What is the Maximum that I can Contribute to a Solo 401K Plan?

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August 24th, 2011

One of the major advantages of using a Solo 401K retirement plan over an IRA is the high contributions that one can make on an annual basis. Unlike an IRA, a Solo 401k plan allows a plan participant to make high annual contributions to the Plan. The contributions can be in the form of pre-tax or Roth type contributions (after-tax).

Prior to 2002, most self-employed individuals tended to use a SEP IRA or SIMPLE IRA as a retirement vehicle.  However, in 2002 the Economic Growth and Tax Reconciliation Act of 2001 (EGTRRA) became effective and generally provided the small business owner with no employees or the self-employed the same advantages/benefits of a conventional 401(k) Plan.  Now with the Solo 41K Plan, also called the Individual 401K or Self Directed 401K Plan, an individual can maximize contributions while not having the administrative responsibilities of a conventional 401(k) qualified retirement plan.

The annual Solo 401k contribution consists of two components, an employee salary deferral contribution and an employer profit sharing contribution. In 2011 the total contribution limit for a Solo 401k Plan participant is $49,000 or $54,500 if age 50 or older. The total allowable contribution limits are combined to get the maximum Solo 401k contribution limit.

With respect to the employee deferral component, a Solo 401K Plan participant can contribute up to $16,500 per year to the plan. In addition, an additional “catch-up” contribution of $5,500 can be contributed for persons over age 50.  Thus, an individual under the age of 50 can make an annual employee deferral of up to $16,500, whereas, an individual over the age of 50 can make an annual employee deferral of up to $22,000.  Note – the employee deferrals can be made in pre-tax or Roth (after-tax).  Also, there is no requirement that an employee deferral contribution be made each year.

With respect to the employer profit sharing contribution component, the employer – not the individual – is permitted to make a tax-deductible contribution on behalf of the employee equal to an amount up to 25% of the participant’s self- employment compensation.  Note – the percentage is actually 20% in the case of a solo proprietorship and a single member LLC once the tax return calculations are complete.  Also, like the employee deferral, the employer is not required to make employer profit sharing contributions, however, if a contribution is made, the contribution percentage must applies to all employees (i.e. husband and wife).

In sum, the Solo 401K Plan offers the self-employed and the small business owner with no employees the highest available retirement contribution options.  Since 2002, the Solo 401K Plan has become the retirement plan of choice for the self-employed largely because the high contribution limits, which in the case of the employee deferral can be in pre-tax or Roth.

To learn more about the Solo 401(k) contribution limitations, please contact a 401K Expert at 800-472-0646 or visit www.solo401kexperts.com

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