Big Wins: Why Small LLCs Should Consider a Solo 401(k)

Good Sunday morning!

1. Feature: Big Wins: Why Small LLCs Should Consider a Solo 401(k) 
   (5 min read)

2. Dear TCoL: How to Handle a “Toxic” but Competent Employee (2 min read)

3. From the Archive: LLC Insurance 101: A New Owner’s Guide to Essential Coverage. Read it here.

Set the tone for the week ahead—reflect, recharge, plan.

-TCoL

Missed our last feature article? How to Hire Subcontractors Without Getting Burned: 9 Golden Rules. Read it here.

☕ For the price of a Starbucks ($7.95 mo.), you can have access to professionally-prepared document templates for your business—simply subscribe to The Co. Letter Premium and get access to our ever-expanding Template Library. This past week we added a ready-to-use Mutual NDA template. [Click for Premium Here]. Save money, be smart.

If you're a small business owner with an LLC and no full-time employees besides yourself (and maybe your spouse), you have a secret weapon available: the Solo 401(k). Even if you can't afford to max out contributions today, it is worth it.

What if you have an IRA? Not a problem. What if you add employees in the future? Also, not a problem—but you will have to convert your Solo 401(k) to a traditional 401(k) (however, a conversion will increase plan costs and complexity).

Overall, setting up a Solo 401(k) puts you in position to slash taxes and supercharge retirement savings whenever cash flow allows.

Here's what you need to know—simply and clearly.

Simple Hypothetical: With and Without a Solo 401(k)

Imagine you're 65, married filing jointly, and own an LLC taxed as an S corp.

• LLC gross sales: $400,000

• W-2 salary: $150,000

• LLC net income after salary and expenses: $100,000

Scenario 1: With Solo 401(k)

• You defer $31,000 (employee side) and the LLC contributes $37,500 (employer side).

• Your taxable income drops by $68,500.

• You save about $16,875 in federal taxes.

• You stash $68,500 into a retirement account growing tax-deferred.

Scenario 2: Without Solo 401(k)

• No tax deferral.

• You pay $16,875 more in taxes.

• You save $0 for retirement.

Over the years, that $68,500 will grow tax-deferred. Which scenario sounds better?

Comparison Summary

Can You Have a Solo 401(k) and a 401(k) at Your Long-Time Employer?

Yes—but you need to coordinate contributions carefully and the two entities (LLC and your employer’s company) can’t be part of the same “Controlled Group.”

If you work at "Y Corp" as a VP and participate in their 401(k), you can still open a Solo 401(k) for your LLC. The IRS lets you have two 401(k)s, but your employee deferral limit ($23,500 in 2025, $31,000 if you're 50+) is shared across both plans.

Example:

• Deferring $15,000 at Y Corp? You can only defer $8,500 into your Solo 401(k).

Good news: Employer contributions are calculated separately. Your LLC can contribute 25% of your W-2 salary (e.g., $150,000 salary = $37,500 employer contribution).

Bottom line: maximize your Solo 401(k) employer contributions. Just keep both plans' totals under the $70,000 (or $77,500 if 50+) IRS limit.

What If Your LLC Is Owned by a Trust?

If your living revocable trust owns your LLC (with you as trustee), good news: the IRS treats you as the owner. You should qualify for a Solo 401(k).

Just watch out for:

• S Corp Compliance: Your trust must stay revocable while you’re alive. If it becomes irrevocable (say, upon death), update ownership quickly to keep S corp status.

• Clean Paperwork: The Solo 401(k) plan should name the LLC as the employer, not the trust.

• No Self-Dealing: Never use Solo 401(k) funds to invest back into your LLC or personal assets. It's a prohibited transaction with painful penalties.

Step-by-Step: How to Set Up Your Solo 401(k)

1. Confirm No Controlled Group Issues (if your current employer has a 401(k)): Make this determination upfront and talk to a CPA or tax attorney to confirm.

2. Set Salary and Appropriate Contributions: Plan ahead with your CPA to set an acceptable W-2 salary and determine appropriate contributions levels.

