Solo 401k contribution limits are very high and they keep getting higher, year after year. Because of this its very advantageous for freelancers, independent contractors, and small businesses to save for retirement. These increases continue to encourage adoption of these Uni-k, Solo-k, or One participant 401k plans.
In addition to high Solo 401k contribution limits, there is also a lot of flexibility in how to contribute. You can do tax deductible traditional Solo 401k contributions to help lower your taxable income. Or you can also do after-tax Roth Solo 401k contributions. Or you can do a combination of both all within the same Solo 401k plan. High contribution limits can mean big changes for your financial future.
The more money you put away, the more your money can grow. When you contribute funds to a retirement plan, they grow tax-deferred or tax-free. Therefore, you can grow your investment profits without paying taxes. This often results in meaningful improvements for your retirement goals.
What Is a Solo 401K?
According to the IRS’s own website, a Solo 401k is simply a one participant 401k plan. It is no different than any other 401k, except that it only covers the owner and maybe also, his or her spouse. It’s key that the sponsoring business compensates the spouse. These plans follow all of the same rules as any other 401k plan. Except no full time W2 employees are allowed in a Solo 401k.
Solo 401ks, just like other 401k plans are designed to help you save for retirement. In a Solo 401k, you play multiple roles, including, employee and employer. As such, you get additional benefits and control compared to a large group 401k plan.
You have very high Solo 401k contribution limits and multiple ways to contribute. With certain Solo 401k providers, you also have full control over your retirement assets and investments. This means you can invest in stocks, bonds, gold & silver, ETFs, private companies, mortgage notes, and bitcoin. All inside your Solo 401k plan.
What Is The Solo 401k Contribution Limit Maximum?
Solo 401k Contribution limits are very high. For 2023, the max is $66,000 and $73,500 if you are 50 years old or older. This is up from $61,000 and $67,500 in 2022. This limit is per participant. So if your spouse is earning money from your small business that means they can also contribute up to the same amount into the Solo 401k. If you are both 50 years old or older, this means that combined Solo 401k contribution limits could be up to $147,000 per year!
Solo 401k contribution limits are much higher than all other retirement plans. Traditional and Roth IRA limits are just $6,500. The catch up contribution is $1,000 more if you are 50 years old or older. The IRS typically increases contribution limits every couple years as a “cost of living” increase to keep up with inflation. Therefore, it’s a fair bet to expect contribution limits to continue going up over time.
How Are Solo 401k Contribution Limits Calculated?
The IRS sets Solo 401k contribution limits each year. The maximum limit went from $61,000 in 2022 to $66,000 in 2023. If you are 50 years old or older the maximum contribution limit went from $67,500 in 2022 to $73,500 in 2023. As a self-employed person you play multiple roles in your Solo 401k. Because of this, there are multiple ways to contribute to a Solo 401k that allow you to get to the maximum Solo 401k contribution limit for 2023.
You are the employee of your business, so you can do an employee salary deferral which can total $22,500 in 2023. This contribution can be up to 100% of your net compensation or W2 depending on your business structure. If you are 50 years old or older, you can also make a catch up contribution of $6,500. This makes the total possible employee salary deferral for 50 year old or older $29,000.
Since you are also the employer, you can also contribute as an employer profit sharing contribution. This contribution can be between 20-25% of your net business self employment income or W2, depending on your business structure.
The more you earn, the more you can contribute. If your spouse works in your business and receives compensation – you can double your contribution amount. Imagine being able to tax-shelter over $100,000 per year!
Solo 401k Contribution Limits: Do Roth Contributions Count?
The Solo 401k contribution limit is inclusive of any contributions that you make to your Roth Solo 401k. Remember that only employee salary deferral contributions can be put directly into the Roth 401k. This is limited to $19,500 with an additional catch-up contribution of $6,500 if you are age 50 or older.
These Roth contributions can be up to 100% of your net self-employment income or W2 wages, depending on your business structure. It’s important to note that if you have already contributed the $22,500 as a pre-tax traditional contribution, then you cannot do direct Roth 401k contributions.
It is also possible to split up this salary deferral in order for some money to go to pre-tax/traditional and some to the Roth 401k. Remember that Roth contributions are not tax deductible on the way in, but if the distributions are qualified when you take them out there is no tax due on all of the gains in your Roth accounts.
The Solo 401k allows massive flexibility to vary your contributions year to year between your pre-tax/traditional bucket and your after-tax Roth bucket. This way you can decide how best to save for retirement in any given year based on your income, needed tax deductions and outlook for the future.
Solo 401K Contribution Calculator
If you are in doubt about how much you can contribute as both an employee and an employer in your Solo 401k plan, a great place to start is by using this handy contribution calculator. Make sure to select your business type from the drop down menu, either unincorporated or a single owner corporation.
For the unincorporated sole proprietorship you would enter your net income after deductions. For a single owner corporation you would enter your W2 wages paid from the corporation. Of course enter your age and then hit calculate.
If you want you can also view the report that will break down your contributions into both employee and employer. Remember to always work with your tax professional to help you get your final numbers correct based on your businesses earnings.
You can also compare your Solo 401k contribution limits relative to other small business retirement plans like a Simple IRA, Sep IRA and Profit Sharing Plan. For any given self employment income, the Solo 401k allows for higher tax deductible contributions.
Solo 401K Rules
In order to have a Solo 401k you do need to follow a few rules set up by the IRS. There are 2 main criteria to remain qualified for a Solo 401k:
- The presence of self-employment income
- The absence of full-time W2 employees outside of yourself or your spouse
The key really lies in how you define these terms. Self employment income is really any income where you are paying self-employment taxes. This could be an incorporated business that is paying W2 wages. Or it could be an unincorporated sole proprietorship or single member LLC generating Schedule C income or K1, line 14 income.
Full time employment is defined by working more than 1,000 hours per year. But recently the SECURE Act introduced new rules that will come into effect as of January 1, 2024.
Soon if an employee has worked 500 hours or more per year for the past 3 years they will be considered full-time. There are some additional factors to consider. Check out this article detailing the Solo 401k rule changes.
Solo 401K Contribution Deadline 2022
You can set up and fund your new Solo 401k plan all the way until you file your taxes in 2023. Depending on your business structure this could be either March 15 or April 15, 2023. If you have an S Corp or Partnership your deadline is March 15th. With a Sole Proprietorship or C Corp your deadline is April 18th.
If you file an extension, you could set up and fund your Solo 401k all the way until either September 15th (S Corp or Partnership) or October 15th (Sole Proprietorship or C Corp).
How To Open a Solo 401K
By now, you have probably determined if you qualify for a Solo 401k. Hopefully you also learned a little bit about how contributions work. There are many ways to contribute. And also a ton of flexibility year to year to change your contribution strategy to suit your needs and goals.
The next step is to set up your Solo 401k with Nabers Group. After you complete our short online application we will get your documents back to you within 2-4 hours. Next you can set up your holding accounts at the bank and/or brokerage of your choice. Then make new contributions and/or roll over funds from other qualified plans and IRAs. Select your investments and simply invest your funds how you want. Click here to get started with your online application.