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Solo 401k Contribution Limits

The 2014 Solo 401k contribution limits are $52,000 and $57,500 if age 50 or older (2013 limits are $51,000 and $56,500 if age 50 or older). The annual Solo 401k contribution consists of 2 parts a salary deferral contribution and a profit sharing contribution. The total allowable contribution adds these 2 parts together to get to the maximum Solo 401k contribution limit. The contribution limit calculation is slightly different depending on whether the business is a sole proprietorship, partnership, LLC, S corporation or C corporation. Examples of each are shown below.

Sole proprietorship, partnership, LLC taxed as a sole proprietorship

How is the Solo 401k contribution calculated?

Salary Deferral Contribution

Although the term salary deferral is used, a sole proprietorship, partnership or an LLC taxed as a sole proprietorship do not provide a W-2 salary to the business owner. For businesses of this type, the salary deferral contribution is based on net adjusted business profit. Net adjusted business profit is calculated by taking gross self employment income and then subtracting business expenses and then 1/2 of the self employment tax. In 2014, 100% of net adjusted business profits income up to the maximum of $17,500 or $23,000 if age 50 or older can be contributed in salary deferrals to the Solo 401k (2013 limits are $17,500 and $23,000 if age 50 or older).

Profit Sharing Contribution

A profit sharing contribution can be made up to 20% of net adjusted business profits. Net adjusted business profit is calculated by taking gross self employment income and then subtracting business expenses and then 1/2 of the self employment tax.

  • EXAMPLE 1
    A sole proprietor is age 35 and works as an independent contractor with $50,000 of net income in 2014. In this example, the sole proprietor could contribute $17,500 of salary deferrals + $9,294 profit sharing contribution = $26,794 Total Solo 401k contribution.
  • EXAMPLE 2
    A sole proprietor is age 35 and works as an independent contractor with $100,000 of net income in 2014. In this example, the sole proprietor could contribute $17,500 of salary deferrals + $18,587 profit sharing contribution = $36,087 Total Solo 401k contribution.
  • EXAMPLE 3
    A sole proprietor is age 50 and works as an independent contractor with $50,000 of net income in 2014. In this example, the sole proprietor could contribute $23,000 of salary deferrals + $9,294 profit sharing contribution = $32,294 Total Solo 401k contribution.
  • EXAMPLE 4
    A sole proprietor is age 50 and works as an independent contractor with $100,000 of net income in 2014. In this example, the sole proprietor could contribute $23,000 of salary deferrals + $18,587 profit sharing contribution = $41,587 Total Solo 401k contribution.

Salary deferral and profit sharing contributions are generally 100% tax deductible from personal income.

Is there a deadline to make salary deferrals into the Solo 401k?

For a sole proprietorship, partnership or an LLC taxed as a sole proprietorship the deadline for depositing salary deferrals into the Solo 401k is generally the personal tax filing deadline April 15 (or October 15 if an extension was filed).

When must profit sharing contributions be made into the Solo 401k?

For a sole proprietorship, partnership or an LLC taxed as a sole proprietorship the deadline to fund the profit sharing contribution is the personal tax filing date of April 15 (or October 15 if an extension was filed).

Solo 401k Calculator

To determine the annual retirement contribution you could make based on your income use the Solo 401k Calculator.

S corporation, C corporation, LLC taxed as a corporation

How is the Solo 401k contribution calculated?

Calculations for an S corporation and C corporation are based on the W-2 salary that is paid to the business owner. For example, S corporation K-1 distributions (corporate profits) are not included when making the contribution limit calculation. Also, the calculation is only based on W-2 wages for an LLC which pays W-2 wages to the business owner.

Salary Deferral Contribution

In 2014, 100% of W-2 wages up to the maximum of $17,500 or $23,000 if age 50 or older can be contributed to a Solo 401k. (2013 limits are $17,500 and $23,000 if age 50 or older).

Profit Sharing Contribution

A profit sharing contribution up to 25% of W-2 earnings can be contributed into a Solo 401k.

  • EXAMPLE 1
    A business owner is age 35 and the owner of a subchapter S corporation with $50,000 of W-2 earnings in 2014. In this example, the business owner could contribute $17,500 of salary deferrals + $12,500 profit sharing contribution (25% X $50,000) = $30,000 Total Solo 401k contribution.
  • EXAMPLE 2
    A business owner is age 35 and the owner of a subchapter S corporation with $100,000 of W-2 earnings in 2014. In this example, the business owner could contribute $17,500 of salary deferrals + $25,000 profit sharing contribution (25% X $100,000) = $42,500 Total Solo 401k contribution.
  • EXAMPLE 3
    A business owner is age 50 and the owner of a subchapter S corporation with $50,000 of W-2 earnings in 2014. In this example, the business owner could contribute $23,000 of salary deferrals + $12,500 profit sharing contribution (25% X $50,000) = $35,500 Total Solo 401k contribution.
  • EXAMPLE 4
    A business owner is age 50 and the owner of a subchapter S corporation with $100,000 of W-2 earnings in 2014. In this example, the business owner could contribute $23,000 of salary deferrals + $25,000 profit sharing contribution (25% X $100,000) = $48,000 Total Solo 401k contribution.

In the above examples, salary deferral contributions are 100% tax deductible and reduce taxable W-2 wages and profit sharing contributions are generally tax deductible as a business expense.

Is there a deadline to make salary deferrals into the Solo 401k?

Salary deferrals must be made into your Solo 401k within 15 days of the period in which you are paying yourself. For example, 401k salary deferral contributions made at the end of a calendar year on December 31 need to be deposited into the Solo 401k by January 15 at the latest.

When must profit sharing contributions be made into the Solo 401k?

The deadline to fund the profit sharing contribution is the corporate tax filing deadline March 15th. If an extension was filed then the deadline is September 15th.

Solo 401k Calculator

To determine the annual retirement contribution you could make based on your income use the Solo 401k Calculator.

Learn more about the benefits of the Solo 401k

  • 401k Loan - A 401k loan up 50% of the total value of the 401k up to a maximum loan of $50,000 is permitted with a Solo 401k plan.
  • Roth 401k - There is an option to make Roth 401k contributions with the salary deferral portion of the Solo 401k. Contributions into a Roth 401k are not tax deductible, but withdrawals are tax free after age 59 ½.
  • Rollover - You can rollover your 401k, 403b, 457, TSP and Defined Benefit Plan from a previous employer. You can also rollover a Traditional IRA, SEP IRA, Rollover IRA, SIMPLE IRA and Keogh plan.
  • Rules - Information, Rules and Frequently Asked Questions about the Solo 401k.
  • Self Employed Retirement Plan Comparison - Compare the Solo 401k, SEP IRA, Defined Benefit Plan and Simple

 

 

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Disclosures:

*The information on this page is for informational purposes only and does not constitute, and should not be construed as, professional, legal or tax advice. To determine your individual tax situation and specific needs, please consult a professional tax advisor.

*Information contained in these sections merely highlight some benefits. There are risks involved with all investments that could include tax penalties and risk/loss of principal.