Solo 401k Contribution Types:
In the words of the IRS, a self-employed individual wears two “hats” in a Solo 401k plan: employee and employer. As such, the self-employed individual may make both “employee” and “employer” contributions to a Solo 401k. The practical result is that the individual may contribute more to his or her retirement plan than may be contributed under other types of retirement plans for self-employed individuals such as SEP and SIMPLE IRA accounts. In fact, the ability to make both employer and employee contributions to a Solo 401k is one of the primary reasons that Solo 401k plans have dramatically increased in popularity relative to SEP and SIMPLE IRA accounts.
Solo 401k Contribution Limits:
- Total Contribution Limit: For 2014, the total contribution limit for Solo 401k accounts (including both employee and employer contributions) is $52,000 or $57,500 for those age 50 or older.
- Employee Contribution Limit: In terms of employee contributions for 2014, a self-employed individual may contribute up to $17,500 of “earned income” (or $23,000 if age 50 or older).
o For purposes of the employee contribution limit, “earned income” is defined as net earnings from self- employment after deducting both one-half of your self-employment tax and contributions for yourself.
o Self-employed persons age 50 or older may make an additional contribution of $5,500 of “earned income” for a total employee contribution limit of $23,000. This additional contribution is referred to as a “catch-up” contribution and must be specifically permitted by the retirement plan. Catch-up contributions provide an additional opportunity to save for those who are nearing retirement age.
- Employer Contribution Limit: The employer contribution limit is (i) 25% of your W-2 income if your business is organized as a corporation; and (ii) 20% of net income if your business is a sole proprietorship or partnership.
- Example: Mary, age 51, earned $50,000 in W-2 wages from her S Corporation in 2014. She deferred $17,500 in regular elective deferrals plus $5,500 in catch-up contributions to the 401(k) plan. Her business contributed 25% of her compensation to the plan, $12,500. Total contributions to the plan for 2014 were $35,500. This is the maximum that can be contributed to the plan for Mary for 2014.
Rollover Contributions and Direct Transfer: With the exception of amounts in a Roth IRA, you may "roll over" or transfer to your Solo 401(k) amounts you have in virtually any other retirement plan (including funds in a former employer 401(k), a governmental 457(b) plan, a 403(b) plan, etc.). There are no limits on the amount that you can rollover or transfer from another retirement account.
Solo 401k Contribution Deadlines: Per IRS Publication 560, contributions may be made for a tax year up to the due date of your return (plus extensions) for that year.
Employer Type* Tax Return Filing Deadline Extended Deadline
Corporation Form 1120 March 15 September 15
LLC Taxed as Corp. Form 1120 March 15 September 15
Partnership Form 1065 April 15 October 15
LLC Taxed as Part. Form 1065 April 15 October 15
Sole Proprietorship Form 1040 April 15 October 15
*Calendar year tax filer
Contributions to Multiple Retirement Plans:
If you are participating in another retirement plan in addition to your Solo 401k, you may be able to make contributions in excess of $52,000 for 2014. This is because employer contributions are not aggregated across all plans in which you participate (in contrast, employee contributions are aggregated across all plans). For example, consider a self-employed individual who also has W-2 position where the person is participating in the employer-sponsored 401k plan (e.g., an IT professional for a Fortune 500 who also has her own web-hosting company). For 2014, this person may contribute $52,000 ($57,500 if age 50 or older) to her Solo 401k and another $52,000 may be contributed as an employer profit sharing contribution to the employer-sponsored 401k plan. As a result, a total of $104,000 may be contributed in 2014 to both plans combined.
Solo 401k Roth Contributions:
A self-employed individual may make post-tax (Roth) contributions to his or her Solo 401k. As these amounts must be segregated from those amounts contributed to the Solo 401k on a pre-tax basis, they must be deposited into a Roth sub-account (or designated account). When a self-employed individual makes Roth contributions, such amounts are contributed as elective deferrals and as such are subject to the limitations that apply to employee contributions: for 2014, $17,500 of “earned income” or $23,000 if age 50 or older provided that the no employee contributions are made on a pre-tax basis since both pre-tax and Roth employee contributions count towards the limit.
Solo 401k Contribution Calculator
To calculate how much you can contribute to your Solo 401k plan, use this online Solo 401k contribution calculator.
Sources: IRS.gov & Publication 560