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Solo 401(k) Contribution Limits for 2019 have increased from 2018. Under the 2019 Solo 401(k) contribution rules, a plan participant under the age of 50 can make a maximum employee deferral contribution of $19,000. Participants can make this amount pre-tax or post-tax (Roth).
As you may remember in learning how a Solo 401(k) works and how you can benefit from this retirement plan, your business can make a 25% profit into your retirement plan. In the case of a sole proprietorship or single member LLC, it’s a 20% profit. This includes the combined employee deferral, which varies depending on whether you’re over or under 50 years old.
Your contribution in your Solo 401(k) Plan comes out of your self-employment (your paycheck) or W-2. This way, you avoid paying taxes on that income, but you can’t touch the money for any personal/immediate use.
Your Solo 401(k) Plan consists of two parts. This is because as a Solo 401(k) Participant, you are self-employed. Therefore, you can contribute money into your retirement account as an employer and employee.
Compare the Solo 401(k) to the SEP IRA and see the difference.
First, as an employee, you have the salary deferral contribution. As an employer, you have the profit-sharing contribution. You can also contribute more into your Solo 401(k) retirement plan because you’re making two types of contributions. However, it’s important to keep in mind that this is based off your earnings. For example, if you’re under the age of 50, you can contribute of up to $56,000. However, if your self-employment isn’t generating $56,000 annually, naturally you cannot make a $56,000 contribution.
As you may know, in 2002 the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) became effective. This created a less complex, more tax-efficient plan in the Solo 401(k). Prior to that, an owner-only business/small business owner didn’t have a good reason to establish a Traditional 401(k). Instead, they went for the SEP IRA Plan and received the same tax benefits.
The EGTRRA makes the Solo 401(k) a more appealing option for these individuals because it offers the employee deferral feature (also known as the elective-deferral contribution).
This allows employees to set aside money from their paycheck. It also includes the profit sharing contribution, which allows the business to make contributions to the retirement account. So as you can see, the Solo 401(k) offers both employee and profit sharing contribution options.
An SEP IRA is strictly a profit sharing plan. So, a participant who has an SEP IRA has a 25% profit sharing contribution up to a max of $56,000 for 2019. For a sole proprietorship or single member LLC, it’s 20%. No employee deferral exists for a SEP IRA. And remember, it’s the employee deferral feature that makes the Solo 401(k) so popular, as it provides the highest contributions to self-employed individuals.
For 2019, you can’t make employee deferrals to any other plan if you reach the employee deferral limit for your Solo 401(k). This amount is $19,000 if you’re under 50 and $25,000 if you’re over 50. Employee deferrals can be made in Pre-tax, after-tax or Roth.
Pre-Tax: When you make an employee deferral pre-tax, this withdrawal isn’t subject to federal income tax. But withdrawals (deferrals) are subject to the Federal Insurance Contribution Act (FICA) and the Federal Unemployment Tax Act (FUTA) tax withholding. Additionally, they cannot exceed the annual deferral limit (or maximum total) which is $56,000 if you’re under 50 and $62,000 if you’re over 50.
After- Tax: You can make employee deferral contributions after-tax if your Solo 401(k) allows you to do so. (Note: The after-tax form is essentially there to funnel the entire contribution of the employer’s profit).
Roth: Much like the after-tax form, you can make an employee deferral contribution, again, if allowed by your Solo 401(k). (Note: A Roth form allows you to directly put your funds into your Roth account without tax deduction).
It’s important to place both your After-tax and Roth contributions into a separate 401(k) bank account. This way, your plan administrator can keep track of your pre-tax, after-tax and Roth contributions.
Did you know that your spouse can participate in the Solo 401(k) Plan? That’s right! Your spouse can make a contribution if he/she earns compensation from the business. He or she can make separate and equal contributions. This increases the annual contribution to $112,000 (under 50) or $124,000 (over 50) for 2019.
We understand that the ins and outs of a Solo 401(k) may seem complicated. That’s why our IRA specialists are just a call or email away. Contact IRA Financial Group for a free consultation to learn more about the 2018 Solo 401(k) Contribution Limits.
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