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2021 Solo 401(k) Contribution Limit Changes

2021 Solo 401(k) Contribution Limit

As they do annually, the IRS has released its retirement contribution limit changes for the following year. These changes are based on cost of living increases. For 2020, the Solo 401(k) contribution limit is $57,000 or $63,500 if you are age 50 or older. The 2021 Solo 401(k) contribution limit increases that a bit. Here is a breakdown of the changes we will see next year.

2020 401(k) Contribution Limits

  • Employee Deferral – $19,500
  • Employer Contribution – $37,500
  • Catch-up Contribution – $6,500
  • Total Contribution Limit – $57,00 or $63,500 for those age 50 and older

2021 401(k) Contribution Limits

  • Employee Deferral – $19,500
  • Employer Contribution – $38,500
  • Catch-up Contribution – $6,500
  • Total Contribution Limit – $58,00 or $64,500 for those age 50 and older

What this Means

As you can see, the employee deferral remains unchanged from 2020. As an employee of a business, you can still contribute up to $19,500. Further, the catch-up contribution, for those at least age 50, also remains the same as 2020. The employer contribution increased $1,000 from 2020, meaning you can contribute more money as an employer.

Those with self-employment income can contribute as both the employee and employer. This means anyone with a Solo 401(k) plan may contribute up to $64,500, an increase of $1,000. A percentage of your business/self-employment income is used to determine the amount you can contribute as the employer. The compensation used for this calculation also increases to $290,000, which is $5,000 more than 2020.

Further, if your employer allows for them, you can contribute after-tax funds up to the new annual limit of $64,500. It’s important to keep in mind, that the overall contribution limit is for all 401(k) plans and types of contributions in the aggregate. Therefore, if you contribute to a 401(k) plan through your employer, this lessens the amount you can save in your Solo 401(k) plan.

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    Explaining the Solo 401(k) Contributions

    Elective Deferral

    As an employee, you have the option to make the Elective Deferral, also known as an employee contribution. For 2021, the Solo 401(k) maximum contribution limit for the elective deferral is $19,500 if you’re 50 and under. This remains the same as the 2020 contribution limit.

    The elective deferral contribution if you’re 50 and older is $26,000, again, no change from 2020. Employee deferral contributions can be made in pre-tax or Roth.

    Profit Sharing

    The Solo 401(k) Profit Sharing Contribution is also known as the Employer Contribution. For 2021, you can make a contribution of $38,500, which is an increase of $1,000 from 2020, no matter your age. Unlike the employee deferral contribution, which is a dollar-for-dollar contribution, the Solo 401(k) plan employer contribution is based on a percentage of earned income.

    Total Limit for Couples 

    Your spouse can participate in the Solo 401(k) Plan if he/she earns compensation from a business. He or she can make separate and equal contributions. This increases the annual contribution to $116,000 (under 50) or $129,000 (over 50) that a couple can make for 2021.

    Saver’s Credit

    The saver’s credit is an incentive for low- and moderate-income earners. This tax credit is provided to those people who save for retirement, who are under certain income thresholds. To receive the credit, your annual income must fall below $66,000 if you are married filing jointly (up $1,000 from 2020), $49,500 if you file as a head of household (up $750) or $33,000 if you are a single filer or married filing separately (up $500).

    Conclusion

    As you can see, not much has changed for the 2021 Solo 401(k) contribution limits. If you are self-employed, you can contribute an additional $1,000, but only as the employer. The amount you can contribute as the employee on a dollar for dollar basis remains unchanged.

    If you want more information about the Solo 401(k) and how it works, please give us a call @ 800.472.0646.

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