High Solo 401k Contribution Limits Make it a Popular Choice
The high contribution limits of the Solo 401k generate a great deal of interest. Especially amidst talk of increased tax rates, the ability to defer more money is highly attractive. And the recent increase in these limits by the IRS allows an even greater opportunity to shelter money.
IRS increases limits this year
This year, the IRS raised the total Solo 401k contribution limits, making them $1,000 higher than last year. The new limit in 2013 is $56,500 for those age 50 and older and $51,000 for those under the age of 50.
Designed for the self-employed and small business owner, the Solo 401k enables the owner to make contributions in two ways: both as an employee and employer. The self-employed individual serves in both capacities and can make both types of contributions to the plan.
As employee, the self-employed individual can make up to a maximum employee deferral contribution of $17,500 if under the age of 50. For those age 50 and above, an additional “catch-up” provision of $5,500 is available. This makes the maximum employee deferral contribution $17,500 for those under 50, and $23,000 for those age 50 and above.
As employer, the self-employed individual can also make an employer profit sharing contribution. The employer profit sharing contribution is calculated differently than the employee contribution. It is calculated as a percentage of the compensation. The maximum employer profit sharing contribution is 20 or 25% of the compensation, depending on the business structure. A corporation, for example, allows 25% of the compensation to be contributed.
The combined total of the employee salary deferral contribution and the employer profit sharing contribution make up the Solo 401k contribution limit. The limit is $56,500 for those age 50 and older, and $51,000 for those under the age 50 in 2013.
If a spouse also participates in the plan
The high Solo 401k contribution limits are also effectively doubled when the spouse works for the business. Under Solo 401k rules, a spouse can also make his/her own contributions to the plan if he/she is also employed by the business. The same factors of age, contribution type and business structure apply.
High Solo 401k contribution limits make it a powerful and attractive option for the self-employed and small business owners.
Related Terms:
- Solo 401k Rules
- Roth Solo 401k
- Solo 401k Roth
- Solo 401k Contribution Limits
- Solo 401k Contribution Deadline
- Solo 401k Contributions
- Solo 401k Contributions Calculator
