Solo 401k Contribution Calculator: S
Lets go over another example where your business is a corporation, with you and your spouse both as members. Start by selecting Single-owner corporation if your business is an LLC taxed as an S-Corp, a multi-member LLC, an S-corp or a C-corp.
Your business will file IRS tax form 1120 and each partner will receive a W-2. According to the IRS, all Solo 401k contributions from your S-corp must come from your W-2 wages .
For purposes of this example, lets assume the wages on your W-2 is $90,000 and wages on your spouses W-2 is $55,000. Well start with your contribution calculation first input $90,000 into the calculator since that is the net compensation listed on your W2.
Then, input your age
With the Solo 401k, you can contribute $47,500 .
The Math:
$6,000 Catch-up contribution because you are over age 50$22,500 employer contribution
Total: $47,500 in tax-deductible contributions
Now lets calculate your wifes contribution. Remember, she made $55,000 in net compensation on her W2.
Based on her net earnings, your wife is able to contribute $32,750.
The Math:
$13,750 Employer contribution
Total: $32,750
With your combined net compensation of $145,000 , you are able to make a grand total tax deductible contribution of $80,250! That will make a huge dent in your remaining taxable income.
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Is A Solo 401k Worth It
One of the few positives to come out of the isolation imposed by the pandemic is a powerful desire for more control over our lives. Many of us learned that we could work very well at home alone. That we dont need nearly the amount of supervision that others thought was necessary. In fact, this is carrying over into todays workplace by people choosing not to return to the corporate office or other controlling workspaces. People found that they can do the job just fine on their own thank you!
Maybe its not only about control. Many people are refusing to return to minimum wage and low-paying jobs that have no future. It all adds up to empowering people to take full control of their lives. For many, it means becoming self-employed whether that is full-time or part-time. Both versions can lead to a very wealthy retirement through a Solo 401k that is fully self-controlled and far away from corporate bosses and Wall Street greed.
Employer Contribution Tax Planning Among Owners
However, what about the situation where there are two or more owners or an owner and a spouse where one owner earns a higher salary or share of the earned income than the other. Well, some very interesting tax planning opportunities present themselves that are not widely unknown except to tax and pension plan experts.
Lets take the example of Jen and Bill. Assume Jen earns $220,000 of W-2 income from an S Corp and Bill earns just $60,000 in 2021. Both Jen and Bill are under 50. Lets assume both Jen and Bill make $19,500 employee deferral contributions and also want to make employer contributions as well. We know that Jen will be able to hit the maximum IRC 415 amount of $58,000 since 25% of $220,000 is $55,000. Hence, Jen will only be able to use $38,500 of the $55,000 available.
We also know that employer profit sharing contribution rules hold that the maximum employer profit sharing contribution for the business is 25% of all W-2 $220,000 + $60,000 or $280,000. Thus, in the aggregate, the business is able to make employer profit sharing contributions in the amount of $70,000 . Jen was able to use $38,500 out of the $70,000, therefore, so long as your plan documents allow for it, Bill would be able to be allocated by the business $31,500 in employer profit sharing contributions for a total of $51,000 including employee deferrals. Since that number is less than what he earned, or the 415 limit, the allocation will be respected.
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Plan Compensation For A Self
To calculate your plan compensation, you reduce your net earnings from self-employment by:
- the deductible portion of your SE tax from your Form 1040 return, Schedule 1, on the line for deductible part of self-employment tax, and
- the amount of your own retirement plan contribution from your Form 1040 return, Schedule 1, on the line for self-employed SEP, SIMPLE, and qualified plans.
You use your plan compensation to calculate the amount of your own contribution/deduction. Note that your plan compensation and the amount of your own plan contribution/deduction depend on each other – to compute one, you need the other . One way to do this is to use a reduced plan contribution rate. You can use the Table and Worksheets for the Self-Employed to find the reduced plan contribution rate to calculate the plan contribution and deduction for yourself.
How To Get Started:
To establish a Solo 401k, set up an application with your Self-Directed 401k provider. You must have an Employee Identification Number . As you contribute more and more to your plan, you may need to fill out additional paperwork. Be aware of any fees a plan custodian may charge so you know what your true cost is, and then begin building your retirement savings for yourself.
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Covering Your Spouse Under Your Solo 401
The IRS allows one exception to the no-employees rule on the solo 401: your spouse, if he or she earns income from your business.
That could effectively double the amount you can contribute as a family, depending on your income. Your spouse would make elective deferrals as your employee, up to the $19,500 employee contribution limit . As the employer, you can then make the plans profit-sharing contribution for your spouse, of up to 25% of compensation.