3. Pick a Provider: Fidelity, Vanguard, or MySolo401k Financial are good choices. Look for low fees and solid support.

4. Draft Correct Plan Documents: Make sure the LLC (not the trust) adopts the plan. Have your CPA and attorney review the plan.

5. Monitor Contributions: Especially, if you will wind up with two 401(k)s (your Solo 401(k) and your employer’s existing 401(k), set up procedures to track both of your plans each year.

6. Start Early: It may take a couple of months to fully set up your Solo 401(k), so allow plenty of time.

Wrapping It Up

Opening a Solo 401(k) can save you thousands in taxes and help you build serious retirement wealth. Even if you can't max it out today, starting now sets you up for big benefits later.

If you:

• Own a solo LLC (even through a revocable trust)

• Have no other employees

• Want to cut taxes and save faster

There's no good reason to delay taking a hard look at whether a Solo 401(k) is right for you.

Just be sure to set it up correctly, coordinate with any existing 401(k), and work with good advisors. Your future self—and your future tax bill—will thank you.

As Warren Buffett might say: someone is sitting in the shade today because someone else planted a tree long ago. Your Solo 401(k) might be your tree.

Disclaimer: We are not legal, tax, or financial advisors. Please consult your attorney, CPA, or financial advisor regarding your specific situation before establishing a Solo 401(k).

Dear TCoL: How to Handle a “Toxic” but Competent Employee

Question: I have an employee that does a great job but his attitude around other workers is terrible. He’s loud, negative and always talking back and questioning managers about tasks in front of other employees. Strange, but he is always on time and does a good job on tasks. The problem is that he’s become a cancer at our small company, but his good work doesn’t outweigh him being so toxic. How do you fire somebody like him?

Answer: Carefully—with proper coaching and documentation to protect your company. To quote our friend Mike Perkins at Frontline HR: “document, document, document.” Unlike most situations, at least he is a good worker, even though he’s toxic. So, if you haven’t already been documenting his bad behavior, you have some time to do so. And, if he is difficult to manage, you should expect him to be difficult when you fire him.

First, try sitting him down and coach him through the issues. Document your coaching sessions. Some employees may mistakenly believe their toxic behavior is humorous or harmless. Hopefully, he will respond to coaching.

If not, begin the process to “coach him out,” says Perkins. Solid write ups and more formal documentation are key. If you don’t have an employee write-up template, try:

“Concerns-Expectations-Consequences-Acknowledgement.” CECA is a simple framework for a formal employee write up.

We don’t know the specifics of this situation, but here is a hypothetical write up using a CECA template:

Employee Name: [Employee’s Name]
Date: [Today’s Date]
Supervisor: [Manager’s Name]
Subject: Formal Written Warning – Unprofessional Conduct

Summary of Concerns:
While your work performance and punctuality consistently meet expectations, there have been recurring concerns regarding your interpersonal conduct in the workplace. Specifically:

• On [Date 1], during [specific situation], you responded to a manager’s instructions by [specific behavior—e.g., raising your voice, questioning directions in front of peers].

• On [Date 2], you made [specific negative comments] during a team meeting, contributing to a negative atmosphere.

• Several employees have reported feeling uncomfortable and distracted by frequent loud and negative remarks.

Expectations Moving Forward:
Professional behavior is essential to maintaining a positive and productive work environment. Effective immediately, you are expected to:

• Communicate professionally with managers and colleagues.

• Raise concerns or questions privately with management rather than in front of other employees.

• Avoid loud, negative, or disruptive comments during work hours.

Consequences:
Failure to immediately and consistently improve in these areas may result in further disciplinary action, up to and including termination of employment.

Acknowledgment:
(Please sign below to acknowledge receipt of this written warning. Your signature does not necessarily indicate agreement.)

Employee Signature: ___________________
Date: _______________

Manager Signature: ____________________
Date: _______________

Have that candid and honest coaching session soon. The sooner you address the behavior, the better your chances of improving—and protecting—your team.

Have an interesting business question and need a free bit of advice? Send your question to [email protected]. No confidential info, please!