Is it always better to max the Solo 401K?

[oldtoyota]

If I max the Solo 401K (or maybe even my IRA), I will have less taxable income (duh, I know). That will mean my future social security payment will decrease. Is the answer not to worry about that and just keep adding as much as possible to the 401K?

When I reviewed my social security statement, I can see that my future social security payment is decreasing each year since I am earning less now than I did when employed full time.

[seattlecyclone]

Last I checked, self-employed retirement contributions don't reduce your self-employment tax, which is what determines how much credit you get for social security.

[oldtoyota]

Last I checked, self-employed retirement contributions don't reduce your self-employment tax, which is what determines how much credit you get for social security.

Okay, thank you!

[terran]

Agreed, neither solo 401(k) nor IRA reduce self employment taxes (the employee and employer portions of social security and medicare taxes) so they don't effect your social security benefit. They only reduce federal and most state taxes.

One thing to note about traditional/tax deferred solo 401(k) contributions is that they also reduce qualified business income, which often means a smaller QBI deduction. This effectively means you often (there are some other factors) only get about 80% of the tax benefit from a traditional solo 401(k) contribution compared to other tax deferred retirement account contributions. This can change the math in favor of Roth depending on what your expected tax bracket is in retirement.

[oldtoyota]

Agreed, neither solo 401(k) nor IRA reduce self employment taxes (the employee and employer portions of social security and medicare taxes) so they don't effect your social security benefit. They only reduce federal and most state taxes.

One thing to note about traditional/tax deferred solo 401(k) contributions is that they also reduce qualified business income, which often means a smaller QBI deduction. This effectively means you often (there are some other factors) only get about 80% of the tax benefit from a traditional solo 401(k) contribution compared to other tax deferred retirement account contributions. This can change the math in favor of Roth depending on what your expected tax bracket is in retirement.

Thank you for letting me know this. I’ll research this further and see if I can figure out what’s best in my situation.