Solo 401k Contribution Calculator
If you are in doubt about how much you can contribute as both an employee and an employer in your Solo 401k plan, a great place to start is by using this handy contribution calculator. Make sure to select your business type from the drop down menu, either unincorporated or a single owner corporation. For the unincorporated sole proprietorship you would enter your net income after deductions. For a single owner corporation you would enter your W2 wages paid from the corporation. Of course enter your age and then hit calculate.
If you want you can also view the report that will break down your contributions into both employee and employer. Remember to always work with your tax professional to help you get your final numbers correct based on your businesses earnings.
You can also compare your Solo 401k contribution limits relative to other small business retirement plans like a Simple IRA, Sep IRA and Profit Sharing Plan. For any given self employment income, the Solo 401k allows for higher tax deductible contributions.
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When Does It Make Sense To Open A Solo 401
A Solo 401 isnt the right investment strategy for everyone. Here are some scenarios when opening a Solo 401 makes sense:
- Youre a business owner and the only employee of your company: This might seem like a given, since this is the exact person Solo 401s are for, but its worth mentioning that its also the only person Solo 401s are for if youre not self-employed or if you have additional employees it wont work to open a 401.
- Youre self employed and want a retirement plan your spouse can contribute to: Since you can add contributions from your spouse to a Solo 401, opening one could be a strong strategy if your spouse currently doesnt have a retirement plan or if they havent maxed out other retirement contributions.
- You want the ability to take loans from the plan: While taking a loan from your own retirement plan isnt ideal, the realities of being a small business owner could mean you want or need that flexibility.
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Drawbacks To The Solo 401
The solo 401 has the same drawbacks of typical 401 plans, plus a couple others that are specific to itself. Like other 401 plans, the solo 401 will hit you with taxes and penalties if you withdraw the money before retirement age, currently set at 59½. Yes, you can take out a loan or may be able to access a hardship withdrawal, if needed, but those are last resorts.
In addition, it can take more paperwork to open a solo 401, but its not especially onerous. You usually wont be able to open the account completely online in 15 minutes, as you would a typical brokerage account. Plus, youll need to get a tax ID from the IRS, which you can do online quickly. On top of this, youll have to manage the plan, choose investments and ensure that you dont exceed annual contribution limits.
Another wrinkle: Once you exceed $250,000 in assets in the plan at the end of the year, youll need to start filing a special form with the IRS each year.
These drawbacks arent especially burdensome, but you should be aware of them.
How Much You And Your Employer Can Contribute For You In 2022
If your employer offers a 401 plan, it can be one of the easiest and most effective ways to save for your retirement. But while a major advantage of 401 plans is that they let you put a portion of your pay automatically into your account, there are some limits on how much you can contribute.
Each year, usually in October or November, the Internal Revenue Service reviews and sometimes adjusts the maximum contribution limits for 401 plans, individual retirement accounts , and other retirement savings vehicles. In November 2021, the IRS made updates for 2022.
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Potential Benefit Of The Roth Individual : Higher Contribution Limits
In 2020 you can annually contribute up to $19,500 and up to $26,000 if youre 50 or over through salary deferral. Plus, you can contribute a profit-sharing portion of your salary. In 2020 the limit from both sources is $57,000 .
In 2021 you can annually contribute up to $19,500 and up to $26,000 if youre 50 or over through salary deferral. Plus, you can contribute a profit-sharing portion of your salary. In 2021 the limit from both sources is $58,000 .
Why A Solo 401k
You might be asking why I’m considering a solo 401k versus a SEP IRA or other self employed retirement savings options. Well, it all comes down to circumstance and how much you can save.
Let’s look at two scenarios that are similar to mine. First, in the past, I only saved in a because my income was lower and I was still maxing out my 401k at work, so I didn’t need any additional employee contributions.
With both a SEP and Solo 401k, on $30,000 of income, the employer contribution is $5,576.11. Since I was already doing the $18,000 at my primary employer, that amount didn’t make a difference.
However, fast forward to today, the business makes much more income, and my wife is now working for the business. As such, it can make a huge difference in savings and lowering our taxes. Let’s assume that the business is going to make $100,000 this year. That means that the business can contribute $18,587.05 to both my 401k and my wife’s 401k. Plus, my wife can contribute $18,000 of her salary to the 401k as well .
As such, the solo 401k provides much more savings options, and lower taxes today as a result.
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Timely Withdrawal Of Excess Contributions By April 15
- Excess deferrals withdrawn by April 15 of the year following the year of deferral are taxable in the calendar year deferred.
- Earnings are taxable in the year they’re distributed.
- There is no 10% early distribution tax, no 20% withholding and no spousal consent requirement on amounts timely distributed.
What Are The Tax Benefits Of A Solo 401
Well first, there are tax benefits for the business. The money the business adds to the solo 401 is tax-deductible to the business. Then, as the employee, you are often able to choose your tax treatment for your contributions as well.
If you want to take the tax deduction now, you can contribute to a traditional solo 401. If you want to let your money grow tax-free, you can contribute to a Roth solo 401. You pay the taxes now, but when you withdraw from a Roth solo 401 during retirement, you dont pay a single dime in taxes.
