fbpx
TALK TO AN EXPERT 1-877-229-9763 Contact Us

Solo 401(k) Contribution Limits

401(k) plans have a maximum contribution limit that is set annually by the Department of Labor. The limits are generally updated and released in late October for the coming year.

Please keep in mind these limits are general in nature, and your individual ability to contribute may be impacted by factors such as business entity type, marital status, income, and whether you or your spouse participate in a separate employer sponsored retirement plan. Please seek guidance from your tax advisor regarding 401(k) contributions.

There are two types of contributions that may be made to a plan.

  • The employer may make profit sharing contributions up to the plan maximum, based on a percentage of income. The percentage calculation varies for businesses taxed as a pass through to the owner as compared with businesses taxed as corporations.
  • As an employee, you may also elect to defer income into the plan. You may defer up to 100% of your income (after self-employment taxes), up to the allowable maximum which is $18,000 for 2016. Participants age 50 or older are allowed a $6,000 catch-up contribution amount.

2017 Contribution Limits for 401(k) Plans

 

Age 49 or younger

Age 50 or older

Plan Maximum $54,000 $60,000
Employee Salary Deferral $18,000 $24,000
Profit Sharing for
Pass Through Entities
20% of Net Business Income
up to $270,000
Same
Profit Sharing for
W-2 Salary / Corporations
25% of W-2 Wages capped
at $54,000
Same

2018 Contribution Limits for 401(k) Plans

Minimal changes were made for the 2018 tax year. The employee deferral amount was increased by $500 to $18,500.  The maximum compensation limit for determining employer profit-sharing contributions was increased from $270,000 to $275,000, and the plan maximum therefore nudged up from $54,000 to $55,000.

Age 49 or younger

Age 50 or older

Plan Maximum $55,000 $61,000
Employee Salary Deferral $18,500 $24,500
Profit Sharing for
Pass Through Entities
20% of Net Business Income
up to $275,000
Same
Profit Sharing for
W-2 Salary / Corporations
25% of W-2 Wages capped
at $55,000
Same

Solo 401(k) contributions are flexible. Both the salary deferral and the profit-sharing contributions are discretionary and can be changed at any time based on business profitability. You may contribute using either method or both, or not make contributions at all for a particular year.

With regard to employee salary deferral contributions, you may elect to categorize these as tax-deferred or choose Roth tax treatment. Employer profit sharing contributions may only be made on a tax-deferred basis.

The contribution limits apply per individual participant. If both you and your spouse have earnings through the business, you may both contribute up to the maximum based on your individual age and income factors.

Solo 401(k) Contribution Examples – Pass Through Entities

When a business is a pass-through entity for taxation, income to the owner is typically classified as distributions, not W-2 wages. Examples would include sole proprietorships, partnerships and LLC’s not electing to be taxed as a corporation.

In this type of arrangement, both the employee salary deferral contribution and the employer profit sharing contribution are based on the amount of Net Adjusted Business Income. Net adjusted business income is calculated by taking gross self-employment income and then subtracting business expenses as well as 1/2 of self-employment taxes.

Employee Salary Deferral Contribution

In 2017 100% of net adjusted business income, up to the maximum of $18,000 or $24,000 for participants age 50 or older, may be contributed in salary deferrals into a Solo 401(k).

Employer Profit Sharing Contribution

A profit-sharing contribution of up to 20% of net adjusted businesses income may be made. The maximum amount of income that can be used for calculating plan benefits is $270,000 in 2017.

Example 1

A self-employed realtor operating as a sole proprietor is age 42 with $50,000 of net profit for the year.

Net Business Income $46,468
Maximum Profit Sharing $9,293
Maximum Salary Deferral $18,000
Maximum Contributions $27,293

Example 2

A self-employed consultant operating through an LLC is age 51 with $100,000 of net profit for the year.

Net Business Income $92,935
Maximum Profit Sharing $18,587
Maximum Salary Deferral $24,000
Maximum Contributions $42,587

 

Solo 401(k) Contribution Examples – Corporate Tax Entities

When a business is taxed as a corporation, compensation to the owner is generally made in the form of W-2 wages. Examples would be a C corporation, or a S Corporation or LLC electing to be taxed as a corporation. Dividends paid to shareholders are not eligible as a source of plan contributions.

Employee Salary Deferral Contribution

In 2017, 100% of W-2 wages, up to the maximum of $18,000, or $24,000 for participants age 50 or older, may be contributed in salary deferrals into a Solo 401(k).

Employer Profit Sharing Contribution

A profit-sharing contribution of up to 25% of W-2 earnings can be contributed into a Solo 401(k).

Example 1

A self-employed contractor operating through a S Corporation is age 38 with $75,000 of W-2 salary.

Maximum Profit Sharing $18,750.00
Maximum Salary Deferral $18,000.00
Maximum Contributions $36,750.00

Example 2

A self-employed salesperson operating through a C Corporation is age 55 with $150,000 of W-2 salary.

Maximum Profit Sharing $37,500.00
Maximum Salary Deferral $24,000.00
Maximum Contributions $57,500.00

Example 3

A husband and wife operate a C Corporation and are the only employees. He is age 50 with $100,000 of W-2 salary. She is age 48 with $100,000 of W-2 salary.

Husband Wife
Maximum Profit Sharing $25,000.00 $25,000.00
Maximum Salary Deferral $24,000.00 $18,000.00
Maximum Contributions $49,000.00 $43,000.00

Their combined contributions toward their future retirement total $92,000!

Note that in some cases an individual may not be able to maximize both profit sharing and salary deferral before achieving the plan maximum.

Timelines

A 401(k) must be established by December 31st of a tax year in order for contributions to be made towards that year.

Profit sharing contributions may look at income for the entire plan year (generally the calendar year).

Employee contributions may only be made from income received after the plan was implemented.

In a corporate tax / W-2 environment, employee salary deferral contributions must be made to the plan with the final paycheck for the tax year (so typically a week into January at most). Employer profit sharing contributions may be made through the corporate tax filing deadline, including extensions (as late as September 15th).

In a sole proprietor / pass through environment, employee salary deferral contributions and employer profit sharing contributions may be made up until the individual’s tax filing date, including extensions (as late as October 15th).