How Do Small Business Owners Choose The Best 401 For Their Needs
To find the right 401 for their small business, employers generally look for plan providers that:
- Charge reasonable plan and investment fees and have no hidden costs
- Provide real-time integration between the 401 recordkeeping and payroll systems to eliminate manual data entry and reduce errors
- Offer a simplified compliance process
- Make administrative fiduciary oversight available
- Offer ERISA bond and corporate trustee services
- Help with investment fiduciary services and plan investment responsibilities
- Make investment advisory services available for employees
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Solo 401k Contributions For 2022
Starting a Solo 401 plan in 2022 has even more benefits than it did in 2021. The Solo 401 plan is designed specifically for the self-employed or a small business with no full-time employees other than the other or the spouse. There are many features of the plan that make it so appealing and popular among self-employed business owners. However, the ability to make high annual maximum contributions is probably the most popular Solo 401 plan feature.
Solo 401k plans are designed for entrepreneurs, contract workers and the self-employed who have no employees other than a spouse, and there can be big benefits to using this type of plan. Participants can self-direct their money and investments, there are generous contribution limits, and there are minimal tax filing requirements. It offers all of the benefits of a traditional plan as well as some additional benefits. The generous contribution opportunities are what will be discussed herein.
Excess Contribution Not Withdrawn By April 15
So what happens if you dont notice that youve over-contributed to one or more 401k plans until after April 15? In this situation, the excess contribution is taxed twice, once in the year when contributed and again when distributed .
Also, the earnings from the excess contribution will be taxable income for the following year. If the mistake is not corrected, then the IRS may disqualify the entire 401k plan retroactive to the beginning of year 1. This results in the employees entire 401k account balance to become income to the employee which would have massive adverse tax consequences.
But the main reason why you want to be more conservative in your self-employed 401k contribution is not the fine. Th main reason is the stress of getting an IRS audit letter in the mail. It will also take time to amend your tax returns. This process can take hours.
Id much rather miss out on contributing an extra $1,000 in my self-employd 401k than go through the torture of dealing with the IRS.
Remember, when in doubt, round down your self-employed 401k contribution amount.
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If I Offer A 401 To My Employees Are There Compliance Regulations I Must Follow Or Can The Retirement Plan Provider Help With These
Certain employers who offer 401 and other retirement plans must abide by the Employee Retirement Income Security Act of 1974, as amended, which helps ensure that plans are operated correctly and participants rights are protected. In addition, a 401 plan must pass non-discrimination tests to prevent the plan from disproportionately favoring highly compensated employees over others. The plan fiduciary is usually responsible for helping comply with these measures.
This information is intended to be used as a starting point in analyzing employer-sponsored 401 plans and is not a comprehensive resource of all requirements. It offers practical information concerning the subject matter and is provided with the understanding that ADP is not rendering legal or tax advice or other professional services. For specific details about any 401 they may be considering, employers should consult a financial advisor or tax consultant.
Unless otherwise agreed in writing with a client, ADP, Inc. and its affiliates do not endorse or recommend specific investment companies or products, financial advisors or service providers engage or compensate any financial advisor or firm for the provision of advice offer financial, investment, tax or legal advice or management services or serve in a fiduciary capacity with respect to retirement plans. All ADP companies identified are affiliated companies.
Calculations For An S Corporation C Corporation Or An Llc Taxed As A Corporation
The annual Solo 401k contribution consists of 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 2022 Solo 401k contribution limit is $61,000 and $67,500 if age 50 or older.
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 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.
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Is Solo 401 Tax Deductible Solo 401 Tax Advantages
The nice thing about a solo 401 is you get to pick your tax advantage: You can opt for the traditional 401, under which contributions reduce your income in the year they are made. In that case, distributions in retirement will be taxed as ordinary income. The alternative is the Roth solo 401, which offers no initial tax break but allows you to take distributions in retirement tax-free.
In general, a Roth is a better option if you expect your income to be higher in retirement. If you think your income will go down in retirement, opt for the tax break today with a traditional 401.
Because of these tax perks, the IRS has pretty strict rules about when you can tap the money you put into either type of account: With few exceptions, youll pay taxes and penalties on any distributions before age 59 ½.
»Want more info? Heres our in-depth comparison of Roth and traditional 401s
What Is A Solo 401 Plan And How Does It Work
A solo 401 plan, also called a one-participant 401 or a solo K, offers self-employed people an efficient way to save for retirement. There are no age or income restrictions, but participants must be business owners with no employees .
The solo K has very high and flexible contribution limits, typically allowing more contributions than SEPs, traditional IRAs and Roth IRAs or SIMPLEs, says Joe Conroy, CFP and founder of Harford Retirement Planners in Bel Air, Maryland.
One key difference between the solo 401 and other self-employed retirement plans is that employees can contribute all of their salary up to the annual maximum contribution. Theyre not limited to 25 percent of their salary, as in some other plans. This feature can allow them to minimize taxes, though this contribution doesnt help them avoid the self-employment tax.
