee contribution into the plan. Here's where it gets better is that as a solopreneur, once you finish doing the 24,500, you can then do what's called an employer contribution where you can take some of the profits as the employer and contribute that to the plan. So the maximum that you can do is 72,000. So again, large amount. It's a very large amount. Now you have to have enough income to be able to support that. But to the extent that you do, you can put away 72,000 on a pre tax basis versus again someone who's a W2 employee that might be constrained to 24,500.

[A]

And can you contribute even more if you're over 50 in going this route?

[E]

Yes. If you're over 50, there's something called a catch up contribution. So Instead of the 24,500 you could do 32,500. So instead of the 72,000 you could do 80,000.

[A]

That's pretty nice. But again, like you said, you have to have that income from your company to be able to hit that.

[E]

That's exactly right. So that's where it's important to work with a cpa. There are a lot of nuances involved, but I think the general takeaway should be as a solopreneur you get the 24,500 but you should have in your mind that you can do more as the employer and maybe as your business

[B]

grows too you can contribute more. But Ryan, I also want to just quickly clarify because you keep throwing the term solopreneur out there. Does this include gig workers? Do you have to be an incorporated business? Who is eligible for these solo 401ks?

[E]

If you're a gig worker 1099 income you qualify. If you are an S corp you also qualify. So, so you don't need to go the full LLC converting to S Corp in order to do it. You can basically say hey, like I'm starting a business and I'm working part time and I'm generating some self employment income and you qualify for a solo 401k. Now you do have to be careful. If you are working at a company that has a 401k plan and you want to do the solo 401k, you have to be mindful of the employee portion. So that's the 24,500. So between both your W2 and your your self employment income, you can do 24,500. So for example, if you do 20,000 in your 401k you can do 4,500 as the employee portion in the solo 401k, but you can still do the employer contribution.

[A]

Are there any other Differences between solo 401ks and workplace 401ks beyond being able to contribute as the employer in a solo 401k?

[E]

Yeah, I mean, I think that's. That's the big nuance, and I think that's the big advantage, that as a solopreneur, you can do both the employee and the employer. So. So that's where, you know, once again, you just have to be mindful of the fact that if you're working at a W2 job and you max out your 401k, your W2, then you're really constrained to just the employer portion that you can do for your solo 401k.

[A]

Okay. And this might be helpful for our listener because they're wondering about whether to contribute a certain amount as the employee and a certain amount as the employer. But from what you've laid out so far, Ryan, it seems like you have to contribute as the employee first up to that maximum, and then you go as the employer contributing. Is that correct, or can you choose to contribute as the employer from the beginning?

[E]

Yeah, it doesn't really matter all that much. I mean, it's still money that you're. You're putting away. And whether you fill it up as the employee first or the employer doesn't really matter all that much. But if this listener has a W2 job, that's then where you just want to be mindful of how you split. And you actually might want to put more as the employer in that case, just to be careful. But, you know, if you're a solopreneur, you don't have a W2 job and you want to put away, you know, 24,500. What I would personally recommend is filling up the employee portion first. Because you get that 24,500, you don't necessarily have to worry about any sort of calculation that goes into how much you can put into the employer, because that's another important nuance to keep in mind is the employer portion. The amount that you can put in. You don't automatically get to put in an additional 47,500 to get to the 72,000. There's a calculation in place. So it's either contingent on if you're an s Corp, the W2 income that you pay yourself, you can do 25%. So, for example, if you do the 24,500 and then you pay yourself $100,000 salary, you can do another 25,000, you're limited to that.

[B]

That makes sense.

[E]

And then for someone who is not an S corp, they're someone where maybe they have an LLC but they haven't converted to an S Corp, they're at 20% of whatever they, they bring in. So if you bring in $100,000, then $20,000 is what you can do for the employer portion.

[A]

Got it. So much simpler to contribute as the employee.

[E]

It's way simpler because you get the 24,500 without really having to think about it. Where again, there is a calculation for the employer, which means you, you do want to work with the cpa because the CPA can help you kind of figure that sweet spot of what you should be paying yourself to be able to maximize the solo 401k contribution versus some other considerations that could be tax advantageous or not in terms of increasing your, your income that you pay yourself. So there's a lot that goes into it. I would say that we work with a number of really good CPAs who basically tell our clients this is what you should be paying yourself through payroll or salary in order to take the best advantage of solo 401k while at the same time maximizing some other tax benefits.

[B]

Ryan, as you outlined, the cap on what you can contribute as an employer and an employee is different. While working with a cpa, I think is a great way to approach it. Not everyone is going to do that. So how should they think through then how to split these contributions?

