The 2021 contribution limits for a Solo 401(k) retirement plan (also known as the self-employed 401(k) contribution limit) has increased from 2020 contributions. Depending on your earnings, you can contribute up to $58,000 if you’re under age 50. You can contribute up to $64,500 if you’re age 50 and older.
Solo 401(k) Contribution Limits—Two Parts
Your Solo 401(k) Plan consists of two components. You can contribute money into your retirement account as an employer and employee. Therefore, you have two Solo 401(k) contributions. The IRS sets the contributions limits every year.
As an employee of a self-employed business or small business with no full-time employees (other than an owner or a spouse), you have the option to make the Employee Contribution. This is also known as the Elective Deferral. For 2021, the Solo 401(k) maximum contribution limit for the elective deferral is $19,500 if you’re under age 50 This remains the same as the 2020 limit. Whereas, the elective deferral contribution if you’re 50 and older is $26,500, again, the same as 2020. Employee deferral contributions can be made in pre-tax or Roth.
The Solo 401(k) Profit Sharing Contribution is also known as the Employer Contribution. For 2021, you can make a contribution of $38,500 whether you are under or over 50 years old. 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 the income.
If your business is a corporation or multi-member LLC, your maximum profit sharing contribution is up to or equal to 25% of your W-2 income or guaranteed payment amount in the case of a partnership.
If your business is a sole proprietor or single member LLC, your maximum profit sharing contribution is up to or equal to 20% of your schedule C income.
As a result, the maximum contribution for a Solo 401(k) plan if you’re younger than 50 is $58,000. If you’re 50 and older, you can make a maximum contribution of $64,500.
Because you have two contribution types, you can reach the maximum contribution amount in a Solo 401(k) retirement plan quicker than a SEP IRA. Total Limit for Couples
Total Solo 401(k) Contribution Limit for Couples
Your spouse can participate in the Solo 401(k) Plan if he/she earns compensation from the business. Remember, only a spouse or business partner can work full time. If you have any other employees, you cannot utilize the Solo 401(k) plan. He or she can make separate and equal contributions. This increases the annual contribution to $116,000 (under 50) or $129,000 (50+) that a couple can make for 2021.
Did You Know?
IRA Financial Group’s Solo 401(k) plan is so very popular because it’s designed explicitly for small, owner-only businesses. Many features of IRA Financial Group’s Solo 401(k) plan make it appealing for small business owners, including being able to maximize contributions as both employer and employee. Contact us today to learn more.