Solo 401k Contribution Limits

Are there any additional advantages of a Solo 401k versus other self employed retirement plans?

Self employed business owners may be able to contribute more into a Solo 401k than a SEP-IRA or Keogh retirement plan at the same income level, therefore maximizing valuable tax deductible retirement plan contributions. This means a self employed business owner can accumulate tax deferred retirement balances faster while reducing annual taxes at the same time.

In 2012, the Solo 401k contribution limit is $50,000 or $55,500 if age 50 or older. The annual contributions into a Solo 401k consists of 2 parts: a tax deductible salary deferral contribution plus an additional tax deductible profit sharing contribution.

1. Salary Deferral Contribution
   In 2012, 100% of compensation up to a maximum of $17,000 ($22,500 if age 50 or older) can be contributed in salary deferrals. For a corporation compensation is based on W-2 wages. For businesses taxed as a sole proprietorship compensation is based on net adjusted business profits. Net adjusted business profit is determined by completing an IRS worksheet. It is calculated by taking gross self employment income and then subtracting business expenses and then subtracting 1/2 of the self employment tax (FICA and Medicare).
2. Profit Sharing Contribution
   A tax deductible profit sharing contribution can also be made. For corporations the profit sharing contribution is based on W-2 wages and can be made up to 25% of W-2 compensation. For sole proprietorships a profit sharing contribution can be made up to 20% of net adjusted business profits. 

The maximum allowable Solo 401k contribution limit calculation simply adds the profit sharing contribution to the maximum salary deferral contribution amount to produce the total allowable contribution. The salary deferral and profit sharing contribution can not exceed the Solo 401k contribution limit. Compared to other retirement plans you may be able to contribute more with a Solo 401k at identical income levels, therefore maximizing retirement contributions and tax deductions.

Solo 401k Contribution Calculations

NOTE: The calculation of how much can be contributed to the Solo 401k is dependent on whether your business is taxed as a corporation and you receive a W-2 or if you are taxed as a sole proprietorship. Examples of both are shown below.

Sole proprietorship, partnership or a LLC taxed as a sole proprietorship.

S or C corporation or a LLC taxed as a corporation.

Solo 401k Frequently Asked Questions

Solo 401k FAQs. Find answers to your questions about the Solo 401k.