Solo 401k-one of the best retirement options for self-employed individuals and small businesses with zero employees. This guide stipulates the solo 401k contribution limits-how much can you contribute in a solo 401k in a given year.
This is my favorite retirement plan if you are self-employed or a small business owner with no common law employees. You can contribute both as an employee and an employer, resulting in maximum possible contributions.
Among all the retirement accounts, solo 401k allows maximum contribution. This is mainly because you are allowed to contribute, both as an employee and as an employer.
Read a detailed analysis of Solo 401k plan for self-employed and small business owners
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Solo 401k vs SEP IRA retirement plans for self employed and small business owners
Table of Contents
Solo 401k Contribution Limits in 2022 and 2023
What is solo 401k?
Solo 401k plan is a retirement plan for self-employed individuals or small business owners with no employees (other than their spouse).
Like the employee-sponsored 401k retirement savings plan, the solo 401k plan also saves your retirement funds in a tax-advantaged manner. You can either contribute to a traditional (pre-tax contributions) or Roth (after-tax contributions) solo 401k.
Why solo 401k?
The solo 401k plan enables the highest allowable contributions when compared to any other retirement plan for self-employed individuals, ultimately resulting in the maximum accumulation of funds possible.
This is due to the fact that solo 401k, unlike other retirement plans for self-employed individuals, allows contributions both as an employee as well as an employer, up to a maximum annual limit in the year (like $66,000 for 2023).
Moreover, if your spouse is employed within your small business, they can also make contributions to the Solo 401(k) up to the same amount. Therefore, collectively, both of you can contribute up to $133,000 ($66,000 + $66,000) in 2023.
Add to it the additional catch-up contributions ($7500 in 2023) for 50 years or older, which is not offered by other retirement plans for self-employed individuals.
The Solo 401(k) offers both traditional (pre-tax contributions, which are tax-deductible, and withdrawals are taxed as current income) and Roth contributions (after-tax contributions, which are taxed initially but allow for tax-free withdrawals).
Solo 401k contribution limits 2023
Contribution as an employee (Elective deferral): As an employee, you can contribute up to the lesser of 100% of your “compensation” or the maximum annual limit of $22,500 for 2023.
For age 50 years or more, a catch up contribution of $7,500 is allowed ($22,500 + $7,500 = $30,000).
Compensation: For self-employed individuals, the compensation refers to your net income, which is defined as net earnings from self-employment after deducting both:
- one-half of your self-employment tax, and
- contributions for yourself.
Contribution as an employer: As an employer, you can contribute up to 25% of your “compensation”.
Again for self-employed individuals, the compensation refers to your net income, which is defined as net earnings from self-employment after deducting both:
- one-half of your self-employment tax, and
- contributions for yourself.
Total allowed contribution for solo 401k in 2023: Please note that the total contribution in solo 401k in the year 2023 cannot exceed $66,000 for ages less than 50 years and $73,500 for age 50 years or more. This includes both employee contribution and employer contribution.
Total contribution= Contribution as an Employee + Contribution as an Employer
Total contribution cannot exceed the maximum ceiling (for example of $61,000 in 2022 and $66,000 in 2023).
Solo 401k contribution limits 2022
Contribution as an employee (Elective deferral): As an employee, you can contribute up to the lesser of 100% of your “compensation” or the maximum annual limit of $20,500
For age 50 years or more, a catch up contribution of $6,500 is allowed ($20,500 + $6,500 = $27,000).
For self-employed individuals, the compensation refers to your net income, which is defined as net earnings from self-employment after deducting both:
- one-half of your self-employment tax, and
- contributions for yourself.
Contribution as an employer: As an employer, you can contribute up to 25% of your “compensation”.
Again for self-employed individuals, the compensation refers to your net income, which is defined as net earnings from self-employment after deducting both:
- one-half of your self-employment tax, and
- contributions for yourself.
Total allowed contribution for solo 401k in 2022: Please note that the total contribution in solo 401k in the year 2022 cannot exceed $61,000 for age less than 50 years and $67,500 for age 50 years or more. This includes both employee contribution and employer contribution.
| Employee Contribution | Employer Contribution | Catch up contribution allowed for age 50 years or more | Maximum elective deferral or employee contribution allowed | Total annual contribution (including employee and employer contributions) | |
| 2022 | Lesser of 100% of your “compensation” or the maximum annual limit of $20,500 | up to 25% of your “compensation”. | $6,500 | $20,500 | $61,000 |
| 2023 | Lesser of 100% of your “compensation” or the maximum annual limit of $22,500 | up to 25% of your “compensation”. | $7,500 | $22,500 | $66,000 |
Source
FAQs
When does a solo 401k need to be established?
Establishing a solo 401k account is one thing and funding your solo 401k is another. So, basically you can first establish your solo 401k. Once you have established your solo 401k, you can fund it at a later time.
As per the IRS publication 560, you need to establish your solo 401k account, by filling in and signing all the required documents by December 31st of the current year.
Can you contribute to a solo 401k and employer 401k?
As a general guideline, based on your eligibility, you can maintain multiple retirement plans such as a 401(k), solo 401(k), SEP, 403(b), or others simultaneously.
If you have a primary day job and a separate side business, provided they do not have any legal overlap, you’re eligible to maintain both retirement plans—i.e., a 401(k) for your primary job and a solo 401(k) for your side business.
This allows you to stash more money in your retirement accounts, along with enjoying associated tax benefits.
However, there are some details to consider. Be aware that any retirement plan, whether it’s a solo 401(k), 401(k), SIMPLE IRA, etc., has two types of contributions—employee contributions (also known as elective deferrals) and employer contributions (including matching, profit sharing, or safe harbor).
Regardless of the number of retirement plans you have, the total employee contributions you make cannot exceed the IRS-defined contribution limit for the year.
For example, in 2023, the maximum allowed employee contribution is up to $22,500. Therefore, no matter how many simultaneous 401(k) or solo 401(k) retirement accounts you maintain, the collective employee contribution cannot exceed the IRS-defined limit ($22,500 in 2023)
