Solo 401k Contribution Limits

With a Solo 401k account, the business owner is seen as the employee and employer of the business. Therefore, his or her Solo 401k contribution limits include both salary deferrals and profit sharing contribution. The total Solo 401k contribution is limited to $55,000 in 2018, which is $1000 higher than the 2017 contribution limit.

Use the Solo 401k Contribution Calculator to determine your contribution limit this year:

 

Salary Deferral

As the only employee of the business, the plan participant can make salary deferral contributions of up to $18,500 a year ($24,500 for those over 50 years old).

Profit-Sharing

As the employer, the plan participant can also make profit-sharing contributions of 20 to 25% of business compensation, depending on the type of business.

SEP IRA vs. Solo 401k Contribution Limits

A Solo 401k has the potential to offer a higher contribution limit than a SEP IRA in certain situations.

Both the Solo 401k plan and a SEP IRA restrict the maximum total contribution to $55,000 in 2018.

A SEP IRA and a Solo 401k both allow profit sharing contributions of 20% of the owner’s compensation for sole proprietorships and single member LLCs. Corporations can contribute up to 25% of the owner’s compensation to a SEP IRA or a Solo 401k.

However, a Solo 401k plan also allows a salary deferral of up to $18,500 a year. The SEP IRA does not allow salary deferrals.

Additionally, Solo 401k plan holders who are 50 years or older can make a catch-up contribution of $6,000. The SEP IRA does not allow for catch-up contributions.

Consider the case of Tom, a 52-year-old owner of a corporation without any employees. Tom’s business earns him $100,000 a year.

With either a SEP IRA or a Solo 401k, Tom is allowed to make profit sharing contributions up to $25,000. With a Solo 401k, however, he is allowed to put an additional $18,500 into the Solo 401k as a salary deferral. Tom can also contribute up to $6,000 in catch-up contributions. A SEP IRA, on the other hand, does not allow any salary deferrals or catch up contributions.

 SEP IRASOLO 401k
Maximum Limit$55,000$55,000
Profit Sharing
(25% of compensation)
$25,000$25,000
Salary Deferral
(up to $18,500)
$18,500
Catch-Up Contribution$6,000
Actual Limit$25,000$49,500

Salary Deferral Contributions

In 2002, the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) took effect and created a whole new incentive for owner-only businesses to set up Solo 401k plans. Previously, the Solo 401k was not much different from a profit-sharing plan or SEP IRA. Since the EGTRRA became effective, Solo 401k plans have been gaining popularity due to their generous contribution limits.

With these, self-employed business owners can put more money into tax-deferred accounts and take full advantage of the tax benefits these plans offer.

The total salary deferral limit is now $18,500 in 2018 for plan participants under the age of 50. Those who are 50 years old or older can contribute an additional $6,000. The contribution can be as much as 100% of the self-employed compensation.

Solo 401k Contributions: The Largest Tax Benefits Allowed by the Tax Code

Tony Watson, a tax consultant at Robert Hall & Associate, explains how investors can save thousands of dollars in taxes by contributing to a Solo 401k.

Profit Sharing Contributions

As an employer, the business owner can make profit sharing contributions of up to 25% of the owner’s compensation.

  • If the business is a sole proprietorship or a single member LLC: The plan can receive up to 20% of the participant’s self-employment compensation.
  • If the business is a corporation: Solo 401k contribution limits allow profit sharing contributions of up to 25% of the total self-employment compensation.

The Total Solo 401k Contribution Limit

The combined total Solo 401k contribution limit without catch-up contributions is $55,000 per year for 2018, while plan participants who are over 50 years old can contribute a maximum total contribution of $61,000.

If the spouse of the plan participant also earns income from the same business, he or she can also make contributions to the Solo 401k plan.

The spouse’s contribution limit is as much as, and separate from, the business owner. That means a couple can contribute as much as $110,000 together in a Solo 401k plan in 2018. In addition, if both of them are over 50 years old they can contribute up to $122,000 to the plan.

Use our Solo 401k Contribution Calculator to determine how much you can contribute to your Solo 401k this year.

The wise man saves for the future, but the foolish man spends whatever he gets.

Proverbs 21:20

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Alternate investment options you get with a Self Directed Solo 401k:

Real Estate

Precious Metals

Private Business

Stock & Funds

Private Lending

Tax Deeds/Liens

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