Maximizing Contributions to a Solo 401(k): What You Need to Know

Author: Siân Killingsworth / 10 Mar 2023 / 401(k) Plan Information, Personal Finance

Self-employed workers have a lot of advantages, but one of the biggest perks is the ability to contribute to a solo 401(k) plan. Solo 401(k)s are designed for small businesses that solely employ the owner (or the business owner, spouse), and/or business partner. They allow participants to contribute almost three times as much money as an IRA.

What are the contribution limits for a solo 401(k)?

If you are self-employed and have been doing so for over two years (and expect to remain so), then the maximum amount that can be contributed each year is $66,000 per person. (That number’s not a typo!) Similar to an individual 401(k), the maximum you can contribute is $22,500 for 2023 if you’re under 50, and $30,000 if you’re age 50 or older. However, as your own employer, you can also contribute up to 25% of compensation, with a maximum of up to $66,000 per year in 2023, with an additional $7,500 catch-up contribution allowed if you are age 50 or older.

The solo 401(k) offers many benefits:

• It allows you to save more money than other types of retirement accounts because there are no income limits on contributions.
• You can take penalty-free withdrawals at any time after age 59 ½ without paying taxes on the withdrawal.
• If you leave your business for any reason (such as selling) before reaching age 59½, all money withdrawn will be subject to your regular income tax rates. The money can be rolled into an IRA or another qualified retirement account. If taken as cash withdrawal it may be subject to taxes.

How do I contribute to a solo 401(k)?

Contributions to a solo 401(k) are made by your business, not you. You can contribute up to the maximum amount, which is $22,500 for 2023 an additional $7,500 if age 50 or older. This limit increases annually with inflation.

A solo 401(k) allows you to make contributions on behalf of yourself and anyone else who works for your company, including yourself if you are self-employed or work part time as an independent contractor/consultant outside of regular job duties at another company or organization.

How much should I contribute to my solo 401(k)?

You can contribute to your solo 401(k) until April 15 of the following year (or when you file your company taxes). You can use an online paycheck calculator to determine how much you can afford to contribute from each paycheck, up to the 2023 maximum limit of $22,500, or $30,000 if you are age 50 or older.

Are there any other advantages of having a solo 401(k)?

• Glad you asked. As someone with a solo 401(k), you gain access to some unique perks that aren’t available through other accounts like Roth IRAs: You can take money out without paying taxes or penalties if it’s used for certain expenses (such as buying a home or paying medical bills). These are known as hardship withdrawals.
• The solo 401(k) is a great option for self-employed people who want to save for retirement. You can contribute more money to this type of account than you would be able to contribute to other types of accounts like Roth IRAs or traditional IRAs. Plus, there are no income limitations on contributing, so even if your income doesn’t qualify you for other types of retirement plans, a solo 401(k) might make sense for you.

Learn how to set up your own solo 401(k) here.

 

Ubiquity is not a registered investment advisor and no portion of the material herein should be construed as legal or tax advice. Please consult with your financial planner, attorney and/or tax advisor for advice.