Taking advantage of the Roth solo 401 would allow you to have the best of both worlds as a business owner. You get the tax deduction now for your business, adding pre-tax money into your solo 401. This money will grow tax-deferred and you will pay taxes on the withdrawal in retirement. Then, you also have the ability to have your own contributions be Roth. You pay income taxes on your individual income now, and then add the money to the Roth portion of the 401. This will grow tax-free and you will not pay any taxes on the withdrawals you take out during retirement. Having both types of money in your retirement portfolio will allow you to do strategic income tax planning throughout retirement.
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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 2021 Solo 401k contribution limit is $58,000 and $64,500 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.
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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Withdrawing Funds From A Self
As with traditional 401 plans, the self-employed 401 is intended to help you save money for retirement, and there are regulations in place to encourage you to do so. For example:
- Withdrawals prior to age 59½ may be subject to a 10% early withdrawal penalty, along with any applicable income taxes1
- You must take required minimum distributions from self-employed 401s beginning at age 722
- Plans can be structured to allow loans or hardship distributions3
- Plans can be structured to accept rollovers from other retirement accounts, including SEP IRAs and traditional 401s, into your self-employed 401
- You can roll your self-employed 401 assets into another 401 or an IRA
Because of its high contribution levels, flexible investment options, and relatively easy administration, the self-employed 401 is an attractive option for small-business owners or sole proprietors who want to be able to save aggressively for the future.
If there is the potential that your business might add employees at a later date, however, know that you will either have to convert your self-employed 401 plan to a traditional 401, or else terminate it. But if you’re confident that you will remain a one-person operation, and you want the high savings options that these plans offer, this type of account may be a good fit.
What Are The Benefits Of A Solo 401
Unlike other options, a Solo 401 account holder can choose between a traditional option and a Roth option. The traditional option allows you to deduct the amount you pay in from your income for that year, giving you an immediate tax break. With the Roth option, the income taxes on that money is paid immediately and you owe no taxes when you withdraw the funds.
The Solo 401 has far higher annual contribution limits than a plain-vanilla IRA, although that is also true for the SEP IRA and the Keogh plan.
The Solo 401 allows you to take loans from your account before you retire. This is not an option with many other retirement plans.
Finally, the Solo 401 is relatively straightforward in terms of paperwork, as it is designed for one-person shops, not corporations.
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Extension Apply To Both Contribution Types Question:
Self-directed 401k contributions deadlines are based on the type of entity sponsoring the solo 401k so you are correct. Please see the following.
- If the entity type is a Sole Proprietorship, the annual solo 401k contribution deadline is April 15, or October 15 if tax return extension is timely filed.
- If the entity type is an LLC taxed as an S-Corporation , the annual solo 401k contribution deadline is March 15, or September 15 if tax return extension is timely filed.
- If the entity type is an LLC taxed as a Partnership , the annual solo 401k contribution deadline is March 15, or September 15 if tax return extension is timely filed.
- If the entity type is a Partnership , the annual solo 401k contribution deadline is March 15, or September 15 if tax return extension is timely filed.
- If the entity type is an S-Corporation , the annual solo 401k contribution deadline is March 15, or September 15 if tax return extension is timely filed.
- If the entity type is an C-Corporation , the annual solo 401k contribution deadline is April 15, or September 15 if tax return extension is timely filed.
Third Party Solo 401k Providers
If you need something a little more robust that the free prototype plans these five brokerage firms offer, then you need to find a third party service that will create the plan documentation for you.
Some of the common reasons why you’d consider using a third-party service to create your solo 401k documentation:
- You want a choice in brokerage
- You want to invest in alternative assets such as real estate, startups, cryptocurrency, promissory notes, tax liens, precious metals, and more.
- You want checkbook control over your 401k
- None of the prototype providers matches exactly what you’re looking for with options
We’re not going to go in-depth on these providers because this section effectively becomes al-la-carte with what you can get and pay for. I just wanted to list some of the most popular third party plan providers that you can reference in your search for the best plan.
Remember, just because you go with a third party provider also doesn’t mean you can’t invest at your favorite firm. For example, you can create a third party solo 401k and then have that 401k held at Fidelity. This gives you access to all of Fidelity’s investment choices, but your options are created by the plan, and NOT Fidelity.
Also, you can use these plans to execute a Mega Backdoor Roth IRA. In fact, several of these companies specifically advertise that they offer it.
This isn’t an exhaustive list. There are also local firms in most areas that can create 401k plan documentation as well.
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How To Include Your Spouse In Your Solo 401k
December 23, 2019 by Hannah Harris
Yes, you can have a Solo 401k with your spouse. There are so many different ways to describe a spouse. We often hear a spouse described as a partner, friend, lover, companion. But a spouse can be so much more: an adventure buddy, motivator, protector, provider, business partner, co-pilot. The list goes on. A spouse is half of your marriage and life.
Therefore, it makes sense to want to include your spouse in your retirement plan. With a Solo 401k, both spouses can participate in the same plan. To qualify, you both must work in the business adopting the plan. Together you and your spouse can make the most of your retirement by both being able to contribute.
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Who Should Invest In A Solo 401
It’s also a good savings option for someone who works for a company that has a 401 plan but who also does contract work on the side, says Scott Frank, a certified financial planner in Encinitas, Calif.
Just keep in mind that 401 contribution limits apply per person, not per plan. If your solo 401 is for a side job, and you’re also participating in a 401 at your day job, the contribution limits apply across all plans, not each individual plan.