Solo 401k Contribution Limit: Is $62,000 Really Legal?

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How can the Solo 401k contribution limit be so high? At Solo401k.com, we constantly receive messages from prospects and clients disbelieving the contribution limits for the Solo 401k plan can be so generous. The truth is that the Solo 401k has one of the highest contribution limits of all retirement plans.

All too often clients tell us:

“Well, my tax guy said I can only contribute $7,000.”

Another common misconception we hear is…

“My CPA says 401ks are limited to $19,000 for 2019.”

Generally, when something sounds too good to be true, it IS too good to be true. However, this is one of those rare instances where it’s not!Tip Your Hat to a Max Solo 401k Contribution Limit

With the Solo 401k plan, you play multiple roles. As a small business owner, you are both the employer and employee. That means you can contribute for each role you play in your business. This adds up to a seriously high contribution limit for the Solo 401k.

Because you wear all the hats in the businesses, and you get the perks that come along with it (and you don’t even need to buy a hat rack)!

To really understand the difference in contribution amounts, first let’s look at a “traditional” 401k plan and its contribution limit.

Jane Stalls On Retirement Savings

Jane has been working for Walmart for almost 15 years in their corporate office. She makes good money, and has a 401k plan as an employee benefit. Jane contributes the max possible to her Walmart 401k plan. As an employee of the company, that means she’s limited to contributing $19,000 per year. Jane just turned 51 years old, so she also gets to make an additional $6,000 in catch up contributions. These contributions, of course, come from Jane’s earnings at Walmart.

Walmart makes matching employer contributions of 6%.  That adds up to a grand total of $26,500 in 401k contributions Jane gets every year.

Josie Reaches Retirement Freedom

Josie has been running her own small business for about 12 years. There are fat years and lean years, but Josie generally makes a strong six-figures consulting dairy farmers on increasing their margins and incorporating green and renewable energy solutions.

Josie opened her Solo 401k plan with Nabers Group in 2008. Because Josie runs her own business, she wears both hats: employer and employee.

This means with the Solo 401k, she can contribute for each role. Josie can contribute to the Solo 401k as the Employee AND the Employer.

The amount Josie can contribute is based on her net income. However, the Solo 401k contribution limits are much higher and more forgiving than a traditional 401k plan.

Solo 401k Contribution – By the Numbers

  • Employee Salary Deferral Contribution: You can contribute 100% of what you’ve earned as an employee up to $19,000 per participant, per year. If your spouse is also an employee in your business, you can each contribute up to $19,000 per year
  • Employer Profit-Sharing Contribution:
    • If your business is a single-member LLC or sole proprietorship, you can contribute 20% of the business’s net earnings up to $56,000 or $62,000 if age 50 or older
    • If your business is multi-member LLC, an S-Corp or C-corp, you can contribute 25% of the business’s net earnings, up to $56,000 or $62,000 if age 50 or older

Both your employee and employer contributions combined cannot exceed the $56,000 limit or $62,000 if age 50 or older. (Source)

Now that you know that the Solo 401k isn’t too good to be true, let us know how you can make it work for you. The Solo 401k is quite the powerful tool for the small business owner!

 

Tip: Thinking of opening your own small business, but not sure where to start? Check out 20 Ways To Become Eligible for the Solo 401k Plan!

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