The limits for employee elective deferrals and employer profit sharing tend to change on an annual basis based on cost-of-living adjustments. This limit applies equally to all 401(k) accounts regardless of how many employers you have. You can decide for yourself how to split your contributions between accounts, but the total amount you contribute as an employee cannot exceed the annual maximum.
As an employee & employer, a small business owner can make two types of contributions to their Solo 401(k). The limit on compensation that can be used to factor your contribution is $305,000 in 2022 and $330,000 in 2023:
Employee elective deferrals: Up to 100% of compensation up to the annual contribution limit.
Employer nonelective contribution up to:
- 25% of compensation as defined by the plan, or
- Self-employed individuals must make a special computation, which you can find more information about on the IRS.gov website here: IRS.gov One Participant 401k Plans
|Maximum Annual Compensation||$330,000||$305,000||$290,000|
|Employee Elective Deferrals||$22,500||$20,500||$19,500|
|*Annual Defined Contribution Limit||$66,000||$61,000||$58,000|
*Does not include catch-up contributions for those age 50 and over.
The Basic Rules of Contributions
Available contributions to your Self-Directed Solo 401(k):
- Traditional (employee salary deferral, pre-tax) are pre-tax employee contributions that are generally a percentage of the employee's compensation, or a specific dollar amount.
- Designated Roth (post-tax) is a type of elective contribution that, unlike pre-tax elective contributions, are currently includible in gross income but can be tax-free when distributed after age 59 ½.
- After-Tax (not available in certain 401(k) plans) are contributions from compensation (other than Roth contributions) that an employee must include in income on his or her tax return. If a plan allows after-tax contributions, they are not excluded from income and an employee cannot deduct them on his or her tax return.
- Catchup Contributions participants who are age 50 or over at the end of the calendar year can also make catch-up elective deferral contributions beyond the basic limit on elective deferrals.
- Employer contribution or profit-sharing. You can choose one calculation period per taxable year, which is always reported as pre-tax deferrals.
There are two contribution limits or "buckets" to meet the annual maximum contribution.
Since profit sharing and employer contributions can only be pre-tax, one may want to consider a Roth contribution for the employee elective deferral. In general, a Roth is a better option if you expect your income to be higher in retirement. If you think your income will go down in retirement, opt for the tax break today with a traditional 401(k).
2023 - $66,000: $22,500 for a Traditional or designated Roth personal deferral, $43,500 for a profit-sharing/employer contribution ($73,500 including catch-up contributions).
2022 - $61,000: $20,500 for a Traditional or designated Roth deferral, $40,500 for a profit-sharing/employer contribution ($67,500 including catch-up contributions).
2021 - $58,000: $19,500 for a Traditional or designated Roth deferral, $38,500 for a profit-sharing/employer contribution ($64,500 including catch-up contributions).
Can I contribute to both a workplace plan and a Solo 401(k) for my self-employed business at Rocket Dollar?
Yes! However, it is the responsibility of the account owner to make sure the contribution amount does not exceed the annual contribution limits as determined by the IRS. You must add up your workplace contributions along with your Solo 401(k) contributions so that you don't overclaim any tax-advantaged contributions on your taxes.
If you have an employer match, be sure not to pass up that match in the workplace retirement plan, especially if it is a generous match. An employer match is one of the easiest and surefire ways to accumulate more capital in your retirement accounts.
Then, after you have taken full advantage of the employer match, you can contribute the rest underneath your Solo 401(k) to invest it however you would like to. Remember, your Solo 401(k) contributions can come from ONLY your Self-Employed Income.
Profit-sharing and matching (updated for 2023 limits)
Example 1: If your business is a C-Corp or LLC taxed as a corporation you can contribute 25% of your net profit from the business via the employer non-elective contribution (sometimes called the profit-sharing contribution) to your Self-Directed Solo 401(k). You can make employer contributions up to $43,500. You'd need compensation (earned income) of $174,000 to make the full contribution of $66,000. Note that for an S-Corp, including an LLC taxed as an S-Corp, both your non-elective contributions and your profit-sharing contribution need to come from your salary so if your goal is to maximize your Self-Directed Solo 401(k) plan contributions, you'll need to pay yourself a salary that is high enough to cover both your non-elective contribution and your profit sharing contribution.
Example 2: If your business is an LLC taxed as a sole proprietorship or a partnership, you can contribute 20% of net profit from the business as the employer contribution or profit-sharing contribution to your Self-Directed Solo 401(k). You can make employer contributions of up to $43,500. You'd need compensation (earned income) of $217,500 to make the full contribution of $66,000.
Example 3(a): Another option available to a Self-Directed Solo 401(k) account holder is to add their spouse to the plan if the spouse is earning an income from the same business as the account holder. Adding the spouse to the plan allows for a doubling of the contributions. The spouse can make the same contributions as the account owner as long as the spouse has earned enough income. If your business is an S-Corp, C-Corp, or LLC taxed as a corporation, you can now contribute up to $132,000 (under age 50), or $147,000 (50+). To contribute the full amount, the married couple would need to generate compensation (earned income) of $348,000 to make the full contribution of $132,000.
Example 3(b): If your business is an LLC taxed as a sole proprietorship or a partnership the married couple would need to generate compensation (earned income) of $435,000 to make the full contribution of $132,000.
If you're not contributing $66,000 (or $132,000 as a married couple) you may still be able to make after-tax contributions. See the article here on Mega Roth.
This is educational information only and is not intended to be taken as tax advice. Before making a decision, consult a tax advisor, or licensed professional.
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