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Solo 401k Contribution Limits

In 2014 the Solo 401k contribution limit is $52,000 and $57,500 if age 50 or older (2013 limit is $51,000 and $56,500 if age 50 or older).

The annual Solo 401k contribution consists of 2 parts a salary deferral contribution and a profit sharing contribution. The total allowable contribution adds these 2 parts together to get to the maximum Solo 401k contribution limit.

Solo 401k contributions are flexible. Both the salary deferral and the profit sharing contributions are discretionary and can be changed at anytime based on business profitability.

The contribution limits can be doubled for husband and wife businesses. Businesses with a spouse on the payroll can also contribute to the Solo 401k. There would be one Solo 401k for the business with two participants. Provided a business owner and spouse have sufficient income from the business in 2014, both may be able to contribute $52,000 and $57,500 age 50 or older.

Solo 401k Contribution Calculations

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.

Calculations for a sole proprietorship, partnership or a LLC taxed as a sole proprietorship

Salary Deferral Contribution:
Although the term salary deferral is used, these businesses do not provide a W-2 salary to the business owner. For businesses of this type, the salary deferral contribution is based on net adjusted business profit. Net adjusted business profit is calculated by taking gross self employment income and then subtracting business expenses and then 1/2 of the self employment tax.

In 2014, 100% of net adjusted business profits income up to the maximum of $17,500 or $23,000 if age 50 or older can be contributed in salary deferrals into a Solo 401k (2013 limits are $17,500 and $23,000 if age 50 or older).

Profit Sharing Contribution:
A profit sharing contribution can be made up to 20% of net adjusted businesses profits. Net adjusted business profit is calculated by taking gross self employment income and then subtracting business expenses and then 1/2 of the self employment tax. You will want to ask your tax professional for assistance with this calculation.

  • EXAMPLE 1
    A 50 year old self employed consultant is the owner of a sole proprietorship with $50,000 of net income in 2014. In this example, the consultant could contribute $23,000 of salary deferrals + $9,294 profit sharing contribution = $32,294 Total Solo 401k contribution.
  • EXAMPLE 2
    A 50 year old self employed consultant is the owner of a sole proprietorship with $100,000 of net income in 2014. In this example, the consultant could contribute $23,000 of salary deferrals + $18,587 profit sharing contribution = $41,587 Total Solo 401k contribution.

Solo 401k Calculator

If you are taxed as a sole proprietorship use your NET income when using the calculator. To determine the annual retirement contribution you could make based on your income use the Solo 401k Calculator.

Calculations for a S or C corporation or a LLC taxed as a corporation

S corporations, C corporations and LLCs electing to be taxed as a corporation pay the business owner a W-2 salary. The calculation of how much can be contributed to a Solo 401k is based only on the W-2 salary of the self employed business owner (business profits are not included in the calculation).

Salary Deferral Contribution:
In 2014, 100% of W-2 earnings up to the maximum of $17,500 or $23,000 if age 50 or older can be contributed to a Solo 401k (2013 limits are $17,500 and $23,000 if age 50 or older).

Profit Sharing Contribution:
A profit sharing contribution up to 25% of W-2 earnings can be contributed into a Solo 401k.

  • EXAMPLE 1
    A 50 year old self employed consultant is the owner of a Subchapter S business with $50,000 of W-2 earnings in 2014. In this example, the consultant could contribute $23,000 of salary deferrals + $12,500 profit sharing contribution (25% X $50,000) = $35,500 Total Solo 401k contribution.
  • EXAMPLE 2
    A 50 year old self employed consultant is the owner of a Subchapter S business with $100,000 of W-2 earnings in 2014. In this example, the consultant could contribute $23,000 of salary deferrals + $25,000 profit sharing contribution (25% X $100,000) = $48,000 Total Solo 401k contribution.

Solo 401k Calculator

The calculation of how much can be contributed to a Solo 401k is based only on the W-2 salary of the self employed business owner (business profits are not included in the calculation). Determine your annual retirement contribution based on your income using the Solo 401k Calculator.

Learn more about the benefits of the Solo 401k

  • Solo Roth 401k - There is an option to make Roth 401k contributions with the salary deferral portion of the Solo 401k. Contributions into a Solo Roth 401k are not tax deductible, but withdrawals are tax free after age 59 ½.
  • Solo 401k Rollover - You can rollover your 401k, 403b, 457 retirement plan from a previous employer. You can transfer a Rollover IRA, Traditional IRA, SEP IRA, Simple IRA and Keogh plan.
  • Solo 401k FAQs - Frequently asked questions, rules and information about the Solo 401k.
  • Solo 401k Loans - Tax free loans are permitted with a Solo 401k plan. Loans up to 50% of the total value of the Solo 401k up to a maximum of $50,000 are permitted. IRS rules do not allow loans with IRAs, SEP IRAs, or Keogh (Money Purchase/Profit Sharing Plans).
  • Self Employed Retirement Plan Comparison - Compare the Solo 401k, SEP IRA, Defined Benefit Plan and Simple IRA.

 

How Can BCM Help You?

Beacon Capital Management Advisors (BCM) is experienced in setting up retirement plans for our clients. BCM provides retirement plans to the self employed, freelancers, entrepreneurs, independent contractors and small business owners and is registered in 50 States. Complete the form below and a BCM Advisor will promptly respond to your inquiry.

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Disclosures:

*The information on this page is for informational purposes only and does not constitute, and should not be construed as, professional, legal or tax advice. To determine your individual tax situation and specific needs, please consult a professional tax advisor.

*Information contained in these sections merely highlight some benefits. There are risks involved with all investments that could include tax penalties and risk/loss of principal.