In other respects, the solo 401 operates like any other 401 plan, whether its a traditional 401 or a Roth 401. If you set up your solo 401 to take tax-deductible contributions, it will operate like a traditional 401, allowing you to contribute pre-tax money and get a break on this years taxes. On the other hand, if you opt for a Roth, youll make after-tax contributions, but will benefit from the tax-free withdrawals in retirement.
If you think tax rates will be higher in the future, like I do, then a Roth can be a very valuable account to reduce your future tax burden in retirement, Conroy says.
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What Are The Tax Benefits To The Employer For Offering A 401 Matching Plan
Employers can use the contributions to employee 401 accounts as tax deductions on their federal corporate income tax returns. These contributions may also be exempt from state and payroll taxes. As a result, the employer keeps their employees happy, sees reduced turnover and benefits financially with tax deductions.
How To Fix The Mistake:
IRC Section 72 imposes a 10% additional tax for distributions that don’t meet an exception, such as death, disability or attainment of age 59 ½, among others. To avoid this additional tax, correct excess deferrals no later than April 15 of the following year. If you don’t correct by April 15, you may still correct this mistake under EPCRS however, it won’t relieve any Section 72 tax resulting from the mistake.
Under Revenue Procedure 2021-30, Appendix A, section .04, the permitted correction method is to distribute the excess deferral to the employee and to report the amount as taxable both in the year of deferral and in the year distributed. These amounts are reported on Forms 1099-R. In the case of amounts designated as Roth contributions, the excess deferral will already have been reported in income in the year of deferral. However, the amount will be reported as taxable in the year distributed.
Example:
Employer X maintains a 401 plan that has 21 participants and plan assets of $715,000. For calendar year 2020, Ann deferred $20,000 to the plan. None of the elective deferrals were designated as Roth contributions. Ann is under age 50 and isn’t eligible to make catch-up contributions. Ann has excess deferrals of $500 because $19,500 is the 402 maximum amount permitted for 2020. Employer X didn’t discover this mistake until after April 15, 2021. On November 1, 2021, X distributed the excess deferral to Ann.
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Solo 401k Contributions: The Largest Tax Benefits Allowed By The Tax Code
Tony Watson, a tax consultant at Robert Hall & Associate, explains how investors can save thousands of dollars in taxes by contributing to a Solo 401k.
Profit Sharing Contributions
As an employer, the business owner can make profit sharing contributions of up to 25% of the owners compensation.
- If the business is a sole proprietorship or a single member LLC: The plan can receive up to 20% of the participants self-employment compensation.
- If the business is a corporation: Solo 401k contribution limits allow profit sharing contributions of up to 25% of the total self-employment compensation.
The Total Solo 401k Contribution Limit
With a Solo 401k account, the business owner is seen as the employee and employer of the business. Therefore, his or her Solo 401k contribution limits include both salary deferrals and profit sharing contribution. The total Solo 401k contribution is limited to $61,000 in 2022.
Use the Solo 401k Contribution Calculator link located above to determine your contribution limit this year.
The wise man saves for the future, but the foolish man spends whatever he gets.
Proverbs 21:20
How Much Can I Contribute To My 401 With Employer Matching
Dylan Telerski / 19 Jun 2020 / 401 Resources
In 2022, the total annual contribution maximum, including 401 employer matching, is $61,000or up to 100% of the employees salary if they make less than that. Individuals may contribute up to a maximum of $20,500 to their 401s or $27,000 if theyre 50+ years old. Employer contributions are added ON TOP of this limit to a maximum of $61,000.
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Alternatives To A Solo 401
There are basically two options in addition to the solo 401 for freelancers and independent contractors who want to save for retirement and get the tax advantages that go with these IRS-approved choices:
- The , for Simplified Employee Pension, is designed to be an easy, flexible option for small businesses with employees. It works much like a traditional IRA but has higher contribution limits. The limits are the same as for the Solo 401: $58,000 for 2021 and $61,000 for 2022. However, your contribution cannot exceed 25% of your net adjusted income. You may not find that adequate for your goals. No catch-up contribution is allowed for those age 50 and older. No Roth option is available. A SEP IRA can be opened through any brokerage or bank.
- The Keogh Plan is open to sole proprietors, partnerships, and limited liability companies and is often used as a profit-sharing vehicle for professional practices such as doctors’ and lawyers’ groups. It has the same contribution limits as the SEP IRA and the Simple 401 but poses a greater administrative burden. There is no Roth option.
Another option, the SIMPLE IRA, is designed for businesses with 100 or fewer employees. It is open to sole proprietors but has a lower contribution limit than the Solo 401 or the SEP IRA. The maximum contribution is up to 3% of salary plus $14,000 in 2022. There is no Roth option.
