Solo 401k Contribution Limits
With a Solo 401k plan, 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.
Use the Solo 401k Contribution Calculator to determine your contribution limit this year:
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.
The Internal Revenue Code (IRC) sets the maximum amount you are allowed to contribute to your Solo 401k plan. Elective deferrals are 100% optional and are made by the business owner/employee. According to the IRS, to determine whether you have exceeded the IRC Section 402(g) limit, you must aggregate all elective deferrals contributed to all of your plans.
Use the Solo 401k Contribution Calculator link located above to determine your contribution limit this year.
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 multi-member LLC, partnership, corporation, or LLC with a corporation election: Solo 401k contribution limits allow profit sharing contributions of up to 25% of the total self-employment compensation.
The Total Solo 401k Contribution Limit
With a Solo 401k plan, 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 $66,000 in 2023 (or $73,500 for those over 50 years old).
Use the Solo 401k Contribution Calculator link located above to determine your contribution limit this year.
“The wise man saves for the future, but the foolish man spends whatever he gets.”
Proverbs 21:20
SEP IRA vs. Solo 401k Contribution Limits
Consider the case of Tom, a 52-year-old owner of a corporation without any employees. Tom’s business pays him a salary of $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 $30,000 into the Solo 401k as a salary deferral including catch up. A SEP IRA, on the other hand, does not allow any salary deferrals or catch up contributions.
| SEP IRA | SOLO 401k | |
| Maximum Limit | $66,000 | $73,500 |
| Profit Sharing (25% of compensation) |
$25,000 | $25,000 |
| Salary Deferral | n/a | $22,500 |
| Catch-Up Contribution | n/a | $7,500 |
| Actual Limit | $25,000 | $55,000 |
Solo 401k Contributions: The Largest Tax Benefits Allowed by the Tax Code
Tony Watson EA, a tax consultant at Robert Hall & Associate, explains how investors can save thousands of dollars in taxes by contributing to a Solo 401k.
What our Clients are Saying:
In my opinion, anyone that owns their own business should have a Solo 401K, and I would highly recommend Sense Financial – you will not be disappointed!
Ben D. – Spokane, WA
Sense Financial made the entire process extremely easy and they have been very responsive. I’ve recommended them to many people already.
Michael L. – Humble, TX
Dmitriy and his staff were consummate professionals. I rolled my Solo 401 (k) into a Self Directed Solo 401 (k). Dmitriy handled it smoothly and confidently…
Mindy Jensen – Longmont, CO
BiggerPockets Community Manager
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Our expert team is always ready to answer you! Give us a call at (949) 228-9394. You can email us at contact@sensefinancial.com