A Solo 401(k) plan is not a new type of retirement plan. It is a traditional 401(k) plan covering only one employee. In general, in order to be eligible to establish a Solo 401(k) plan, one must be self-employed or have a small business with no full-time employees other than a spouse or other owner(s).
One of the primary advantages of establishing a Solo 401(k) for a small business is the ability to generate high annual tax deductions and shelter related income and gains from taxation. The primary medium for generating deductions is through making employee- and employer-based plan contributions. In the case of an employer 401(k) plan that consists of not just owner-employees (i.e. Tesla), the maximum one would typically be able to contribute in 2024 is $23,000 or $30,500 if at least age 50.
Many employer’s 401(k) plans tend to elect to be treated as a safe harbor 401(k) plan, which requires the employer to make a 3%-5% matching safe harbor contribution. Whereas in the case of a Solo 401(k) plan, the maximum one can contribute in 2024 is $69,000 or $76,500 if age 50 or older.
The primary reason a Solo 401(k) plan participant can contribute more than an employee at a business they do not own (i.e. safe harbor 401(k)), a participant can make employee deferral contribution plus up to a 25% employer profit sharing contribution (20% if self-employed), versus 3%-5% safe harbor 401(k) matching contributions.
Note – a safe harbor 401(k) plan can technically make employer contributions as well, but it is very uncommon since that would require the employer to make the employer profit sharing contributions (up to 25% of the employee’s salary) for every eligible participant.
Below is a detailed breakdown of how the employee and employer contribution rules work for a Solo 401(k) plan participant and employer.
Employee Elective Deferrals
For 2024, up to $23,000 per year can be contributed by the participant through employee elective deferrals. An additional $7,500 can be contributed for persons at least age 50. These contributions can be up to 100% of the participant’s self-employment compensation. Employee deferral contributions can be made in pretax or Roth.
In order to determine how much one can contribute to a Solo 401(k) plan as an employee deferral in 2024, the following items must be considered:
- One cannot contribute more than they earn. For example, if one earns $10,000 in earned income from the adopting employer business, only up to $10,000 can be contributed to the plan, minus any FICA and social security taxes.
- Only earned income or W-2 from the adopting employer or a related business can be used to determine the aggregate earned income amount.
- If one makes any employee deferral contributions to another 401(k) plan, that amount needs to be taken into account to reduce the maximum employee deferral contribution amount.
- For example, Joe is 35 and works full-time at a software company he does not own. Joe made a $10,000 employee deferral contribution to the plan. Joe also has a side business where he does consulting work and earned $40,000. If Joe set up a Solo 401(k) plan for the consulting business, he would be able to make another $13,000 employee deferral contribution to the plan ($23,000 maximum, minus $10,000 employee deferral contribution he already made.)
- Employee deferral contributions can be made in pretax or Roth.
Employer Profit Sharing Contributions
Through the role of employer, an additional contribution can be made to the plan in an amount up to 25% of the participant’s W-2 income or 20% in the case of a sole proprietor or single member LLC. As a result of the SECURE Act 2.0, employer profit sharing contributions can now be made in pretax or Roth. If Roth employer profit sharing contributions are made, the employee must recognize income on the amount of the employer contribution and the employer would receive a corresponding income tax deduction.
Example 1: Jane has a sole proprietorship business and earned $100,000 of net schedule C income in 2024. Jane would be able to make up to a $20,000 employer profit sharing contribution to her plan (20% of $100,000 Schedule C income).
Example 2: Amy is the sole owner of a S corporation and earned $100,000 in W-2 income for the year. The business generated $2 million in profit. Amy would be able to make up to a $25,000 employer profit sharing contribution to her plan (25% of $100,000 W-2). Note – in the case of a corporation, employee and employer profit sharing contributions are based on the W-2 amount and not the profits of the business.
Total Limit
The sum of both contributions can be a maximum of $69,000 for 2024 or $76,500 for persons age 50 and older. If the business owner’s spouse elects to participate in the Solo 401(k) and earns compensation from the business, the spouse is allowed to make separate and equal contributions doubling the couples’ annual total contribution to $138,000 for or $153,000 if both spouses are at least age 50.
| Employee Deferral Max | Employer Profit Sharing Max | Total Solo 401(k) Max Contributions for 2024 | |
|---|---|---|---|
| Sole Proprietor Under 50 | $23,000 of Net Schedule C Income | 20% of Net Schedule C income | $69,000 |
| Sole Proprietor Age 50+ | $30,500 of Net Schedule C Income | 20% of Net Schedule C income | $76,500 |
| C Corp Owner Under 50 | $23,000 of W-2 Income | 25% of W-2 | $69,000 |
| C Corp Owner Age 50+ | $30,500 of W-2 Income | 25% of W-2 | $76,500 |
| S Corp Owner Under 50 | $23,000 of W-2 Income | 25% of W-2 | $69,000 |
| S Corp Owner Age 50+ | $30,500 of W-2 Income | 25% of W-2 | $76,500 |
| Partner of a 1065 Partnership Under 50 | $23,000 of Guaranteed Payment Amount | 25% of Guaranteed Payment Amount | $69,000 |
| Partner of a 1065 Partnership Age 50+ | $30,500 of Guaranteed Payment Amount | 25% of Guaranteed Payment Amount | $76,500 |
Why Should I Choose IRA Financial to Set up My Solo 401(k)?
IRA Financial “literally” wrote the book on the Self-Directed Solo 401(k). Our founder, Adam Bergman, Esq, has written nine books on self-directed retirement plans and, over the last 15+ years, has helped over 24,000 self-directed clients invest over $3.2 billion in alternative assets. IRA Financial is the leading provider of Self-Directed Solo 401(k) plans with “checkbook control.” Our expertise and experience in designing and customizing Solo 401(k) plan solutions for entrepreneurs and small businesses is unmatched.
Our solution is specifically designed and customized for each type of investment. Whether it is real estate, private equity, venture capital, hedge funds, private businesses, cryptos, precious metals, hard money loans, etc., our Solo 401(k) tax experts will work with you to design the perfect solution for your business and investment goals, including tax optimization, Roth maximization, and UBTI protection. Additionally, IRA Financial is the only self-directed retirement company that provides annual consulting, IRS tax reporting/filings, BOI FinCEN reporting, and full IRS audit guarantee.
