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Solo 401k Contribution Limits

What are the advantages of the 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.

Solo 401k retirement plans have a maximum 2015 contribution limit of $53,000 ($59,000 if you are age 50+). In the years that follow there are Cost of Living Adjustments (COLA) to the solo 401k maximum contribution limit which may potentially increase the limit beyond the current level.

How are the total contributions in a Solo 401k calculated?

The annual contribution into a solo 401k consists of two parts called a salary deferral and a profit sharing contribution. Generally, both contributions are 100% tax deductible when made into a solo 401k (solo roth 401k contributions are not tax deductible).

In 2015, self employed business owners can contribute up to 100% of their first $18,000 of compensation or $24,000 if age 50+. Compensation is defined as W-2 wages if incorporated or self employment income if a sole proprietorship. This is the salary deferral contribution of the solo 401k.

In addition to the salary deferral contribution, a profit sharing contribution is permitted in a solo 401k. Profit sharing contributions of up to 25% of W-2 compensation for incorporated businesses or 20% of net adjusted business income for sole proprietorships can also be made into a solo 401k.

The 2015 maximum allowable contribution of $53,000 and $59,000 if you are age 50+ simply takes the salary deferral contribution and adds the profit sharing contribution amount to it and that’s the total allowable contribution.

Solo 401k plan contributions and investment earnings grow tax deferred. Withdrawals after age 59 ½ are taxed as ordinary income. Withdrawals prior to age 59 ½ may incur an IRS 10% premature withdrawal penalty as well as income taxes.

Solo 401k Loans

Learn more about the additional advantages of the Solo 401k.


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*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.