[E]

It goes back to what I was saying before. It's like, just take the 24,500 as the employee and look for a lot of people. That's a lot. It's hard to get up there, just especially when you're first starting out. So I think like, number one is like, that should be the first target is maxing out the employee at the 24,500. I think then when you start to say, okay, hey, I feel comfortable, you know, putting that in, I want to put more in. I think that's when the rough math is basically 20% of your, your business profits, unless you're an S Corp. But if you're an S corp, you probably have a cpa, so they can help you with that. But if you're, if you're not an S corp yet, I would just kind of have that 20% in mind. So if you're making profit $50,000, you know, an extra 10,000 could go into it. Now, I also want to keep in mind that while there are some tax advantages to being able to do the employer portion. You also have to live your life too. So the last thing you want to do is to put the 72,000 and feel really good that you got the maximum tax benefits. But then you're not able to grow your business because you're capital constrained. So I'm a huge fan of these retirement plans. Again, for solopreneurs who are making 2003-004005-00000 or more, great, all day long, max us out. But if you're getting started and you're trying to grow your, your solo business, your solo practice, yes, you, you want to be able to put away as much as possible, but you also have to keep in mind that you might want to grow your business and, or have some free cash flow to live your life. So I would also put those constraints in there as well.

[A]

So in that case, say someone is just a few years into starting their business and they do want to save retirement, maybe they're considering a solo 401k or an IRA. Do you think either option is fine? I mean, of course a solo 401k has a higher contribution limit, but do you think one might be better than another at maybe an earlier stage in someone's business?

[E]

So a close cousin to the Solo 401K is what's called a SEP IRA. And that was the popular kind of solopreneur retirement plan before solo 401ks. I would still say a SEP is a good option. It is constrained to a percentage of your profits, so you don't automatically get that $24,500 in a SEP. So there's a really good chance with a step that you can't put away as much. Now, historically speaking, the reason people did steps Instead of solo 401ks is steps were just a lot easier to set up where there was a little bit more admin with solo 401k. A lot of the big brokerage firms have made it very easy to open solo 401ks now. So what I've seen over the last couple of years, it used to be 4, 5, 6, maybe 10 years ago, SEPs were the popular option. Now I would say that, I would say 70, 80% of the time we're seeing solo 401ks.

[B]

Oh, wow. So, so I'm, I'm old school. Am I left behind? I use a SEP IRA and it works perfectly fine for me. I know, Sean, that you recently started a business. Of course. And Ryan, do you have a business? Do you guys use retirement accounts and if so, which ones do you use?

[E]

Yeah, it's a great question. So when I first started my business, I, I did zero retirement accounts. Why? Because I wanted to grow the business. So, you know, I wanted to take advantage of some of these options. At the same time, it goes back to like, I didn't want to be capital constrained. And by the time we got to the point where I started maxing out retirements, we actually had employees at that point. So I was no longer a solopreneur. So that's where I we had a more traditional 401k plan. I will say if you have a SEP and the SEP is working for you, by all means, SEPs are great. There's nothing wrong with a SEP. It's a very, very, very close relative to the solo 401k. I would say where I've seen people go from a SEP to a Solo 401k, it really is that point where it's like, gosh, I'm so flush with cash right now and I just, I really want to be able to put more into it. When you're self employed, you can structure your pay to minimize the amount of payroll taxes you have to pay. That's through an S corp. But there's a puzzle pie and there's kind of this mosaic you have to put together of how little do I want to pay myself to avoid the payroll taxes. But the less you pay yourself, the less you can put into your sep. So then it becomes a. Well, wait a second. If I do a solo 401k, I get the 24,500 automatically. But what you might be able to do is pay yourself intentionally a lower salary to pay less in payroll taxes. But with a Solo 401K, you can still get that 24,500, whereas a SEP, you're going to be able to put in far less because of the percentage of your salary that you can contribute.

[A]

Yeah. And Elizabeth, a benefit of you having this SEP is that it doesn't have the same contribution limit, doesn't share a contribution limit with your workplace 401k.

[B]

Yes.

[A]

Whereas if you had the Solo 401k, you would have that combined contribution limit on the employee side.

[E]

That's a great point.

[B]

Absolutely.

[A]

I want to talk about investment options in Solo 401s. A benefit of Workplace 401s is that they're often loaded up with different target date funds that are pretty easy to just get into. Is that accessible in a solo 401k? Or how might people decide what investment Options might be best for them if they don't have access to a target date fund.

