Solo 401k retirement plans have gained popularity over the past couple of years on account of their higher contribution limits and vast investment landscape. If you are a small business owner or self-employed individual, it is important to educate yourself about Solo 401k contribution limits and maximize your retirement savings.
3 Questions You Need to Ask About Solo 401k Contribution Limits
Question: What are the various contribution types available in Solo 401k retirement plans?
Answer: Solo 401k plans differ from other traditional retirement plans in terms of their dual contribution benefits. The IRS allows “employee” as well as “employer” contributions for self-employed 401k plans, offering a bigger tax shelter to the plan owners. In fact, the dual contributions available under Solo 401k plans have made them a popular investment vehicle for small business owners.
Question: What are the Solo 401k contribution limits for employee and employer components?
Answer: The IRS has set Solo 401k contribution limits of $53,000 for 2015, including both employee and employer contributions. For small business owners, who are above 50 years, there are catch-up contributions of $6,000, with net contribution limit of $59,000 for 2015.
- Employee contributions limits: The salary deferral contribution or employee contribution is capped at $18,000 along with catch-up contributions of $6,000 for individuals above 50 years.
- Employer contribution limits: A single member LLC or sole proprietorship can make 20% profit sharing contributions in Solo 401k plan, up to a combined limit of $53,000. For corporations, the profit-sharing limit is set at 25%, allowing you to contribute up to 25% of your profits in any given year up to a maximum limit of $53,000.
Let us consider the case of Joe, who made $60,000 in fiscal year 2015 and operates a sole proprietorship. According to the current contribution limits, Joe can contribute $18,000 in the salary deferral part and $12,000 under employer contributions (20% of net amount), making net contributions of $30,000 for 2015.
In another instance, where Joe is 51 years old and made $60,000 in fiscal year 2015, operating J Corporation, his salary contributions will jump to $24,000, courtesy of catch-up contributions. His annual employer contributions will be $15,000 (25% of net amount), making net contributions of $39,000 in 2015.
Question: What are the contribution deadlines for Solo 401k retirement plan?
Answer: According to the current IRS rules, the plan participant of Solo 401k must elect to make employee contribution by December 31, however, the actual contributions can be made up to the tax-filing season for any given year. On the other hand, you can make employer contributions up to April 15 of any financial year, along with additional extension period of six months to October 15, if filed. However, if you want to contribute in 2015, make sure to open a Solo 401k account before December 31, 2015 and you can apply for extension if necessary. For more details about Solo 401k Contribution Limits, it is best to get in touch with a professional plan provider.