Solo 401(K) Contribution Limits

Under the 2014 Solo 401(k) contribution rules, a plan participant under the age of 50 can make a maximum employee deferral contribution in the amount of $17,500. That amount can be made in pre-tax or after-tax (Roth). On the profit sharing side, the business can make a 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to a combined maximum, including the employee deferral, of $52,000, an increase of $1,000 from 2013.

For plan participants over the age of 50, an individual can make a maximum employee deferral contribution in the amount of $23,000. That amount can be made in pre-tax or after-tax (Roth). On the profit sharing side, the business can make a 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to a combined maximum, including the employee deferral, of $57,500, an increase of $1,000 from 2013.

One of the main benefits of a Solo 401(k) Plan is the opportunity to make higher contributions. Under most retirement plans that an owner only business could establish, the maximum annual deductible contribution is 25 percent of the business owner’s compensation.

Solo 401(k) Contributions Vs. SEP IRA

A Solo 401(k) Plan includes both an employee and profit sharing contribution option, whereas, a SEP IRA is purely a profit sharing plan. Hence, a participant in a SEP IRA would be limited to 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to a combined maximum of $52,000 for 2014. No employee deferral exists for a SEP IRA.

Employee Elective Deferrals

Before the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) became effective in 2002, there was no incentive for an owner-only business to establish a 401(k) plan because the business owner could generally receive the same benefits by adopting a profit sharing plan or SEP IRA. However, EGTRRA changed everything and turned the Solo 401(k) Plan in to the most popular retirement plan for the self-employed. EGTRRA cleared the way for an owner-only business to defer more money into a retirement plan and to operate a more cost-effective, less complex type of plan. One of the key features of EGTRRA was that it added the employee deferral feature founded in a traditional multiple employee 401(k) Plan to the Solo 401(k) Plan. This feature turned the Solo 401(k) Plan into the retirement vehicle that provided the highest contribution benefits to the self-employed.

For 2014, up to $17,500 per year can be contributed by the participant through employee elective deferrals. An additional $5,500 can be contributed for persons over age 50. These contributions can be up to 100% of the participant’s self-employment compensation.

Employer Profit Sharing Contributions

Through the role of employer, an additional contribution can be made to the plan in an amount up to 25% of the participant’s self-employment compensation (20% in the case of a Sole Proprietor or a Schedule C Tax Payer).

Total Limit

The sum of both contributions can be a maximum of $52,000 per year (for 2014) or $57,500 for persons over age 50.

If the business owner’s spouse elects to participate in the Solo 401(k) and earns compensation from the business, the spouse is allowed to make separate and equal contributions increasing the couples’ annual total contribution to $104,000 for 2014 or $115,000 if both spouses over age 50.

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

A Solo 401k participant can contribute to the plan as an employee and as employer.

Calculate Your Solo 401k Plan Maximum Contribution Limit Please click here to calculate your Solo 401(k) Plan Maximum Contribution Limit.

 

Solo 401k Contribution Calculations

The calculation of how much can be contributed to a Solo 401k Plan is based on whether your business is taxed as a corporation and you receive a W-2 or if you are taxed as an LLC, partnership, or sole proprietorship.

C Corporation or S Corporation

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.

Profit Sharing Contribution : Internal Revenue Code Section 401(a)(3) states that the amount of employer contributions is limited to 25 percent of the compensation paid. Accordingly, a profit sharing contribution up to 25% of W-2 earnings can be contributed into a Solo 401k. In other words, in the case of company, the employer profit sharing contribution must be based on the compensation paid by company not the overall profits earned by the company.

Multiple Member LLC or Partnership

Salary Deferral Contribution: In 2014, 100% of the owner’s self-employment earnings up to the maximum of $17,500 or $23,000 if age 50 or older can be contributed to a Solo 401k.

Profit Sharing Contribution : Internal Revenue Code Section 401(a)(3) states that the amount of employer contributions is limited to 25 percent of the entity’s overall self-employment earnings. In other words, the 25% employer contribution amount is based on the K-1 income attributable to self-employment earnings, not necessarily the overall income of the entity if income is attributable to passive types of investments not considered self-employment earnings (i.e. passive business income).

Single Member LLC or Sole Proprietorship

Salary Deferral Contribution: In 2014, 100% of the owner’s self employment earnings up to the maximum of $17,500 or $23,000 if age 50 or older can be contributed to a Solo 401k.

Profit Sharing Contribution : Internal Revenue Code Section 401(a)(3) states that the amount of employer contributions is limited to 25 percent of the entity’s income subject to self-employment tax . Single member LLCs or Schedule C sole-proprietors must do an added calculation starting with earned income to determine their maximum contribution, which, in effect, brings the maximum 25% of compensation limit down to 20% of earned income. A step-by-step worksheet for this calculation can be found in Pub 560. In general, compensation is your net earnings from self-employment. This definition takes into account both of the following items: (i) the deduction for one-half of your self-employment tax, and (ii) the deduction for contributions on your behalf to the plan.

Example 1: Joe, who is 35, is the sole owner of ABC, Inc. Joe receives $100,000 of compensation from the corporation. The maximum deductible contribution Joe can make to his Solo 401(k) account in 2014 would be a whopping $42,500 [$17,500 + (25% of $100,000)]. That's a significant amount more than the amount Joe would be able to contribute to a traditional IRA or SEP IRA.

Example 2: Joe, who is 35, is a sole proprietor. Joe earns $100,000 from his sole proprietorship. For 2014, the maximum deductible contribution Joe can make to his Solo 401(k) account would be a whopping $37,500 [$17,500 + (20% of $100,000)]. That's a significant amount more than the amount Joe would be able to contribute to a traditional IRA or SEP IRA.

Example 3: Joe, who is 42, is the owner of a single member LLC. Joe earns $100,000 from his LLC from self-employment earnings. For 2014, the maximum deductible contribution Joe can make to his Solo 401(k) account would be a whopping $37,500 [$17,500 + (20% of $100,000)]. That's a significant amount more than the amount Joe would be able to contribute to a traditional IRA or SEP IRA.

Example 4: Joe, who is 55, is the sole owner of ABC, Inc. Joe receives $100,000 of compensation from the corporation. In 2014, the maximum deductible contribution Joe can make to his Solo 401(k) account would be a whopping $48,000 [$23,000 + (25% of $100,000)]. That's a significant amount more than the amount Joe would be able to contribute to a traditional IRA or SEP IRA.

Example 5: Joe and Kim are married. Joe, who is 35, is the sole owner of ABC, Inc. Joe and Kim each receive $100,000 of compensation from the corporation. For 2014, the maximum deductible contribution Joe can make to his Solo 401(k) account would be $42,500 [$17,500 + (25% of $100,000)] and the maximum deductible contribution Kim can make to his Solo 401(k) account would be $42,500, for a total of a whopping $85,000.

Why Work With the IRA Financial Group?

The IRA Financial Group was founded by a group of top law firm tax and ERISA lawyers who have worked at some of the largest law firms in the United States, such as White & Case LLP, Dewey & LeBoeuf LLP, and Thelen LLP. Over the years, we have helped thousands of clients establish IRS compliant Solo 401(k) Plans. With our work experience at some of the largest law firms in the country, our retirement tax professionals’ tax and ERISA knowledge in this area is unmatched.

To learn more about the Solo 401(k) Plan annual contribution rules, please contact one of our Solo 401(K) Plan experts at 800-472-0646 for more information.

Did you know? A rollover of funds to a Solo 401(k) Plan is done via a direct rollover request form.


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