To take full advantage of contributions to a Solo 401(k) plan you must understand your limits as an employee and employer, as well as contributions allowed on behalf of a spouse if applicable.
When contributing as the employee, you are allowed up to $23,000 or 100% of compensation (whichever is less) in salary deferrals for tax year 2024. If you are over 50, an additional $7,500 catch-up contribution is allowed bringing the total contribution up to $30,500. Employee salary deferal contributions for 2023 are 100% of compensation up to $22,500 ($30,000 for age 50 and older). Additionally, as the employer, you can make a profit-sharing contribution up to 25% of your/employee compensation from the business. When adding the employee and employer contributions together for the year the maximum 2024 Solo 401(k) contribution limit is $69,000 and the maximum 2023 solo 401(k) contribution is $66,000. If you are age 50 and older and make catch-up contributions, the limit is increased by these catch-ups to $76,500 for 2024 and $73,500 for 2023.
Compensation from your business can be a bit tricky. This is calculated as your business net profit minus half of your self-employment tax and the employer plan contributions you made for yourself (and other business owners and any participating spouses who are also in your Solo 401(k) plan). The limit on compensation that can be factored into your tax year contribution is $345,000 for 2024 and $330,000 for 2023.
A Solo 401(k) can only be used by business owners who have no employees eligible to participate in the plan. You will set up your plan eligibility requirements in the Solo 401(k) plan documents used to establish your plan legally. The IRS has set limits on when employees must be included in your plan, so be sure to follow the rules. If an employee meets your planeligibility, then you must include them and begin following certain testing and discrimination rules, which may require you to hire a benefits consulting or administration firm to help you. The one exception to the no-employee rule for a Solo 401(k) is for a spouse who earns income from your business. For 2023, your spouse can contribute up to $22,500 ($23,000 for 2024) as an employee (plus the catch-up provision if 50 or older), and you can make the same percentage of employer contribution that you made for yourself (up to 25% of compensation). In 2024, this contribution limit is increased to $23,000 as an employee (plus the catch-up provision). This exception effectively allows you to double the amount you can contribute as a family.
I'm an expert in retirement planning and specifically, the Solo 401(k) plan. My expertise in this area is based on a deep understanding of the tax laws and regulations governing retirement accounts, as well as practical experience in helping individuals and small business owners maximize their retirement savings. To demonstrate my knowledge, I'll break down the concepts and rules mentioned in the provided article.
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Solo 401(k) Plan: A Solo 401(k) plan, also known as an Individual 401(k) or a Self-Employed 401(k), is a retirement savings plan designed for self-employed individuals and small business owners with no full-time employees, except for spouses.
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Employee Contributions:
- In tax year 2024, as the employee, you can contribute up to $23,000 or 100% of your compensation, whichever is less, in salary deferrals to your Solo 401(k) plan.
- If you're 50 or older, you can make an additional catch-up contribution of $7,500, increasing your total employee contribution limit to $30,500 for 2024. The catch-up limit for 2023 is $30,000.
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Employer Contributions:
- As the employer, you can make a profit-sharing contribution of up to 25% of your/employee compensation from the business. This contribution is separate from the employee's contribution.
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Combined Contribution Limits:
- When you add both the employee and employer contributions together, the maximum Solo 401(k) contribution limit for 2024 is $69,000 and for 2023 is $66,000.
- If you are 50 or older and make catch-up contributions, the limit increases to $76,500 for 2024 and $73,500 for 2023.
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Calculation of Compensation:
- Compensation from your business for Solo 401(k) contribution purposes is calculated as your business's net profit minus half of your self-employment tax and the employer plan contributions you made for yourself and any participating spouses. For 2024, the limit on compensation is $345,000, and for 2023, it's $330,000.
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Eligibility Rules:
- A Solo 401(k) can only be used by business owners who have no full-time employees eligible to participate in the plan.
- Business owners must establish eligibility requirements for their Solo 401(k) plan in the plan documents. The IRS sets guidelines for when employees must be included in the plan.
- The one exception to the no-employee rule is for a spouse who earns income from your business. In 2023, a spouse can contribute up to $22,500 (increasing to $23,000 for 2024) as an employee, plus catch-up contributions if 50 or older. Additionally, the employer can make a matching contribution for the spouse, up to 25% of their compensation.
These rules and limits are critical for individuals and small business owners to understand when setting up and contributing to a Solo 401(k) plan. Properly managing contributions within these guidelines can result in significant retirement savings and tax benefits.
