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2019 Solo 401(k) Contribution Limits
The 2019 contribution limits for a Solo 401(k) retirement plan (also known as the self-employed 401(k) contribution limit) has increased from 2018 contributions. Depending on your age and earnings, you can contribute up to $56,000 if you're 50 and under. You can contribute $62,000 if you're 50 and older.
Solo 401(k) Contribution Limits - Two Part Solo 401(k)
Your Solo 401(k) Plan consists of two parts. You can contribute money into your retirement account as an employer and employee. Therefore, you have two Solo 401(k) contribution limits, also known as the individual 401(k) contribution limit.
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 Contributions. This is also known as the Elective Deferral. For 2019, the maximum contribution limit for the elective deferral is 19,000 if you're 50 and under. This is an increase from the 2018 contribution of $18,500. Whereas, the elective deferral contribution if you're 50 and older is $25,000, up $500 from 2018. 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 2019, you can make a contribution of $37,000 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 50 and younger is $56,000. If you're 50 and older, you can make a maximum contribution of $62,000.
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.
Advantages of the Solo 401(k) Plan
As you may know, the Solo 401(k) - also called the self-employed 401(k) or individual 401(k)- is a retirement savings plan for self-employed individuals and small business owners with no employees. It has become popular among sole proprietors due to its features. These include:
- Higher self-employed 401(k) contribution limits
- $50,000 penalty and tax-free loan (use for any purpose)
- Simple and cost-effective set-up
- Diverse and flexible investment options
The primary advantage, however, is that retirement planners can reach their contribution limits faster.
Solo 401(k) vs. SEP IRA
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 employer 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. The employee deferral feature makes the Solo 401(k) so popular, as it provides the highest contributions to self-employed individuals.
Total Limit for Couples
Your spouse can participate in the Solo 401(k) Plan 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 wrote the book on the Solo 401(k)
A simple, yet informative handbook, Going Solo: America’s Best-Kept Retirement Secret for the Self-Employed was written to help small business owners and self-employed individuals discover the many advantages of establishing a Solo 401(k) Plan.
In an effort to eliminate the complexity of how one can establish an individual 401(k) plan, Adam Bergman wrote Solo 401(k) in a Nutshell. The book “…simplifies the process (of establishing a Solo 401(k) while…providing everything one needs to maximize their retirement assets” and gain financial freedom.
Get in Touch
Do you still have questions about the Solo 401(k), or self-employed 401(k) contribution limits that we didn't cover in this article? Please contact IRA Financial Group directly at 800-472-0646. We also encourage you to fill out the form to speak directly with a 401(k) specialist who is onsite to answer all of your questions.