[E]

Yeah. And a solo 401k. I mean you're going to open it up at a brokerage firm like a Charles Schwab for example. And then I mean you have a wide array of investment options, which is a good thing and a bad thing. So why is it a good thing? It's a good thing because you have more investment options so you're not just constrained to the investments in the 401k plan. Why is it potentially a bad thing? Well, it's a bad thing because there are a ton of options. So there are more ways to make mistakes. The clients we work with who have solo 401ks where we're managing the investments for them. So that kind of alleviates that concern for someone who's going at the solo. You know, you definitely have to make sure that you're, you're, you're researching investments and that you have an allocation that is aligned with your long term goals and objectives. And you're probably going to want to make it pretty similar to what the target date funds are in terms of the allocations. But again, depending on who you are and how you see it, it's e advantage or a disadvantage.

[B]

I know we touched on this earlier, we talked a little bit about tax benefits, but I want us to go a little deeper into that because that's one of my favorite aspects of retirement accounts. Can you talk us through the tax benefits of a solo 401k? Ryan?

[E]

The big one is that you're able to defer taxes on it. So if you make a pre tax contribution and let's say you do the full 72,000, that's 72,000 that you're not being taxed on this year. So let's say you're a solopreneur and you have a blowout year and you're in the top marginal tax brackets and let's say you live in a place like New York or California. Well, by putting 72,000 in, you basically get a $30,000 plus tax benefits. So you pay $30,000 less in taxes than you would otherwise. In addition, that money grows tax deferred. So when it's invested, any sort of capital gains or dividends in the account will not be taxed. Now in the future when you take out that is going to be taxable. So you do pay taxes at some point in time, but the benefit is you get to delay or defer the taxes. Now there's also the option to do a Roth Solo 401K. Now with the Roth Solo 401K, you don't get a tax deduction upfront. So that 72,000, that's still going to be income that you, that you're going to pay taxes on. But the money that goes into a Roth grows tax free. So any interest or capital gains grows tax free. And then we take it out in the future. You're not taxed on it. So what's the right choice? Do you do the traditional solo 401k or do you do the Roth? It all depends on the income bracket that you're in right now. So I would say that if you are someone where you're having that amazing year and you're in the top marginal bracket and you live in a high tax state, taking the pre tax and being able to defer those taxes, that's really powerful because there's a good chance in the future that you're not going to be in the top marginal tax rates. If you're in a lower tax bracket, but your business is growing, growing pretty quickly, there's a chance you're going to be in higher tax brackets later on. So you might want to take advantage of the Roth because that tax deduction isn't necessarily as important that money can grow tax free. And then when you take it out in the future, it's not taxable. So there are a lot of tax benefits. It's very similar to a 401k, but you just have to make the choice. Do I want to get the tax deduction now and have tax deferred growth or do I not care about the tax deduction now, but I'm getting a tax free growth and when I take it out in the future, I'm not going to be taxed.

[A]

The decision that you just outlined around whether to go Roth or traditional with the Solo 401k is a lot how people consider this when it comes to their own workplace 401s or working with even a traditional or a Roth IRA. Are there any other unique tax considerations that people should consider with a Solo 401 when they are deciding traditional or Roth, or is it pretty much the same across the board with these different accounts?

[E]

Yeah, I think again it just goes down to are you in a higher tax bracket now or are you going to be in a higher tax bracket in the future? Now we don't know. There are no future facts, so we have zero clue what tax brackets are going to be in the future. I will say though, if you are a top marginal earner right now and you're in a high tax state, I feel like it's probably a pretty safe bet that you're in the highest tax bracket that you're ever going to be in. So you get the benefit from doing the traditional pre tax today and paying taxes in the future.

[B]

Well, Ryan, you work with people every single day with their finances. I'm sure you work with people who have a solo 401k. Are there any common mistakes that you see people making when it comes to these accounts?

[E]

The big mistake I see people making is that they get over enthusiastic about it and they put too much into it. Look, I'm a fan of taking advantage of all of these amazing tools and tax breaks. However, it's like I was saying before, if you're putting 72,000 into this and you can't live your life or you don't have as much money to invest in your business or you're feeling cash constrained, that's a problem. So it's one of those where it's like, yes, we want to be able to take advantage, but let's also put this in the context of other spots in your financial plan and other financial goals that you have. I think the other big one too is going back to that traditional versus Roth. I'm a big fan of Roths. However, one thing I do see is that the Roth is so ingrained in people's heads and to be honest, like a lot of accountants as well, where it's you're trained to think of the Roth like, I want to pay less when I take it out in the future. And especially when I see people who are getting up there in tax brackets, they still have this mindset of the Roth. And what we have to oftentimes remind them of is that hey, like you're in a pretty high tax bracket right now. You get a massive deduction for putting in the traditional portion right now. And at some point in the future you're likely going to be in a lower tax bracket and you can do Roth conversions then. There's one other thing too that you have to be mindful of is that when solo 401ks get beyond 250,000, you have to file a form. It's called a 5500 form. It's not a hard form to complete. However, if you don't do it, the penalties can be punitive. So it's one thing to be mindful of when you have a solo 401k is you do kind of have to be mindful of the fact that as this grows, there are going to be some reporting requirements that you're going to have to think about and, and adhere to. And again, they're not hard, but the penalties for not following them are very steep.

