Sole Proprietorship Solo 401k Contributions - Solo 401k (2024)

FAQs

Sole Proprietorship Solo 401k Contributions - Solo 401k? ›

How much can I contribute to a Solo 401k? You can contribute up to $61,000 in 2022 and $66,000 for tax year 2023. An additional catch-up contribution of $6,500 can also be made for 2022, and $7,500 for 2023 if you are age 50 or older.

A solo 401(k) is a retirement account for anyone who is self-employed or owns a business or partnership with no employees apart from a spouse. In 2024, the maximum you can contribute is $23,000 as the employee plus an additional 25% of compensation as the employer.

One of the more common questions we receive from self-employed business owners seeking to establish a Solo 401(k) plan is whether it can reduce self-employment tax. The short answer is no.

Net earnings must be derived from personal services (not investment income) performed by the self-employed business owner. If the trade or business operates at a loss for the year, you will not be able to contribute to the plan.

Solo 401(k) Plan EIN

In general, an EIN will be acquired on behalf of the plan. The EIN is used to allow the plan to open a bank account. There is no formal requirement that an EIN be acquired for a Solo 401(k) plan since it is an owner-only plan.

Elective deferrals up to 100% of compensation (“earned income” in the case of a self-employed individual) up to the annual contribution limit: $23,000 in 2024 ($22,500 in 2023; $20,500 in 2022; $19,500 in 2020 and 2021), or $30,000 in 2023 ($27,000 in 2022; $26,000 in 2020 and 2021) if age 50 or over; plus.

SEP-IRA holders are limited to contributing 25% of earned income. Earned income is calculated by taking the net profit of the business and deducting both one-half of the self-employment tax assessed on it as well as any tax-deductible contributions made to the SEP-IRA for the account holder.

There is a downside, however, since setting up and managing the plan is usually a bit more intensive. You'll have to file a special form with the IRS each year if your account balance exceeds $250,000, and you may find that the fees are somewhat higher than what you'd pay for an IRA.

Therefore, you can make both your employee and profit sharing contributions to the solo 401k plan based on your W-2 wages since your self-employed business is and LLC taxed as an S-corp.

The Bottom Line. A 401(k) retirement plan will reduce both your AGI and MAGI, as contributions are taken out of your salary before taxes are deducted. This in effect reduces your salary in relation to taxes.

How to report Solo 401k contributions on tax return? ›

It acts and is treated like any other 401(k) plan. Essentially, this plan has the sole owner and sole employee making contributions to the same one plan. This means you will report the total amount (as sole owner and sole employee) contributed as an adjustment on Schedule 1, line 16.

Differences at the state level determine when IRAs are fair game for lawsuits. The fact is that many states don't protect IRAs nearly as well. Even though the Solo 401k doesn't generally qualify under Title I of ERISA, it often offers more from lawsuits and bankruptcy courts.

401(k) plan

Contribute up to an additional 25% of your net earnings from self-employment for total contributions of $69,000 for 2024 ($66,000 for 2023, $61,000 for 2022; $58,000 for 2021; $57,000 for 2020 and $56,000 for 2019), including salary deferrals.

They're not limited to 25 percent of their salary, as in some other plans. This feature can allow them to minimize taxes, though this contribution doesn't help them avoid the self-employment tax. In other respects, the solo 401(k) operates like any other 401(k) plan, whether it's a traditional 401(k) or a Roth 401(k).

An S-Corp Solo 401k is much more efficient than one in a sole prop. This is because of how the maximum contribution is calculated. Let's look at an example of each starting with the same amount of net income and see how it differs.

Because you are allowed to be your own plan administrator with the Solo 401k plan, there is no need for the expense or bureaucratic burden of an outside administrator.

Periodic or Lump Sum: Solo 401k contributions can be made periodically or in one lump sum.

You can write a check directly from your personal or business checking account to the solo 401k account. This is probably the most common way for business owners to fund their solo 401k outside of payroll.

There is a downside, however, since setting up and managing the plan is usually a bit more intensive. You'll have to file a special form with the IRS each year if your account balance exceeds $250,000, and you may find that the fees are somewhat higher than what you'd pay for an IRA.

(1) Yes the IRS solo 401k rules allow for investing in a private company (private equity) provided that (i) the solo 401k owner / participant (nor any closed related persons) are not working for the entity in which she intends to invest retirement funds; (ii) the solo 401k owner / participant (nor any closed related ...