I lowered my tax bill by $25k as a freelancer - took me 10 minutes

Note: only relevant to the US-based freelancers!

I worked as a freelance software developer between 2021 and 2022. I loved not getting hit with taxes on each paycheck, which meant a bigger chunk of funds going INTO my account. But come tax season, it hurts to be a freelancer. You really need to be mindful of setting aside a large amount of cash to pay your taxes.

Before freelancing, I was used to contributing the max funds to a company sponsored 401k (roughly ~$21k, reducing my tax bill by ~6k), but as a freelancer I had limited options. So I thought.

As a freelancer, you have the option to set up a SOLO 401k.

What is a SOLO 401k? It's a 401k for small business owners with no employees. All you need to set up one of these accounts is an Employer Identification Number (EIN)! Great, so now I was able to contribute ~$20k and reduce my tax bill. But....it got better. With the Solo 401k, you are both the employee AND the employer so you get to contribute up to the COMBINED limit of $61k!

Since I had already set aside funds for taxes I was able to move in the full $61k! Reducing my tax bill by almost $27k USD.

Solo 401k's are also very flexible and have some neat features, like loans of up to $50k, too. I was able to set one up on e-trade in about 10 minutes. Right now, it's too late to create one for 2022, but get ahead of it for 2023, the contribution limits are also going up in 2023!

I've mentioned this to some other freelance friends and many of them had never heard of the Solo 401k. Was wondering if many of you have solo 401ks or have heard about them?

I'm thinking of tidying up some notes and putting a blog out there, too, so it'd be neat to gather some common questions other freelancers had!

Not financial advice or tax advice, of course :)