On October 23, 2014, the IRS announced the changes in contribution limits for all retirement plans to allow for cost of living adjustments. Solo 401k contribution limit is also updated with some changes. In 2015, account holders of a Solo 401k plan will be able to increase their contribution for the year.
Understand Solo 401k Contribution Limit
As Solo 401k plan participants already know, in a self employed business with no other full time employee, the owner is seen both as the employer and the employee of the business. This means that they can make both types of contributions: salary deferrals and profit-sharing contribution. This allowance puts Solo 401k among retirement plans with the highest contribution limits.
Newly Increased Contribution Limit for 2015
Solo 401k contribution limit is now increased to an even higher amount by the IRS in their latest update. In 2015, the salary deferral limit is increased to $18,000, up from the current $17,500 limit for this year. Adding the profit sharing contribution, each plan participant can contribute as much as $53,000 in 2015, which is $1,000 higher than the 2014 contribution limit.
Not only that, account holders who are 50 years old or older are allowed an additional catch-up contribution. In 2014, this catch up contribution is limited to $5,500. The recent update from the IRS revealed that this amount will be increased to $6,000 in 2015.
Benefits to Plan Holders
The generous Solo 401k contribution limit attracts many plan holders who would like to put more money into their retirement savings. By doing so, they can take full advantage of the tax benefits that this plan offers. The tax-deferred contributions are allowed to grow uninterruptedly. No tax charge is applied until the plan participant starts making withdrawals from the account, which is usually years later.
Being able to contribute more also means that account holders will have more funds to invest. A Solo 401k plan allows plan holders to gain checkbook control over their retirement savings. This means they can still invest and control the funds however they want without consulting a custodian. As money in the tax-deferred account often grows exponentially, account holders often want to start contributing as soon as possible. The increase of Solo 401k contribution limit is certainly good news to self employed business owners and independent contractors.
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