Each year, the IRS adjusts the Solo 401(k) contribution limits mainly due to cost of living increases. Some years, there is little if any change. Others, like 2023, there is a nice bump to what you can save annually, an indirect benefit of high inflation. For 2022, the Solo 401(k) contribution limits are $61,000 or $67,500 if you are at least age 50. The 2023 Solo 401(k) contribution limits will increase those totals. Here is what you can expect to see next year.
2022 401(k) Contribution Limits
- Employee Deferral – $20,500
- Employer Contribution – $40,500
- Catch-up Contribution – $6,500
- Total Contribution Limit – $61,000 or $67,500 for those age 50 and older
2023 401(k) Contribution Limits
- Employee Deferral – $22,500
- Employer Contribution – $43,500
- Catch-up Contribution – $7,500
- Total Contribution Limit – $66,000 or $73,500 for those age 50 and older
What Does it All Mean?
In 2022, the IRS increased the employee deferral $1,000 after remaining the same for the previous two years. For 2023, you can contribute an additional $2,000 to a 401(k) plan. In addition, the catch-up contribution, for those at least age 50, has also increased $1,000 to a total of $7,500. Further, the employer contribution has increased $3,000 from 2022, equaling the increase for this past year.
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 $66,000 in 2023, an increase of $5,000. If you are at least age 50, you may contribute up to $73,500, an increase of $6,000. 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 increases to $330,000, which is $25,000 more than 2022.
Plus, if your employer allows for them, you can contribute after-tax funds up to the new annual limit of $66,000 or $73,500. After-tax contribution should generally only be considered when employing the Mega Backdoor Roth strategy.
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 lowers the amount you can save in your Solo 401(k) plan. Obviously, if you only have one 401(k) plan, you may contribute the maximum to that plan.
Explaining the Solo 401(k) Contributions
As an employee, you have the option to make the Elective Deferral, also known as an employee contribution. For 2023, the Solo 401(k) maximum contribution limit for the elective deferral is $22,500 if you’re age 50 and under. This is an increase of $2,000 from 2022.
The elective deferral contribution if you’re at least age 50 is $30,000, which is a $3,000 increase from 2022. Employee deferral contributions can be made in pretax or Roth.
The Solo 401(k) Profit Sharing Contribution is also known as the Employer Contribution. For 2023, you can make a contribution of $43,500, which is an increase of $3,000 from 2022, 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.
You may make employer profit sharing contributions up to 20% of your self-employment income (net Schedule C) or 25% of your W-2. Please note that these contributions can only be made pretax, and not Roth.
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 $132,000 (under age 50) or $147,000 (50+) that a couple can make for 2023.
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 $73,000 if you are married filing jointly (up $5,000 from 2022), $54,750 if you file as a head of household (up $3,750) or $36,500 if you are a single filer or married filing separately (up $2,500).
One of the indirect benefits of high inflation is that the annual Solo 401(k) contribution limits have increased significantly from 2022. Accordingly, there are big changes to the 2023 Solo 401(k) contribution limits. Everyone with a 401(k) plan may contribute an additional $2,000. If you are self-employed, you can contribute a whopping $5,000 more. Plus, for the first time in awhile, the catch-up contribution for those age 50 and older have increased as well allowing you to contribute $6,000 more than you can in 2022.
If you want more information about the Solo 401(k) and how it works, please give us a call @ 800.472.0646. We can answer any questions you have, if you are eligible, and how to set one up. More than ever, 2023 may be the best time to go into business for yourself!