Each year, the IRS adjusts the Solo 401(k) contribution limits due to cost-of-living increases. Some years, there is little if any change. Others, there is a nice bump to what you can save annually, an indirect benefit of high inflation. For 2024, there’s a slight increase in the amount you can save in your 401(k) plan. For 2023, the Solo 401(k) contribution limits are $66,000 or $73,500 if you are at least age 50. The 2024 Solo 401(k) contribution limits will increase those totals. Here is what you can expect to see next year.
2023 401(k) Contribution Limits
- Employee Deferral – $22,500
- Employer Contribution – $43,500
- Catch-up Contribution – $7,500
- Total Contribution Limit – $66,000 or $73,500 for those age 50 and older
2024 401(k) Contribution Limits
- Employee Deferral – $23,000
- Employer Contribution – $46,000
- Catch-up Contribution – $7,500
- Total Contribution Limit – $69,000 or $76,500 for those age 50 and older
What Does it All Mean?
In 2023, the IRS increased the employee deferral $2,000 after an increase of $1,000 the previous year. For 2024, you can contribute an additional $500 to a 401(k) plan. After a $1,000 increase for the 2023 taxable year, the catch-up contribution for those age 50 or older remains the same at $7,500. Further, the employer contribution will rise to $2,500 for next year.
Those with self-employment income can contribute as both the employee and employer. This means anyone with a Solo 401(k) plan may contribute up to $69,000 in 2024, an increase of $3,000. If you are at least age 50, you may contribute up to $76,500, an increase of $3,000. A percentage of your business/self-employment income is used to determine the amount you can contribute as the employer. The compensation used for this calculation increases to $345,000, which is $15,000 more than in 2023.
Plus, if your employer allows for them, you can contribute after-tax funds up to the new annual limit of $69,000 or $76,500. An after-tax contribution should generally only be considered when employing the Mega Backdoor Roth strategy.
It’s important to keep in mind that the overall contribution limit is for all 401(k) plans, and types of contributions in the aggregate. Therefore, if you contribute to a 401(k) plan through your employer, this lowers the amount you can save in your Solo 401(k) plan. If you only have one 401(k) plan, you may contribute the maximum to that plan.
Read more: Solo 401(k) Investments
Explaining the Solo 401(k) Contributions
Elective Deferral
As an employee, you have the option to make the Elective Deferral, also known as an employee contribution. For 2024, the Solo 401(k) maximum contribution limit for the elective deferral is $23,000 if you’re age 50 and under. This is an increase of $500 from 2023.
The elective deferral contribution if you’re at least age 50 is $30,500, again, a $500 increase from 2023. Employee deferral contributions can be made in pretax or Roth.
Learn More: The Roth Solo 401(k)
Profit Sharing
The Solo 401(k) Profit Sharing Contribution is also known as the Employer Contribution. For 2024, you can make a contribution of $46,000, which is an increase of $2,500 from 2023, no matter your age. Unlike the employee deferral contribution, which is a dollar-for-dollar contribution, the Solo 401(k) plan employer contribution is based on a percentage of earned income.
You may make employer profit-sharing contributions up to 20% of your self-employment income (net Schedule C) or 25% of your W-2. Thanks to SECURE Act 2.0, these contributions can be made in both pretax and now Roth (for those who want to pay taxes upfront).
Total Limit for Couples
Your spouse can participate in the Solo 401(k) Plan if he/she earns compensation from a business. He or she can make separate and equal contributions. This increases the annual contribution to $138,000 (under age 50) or $153,000 (50+) that a couple can make for 2024.
Related: Solo 401(k) Investment Options
Saver’s Credit
The saver’s credit is an incentive for low- and moderate-income earners. This tax credit is provided to those people who save for retirement, and who are under certain income thresholds. To receive the credit, your annual income must fall below $76,500 if you are married filing jointly (up $3,500 from 2023), $57,375 if you file as a head of household (up $2,625), or $38,250 if you are a single filer or married filing separately (up $1,750).
Conclusion
One of the indirect benefits of high inflation is that the annual Solo 401(k) contribution limits increased significantly for 2023. Although inflation is still high, the contribution limits only increased slightly for the next year. Everyone with a 401(k) plan may only contribute an additional $500. If you are self-employed, you can contribute $3,000 more. Last year so an increase in the catch-up contribution for those aged 50 or older. However, there was no such increase for 2024, as the catch-up remains at $7,500, which is still better than it was in previous years.
If you want more information about the Solo 401(k) and how it works, please give us a call @ 800.472.0646. We can answer any questions you have, if you are eligible, and how to set one up. Self-employed individuals have a distinct advantage in saving for retirement.