[A]

I want to go back to your point, Ryan, about figuring out how much you can contribute to these accounts while still growing your business and living your life. How do people determine what amount might be right for them?

[E]

It's a good question, and it's my favorite answer. It depends. It depends. I mean, it's one of those things where a married couple and they have goals to buy a home and one of the spouses has a traditional W2 job, another spouse has a solo 401k and they want to buy a house in the next couple of years, but they put 72,000 into the solo 401k and then that delays their ability to make a down payment, things like that. There's more research coming out called the middle class trap, and that is there's a whole bunch of people out there that are millionaires. And they're millionaires because they've accumulated so much in their retirement accounts with a retirement account rich, but they have zero liquidity everywhere else. So what that means is if you want to take a mini sabbatical, if you want to maybe retire early, if you have an unexpected disruption where maybe you do lose your job and you're going to be out of work for a year, that the money in retirement account. Yeah, that's great, but doesn't really help you all that much. So we're huge advocates of maxing out all these retirement plans. Don't get me wrong, however, you know, when we underwrite financial plans for our clients, you know, we have to look at, you know, what are some of these goals? And you know, sometimes there are things that are right to do, but they're in conflict or provide tension to some of these other life goals. So that's where it's like, what's the answer? The answer is depends. And it's very specific to the client or the individual.

[A]

And that's why you work with a financial advisor who can help you do this.

[E]

That's right.

[B]

Well, I can't let you go, Ryan, without talking about one of my favorite topics. And that is saving for retirement. And I know not everyone is able to do that, but I find the data interesting that I come across about how entrepreneurs are saving for retirement or the lack thereof. According to a 2025 Wealth Rabbit small business retirement report that I came across, the most common amount entrepreneurs between the ages of 45 and 55 has saved for retirement was $50,000. And it also found that one in five business owners don't have any savings at all. So can you quickly talk about the importance of saving for retirement? As an entrepreneur, and I sometimes hear people are relying on hopefully selling their business during retirement, and that's their retirement plan, which sounds pretty scary to me.

[E]

I agree. And as, as someone who's a small business owner myself, there's a lot of Hopium involved. And, and I. I will say you don't start a business if you're not optimistic, right? You have to have a certain amount of optimism to be able to take the plunge and to go into business on your own. So you're kind of wired that way to begin with. I know I certainly was. And I mentioned that in the first couple of years, I actually didn't contribute to retirement plan because I was getting my business up and running, and that was more important to me. That said, the second that I could, I did, and I really focused on that. I want all the solopreneurs listening to this podcast to have an enormous amount of optimism, but it's also important to hedge. I think putting money into retirement account is a great hedge just in case things don't go the way that you think they're going to go. I think another important point, I was talking to someone recently about this. You know, there's a saying that we overestimate what we can do in a year and underestimate what we can do in a decade. That is so true with building wealth. So what? You know, when we look at financial plans for our clients and when we look at someone who's in their late 30s or so and trying to get to financial independence in their, you know, mid-50s to early 60s, it's actually not that heroic in terms of what you have to do in order to reach those goals. But you have to be consistent. You have to make sure that you're investing. But I would say for any solopreneur out there, it's. You have to think about planning for retirement and you have to diversify outside of your business. And once again, I just want to repeat myself. It's so important to land this point, is that it doesn't require anything heroic today. Even if you are able to put 10, 15, 20, you get to the 24, 500. That does move the needle significantly over time.

[A]

All right, Ryan, I think that's a great place to leave it. Thank you so much for coming on and talking with us about all this today.

[E]

Yeah, thank you so much.

[B]

And once again, Ryan is a wealth advisor with NerdWallet Wealth Partners. If you yourself are considering working with a financial planner like ryan, then visit nerdwalletwealthpartners.com of course we're going to include a link link to that in today's

[A]

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[B]

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[A]

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[B]

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[A]

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