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2022 Solo 401(k) Contribution Rules

2022 Solo 401(k) Contribution Rules
4 Minute Read

Starting a Solo 401(k) plan in 2022 has even more benefits than it did in 2021.  The Solo 401(K) plan is designed specifically for the self-employed or a small business with no full-time employees (over 1000) other than the other(s) or the spouse(s).  There are many features of the plan that make it so appealing and popular among self-employed business owners.  However, the ability to make high annual maximum contributions is probably the most popular Solo 401(k) plan feature.

Key Points
  • For 2022, one can save a lot more money for retirement with a Solo 401(k) plan
  • One can contribute as both the employee and the employer to a Solo 401(k)
  • The plan remains the best retirement savings vehicle for the self-employed and owner-only businesses

Maximum Solo 401(k) Plan Contribution

In general, a Solo 401(k) plan consists of two components: (i) employee deferrals and (ii) employer profit sharing contributions. First, there is the elective deferral which is the contribution you make as the employee. The second type of contribution for a Solo 401(k) is the employer contribution, which is a percentage of your self-employment income or your schedule C if you’re a single member LLC or sole proprietor.

For 2021, the maximum aggregate solo 401(k) plan contribution, including employee deferrals and employer profit sharing contributions is $58,000 if under the age of 50 and $65,500 if age 50 or older.

For 2022, the maximum aggregate Solo 401(k) plan contribution, including employee deferrals and employer profit sharing contributions, is $61,000 if under the age of 50 and $67,500 if age 50 or older.

Employee Elective Deferrals

For 2021, the maximum Solo 401(k) plan employee deferral contribution is $19,500 or $26,000 if age 50+. Based on your plan documents, employee deferrals can be made in pretax or Roth.

For 2022, the maximum Solo 401(k) plan employee deferral contribution is $20,500 or $27,000 if at least age 50.  Again, based on your plan documents, employee deferrals can be made in pretax or Roth.

Employee deferrals are 100% elective.  The due date for making employee deferrals is based on the type of business that adopted the Solo 401(k) plan.  Sole proprietors and single member LLCs have until the filing of the 1040 tax return to make deferrals.  Whereas, owner/employees of partnerships and corporations must elect to make employee deferral contributions by December 31.

Employer Profit-Sharing Contributions

Employer profit sharing contributions are a percentage based on each eligible plan participants compensation.  For a sole proprietor or a single member LLC, the maximum employer profit sharing contribution percentage is 20%.  However, for a C or S corporation earning a W-2, the maximum employer profit sharing contribution percentage is 25%. Employer profit sharing contributions must be made in pretax, but can be converted to Roth.

Employer profit sharing contributions are due when the business return is filed.

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    Important Tips to Remember

    • It’s important to note, you cannot defer more than you earn in compensation during the taxable year. For example, if you earned $15,000 in W-2 income, you cannot make employee deferrals or employer profit sharing contributions in excess of that amount.
    • To determine the exact amount you can contribute to a solo 401(k) based on your income amount, check out our solo 401(k) plan contribution calculator
    • You can establish a Solo 401(k) plan for a part-time business even if you have a full-time job that offers a plan.  However, the amount you will be permitted to contribute to the plan may be limited based on your income from the part-time business as well as based on contributions made to your employer plan.
    • Not all Solo 401(k) plans are the same.  The free plan you may receive from a bank or brokerage firm will likely not offer Roth options, a $50,000 loan feature, alternative asset investments, as well as require you to handle all plan IRS filing requirements
    • The difference between a SEP IRA and a Solo 401(k) plan is that a SEP IRA is a pure profit sharing plan and a Solo 401(k) plan also includes an employee deferral component, plus a catch-up, Roth option, and a loan option.  For example, if one makes $40,000 and is self-employed and over the age of 50, a the maximum SEP IRA contribution would be $8,000.  Whereas, for 2022, the maximum Solo 401(k) plan contribution would be $35,000 ($27,000 employee deferrals + $8,000 employer profit sharing contribution).
    • Below is a table the summarizes the maximum Solo 401(k) plan & IRA contribution limits for 2022 versus 2021:
     Solo 401(k)SEP IRATraditional IRARoth IRASIMPLE IRA
    2022$61,000 or $67,500 if at least age 50$61,000$6,000 or $7,000 if at least age 50$6,000 or $7,000 if at least age 50 $14,000 + $3,000 catch-up if at least age 50
    2021$58,000 of $64,500 if at least age 50$58,000$6,000 or $7,000 if at least age 50$6,000 or $7,000 if at least age 50 $13,500 + $3,000 catch-up if at least age 50

    Conclusion

    If you are self-employed, the Solo 401(k) is the best retirement plan you can establish this year. The high contribution limits, which have been increased significantly this year, is one of the major benefits of the plan. Plus, the Roth option, loan feature, and the ability to invest in alternative assets, make it a must have for everyone eligible.

    If you have any type of self-employed income, you should consider starting up a plan for yourself. Of course, you should first determine the features you want to have, and then find the right provider to work with.

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