An example
For a 45-year-old independent software engineer billing clients through a single-member LLC, the 2026 figures work out like this:
- Cash balance plan, first year
- $156,000
- Solo 401(k) alongside
- $32,000
- Both plans
- $188,000
- A Solo 401(k) on its own
- $72,000
- Federal income tax saved
- $55,600
Federal income tax only, compared with making no retirement contributions. State tax saved depends on where you live: see savings by state. An illustration from the same calculation as the estimate, not a quote.
Software engineers are generally sometimes a specified service business for the 20% qualified business income deduction, depending on what exactly the work is. That changes how much a contribution saves at higher incomes. How the deduction interacts with contributions
How the work is paid
Contract software work reaches engineers through several channels, and they are treated differently.
| Paid as | Counts for your own plan? |
|---|---|
| 1099 fees directly from clients | Yes, as net self-employment earnings. |
| Corp-to-corp, paid to your own S corporation | Only the W-2 salary your corporation pays you. |
| W-2 through a staffing agency | No. You are the agency's employee. |
Many independent engineers work for one client for years. That is allowed, but if the client controls how, when and where you work, the IRS may view the relationship as employment, and the income as wages that cannot support your own plan. Sole proprietors can read sole proprietors and single-member LLCs; S corporation owners should read S corporation owners, since salary sets the plan's ceiling.
The year you leave a salaried job
Engineers often go independent after years at a company with a 401(k) and stock grants. Two things carry over into the first year.
- Salary deferrals you made through the old employer's payroll count against the same per-person limit ($24,500 in 2026, plus catch-up from age 50) as deferrals to a new Solo 401(k).
- Restricted stock units and option income from the old employer are wages from that employer. They do not count toward your new business's plan, even when they vest after you leave.
A cash balance plan's benefit is capped at your average pay over your highest three consecutive years from the business that sponsors it. Pay from the old employer does not enter that average, so the first years of the new business set the base. See how much you can contribute.
Products, licensing and passive income
Some engineers earn from a product rather than hours: an app, a library with paid licenses, a SaaS business. That income can support a plan when your own work is a material part of producing it. The tax code also treats income from licensing property you created by your own efforts as earned income, which covers licensing code you wrote.
Dividends from startup shares, interest and capital gains are not earned income, whatever their size.
Software and the QBI deduction
The specified service list expressly leaves out engineering, and it does not name software development. Consulting is on the list, and the regulations define it as professional advice and counsel. Writing and shipping code under contract is generally not advice; an engagement to recommend a technology strategy or review a client's architecture can be.
A business with gross receipts of $25 million or less is not a specified service business if less than 10% of its gross receipts come from specified services, so occasional advisory work does not change the answer for a business that mostly builds software.
If your work is not a specified service, the deduction stays available above $276,750 for a single filer, subject to a limit based on W-2 wages paid. How that interacts with a contribution is set out on the page for engineers and architects and in the QBI deduction and retirement contributions.