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What is a Solo 401(k) Plan and How Can it Benefit Your Small Business?

December 19, 2022

Are you getting ready to launch a solo business endeavor? We’ll give you all the information about the retirement plan that makes the most sense for you.

Running a one-person business comes with its challenges, but finding the right retirement plan shouldn’t be one of them. Find out why the “solo 401(k)” plan may be the right one for you or your spouse.

Who is eligible?

The one-participant 401(k) or “solo 401(k)” is designed for a business owner with no employees. You cannot contribute to the plan if you have any employees, aside from your spouse, who could make elective deferrals if they earn income from the business.

What are the contribution limits?

In a one-participant 401(k) plan, the business owner acts as the employee and the employer, and can contribute to the plan in both capacities.

Here are the contribution limits:

  • As an employee, the owner can choose elective deferrals of up to 100% of compensation of the earned income up to the annual contribution limit:
    • $20,500 in 2022, $22,500 in 2023
    • or if age 50 of older $27,000 in 2022, $30,000 in 2023
  • As the employer, you can contribute up to 25% of your compensation or net self-employment income.
  • The total contributions to a single account, not counting catch-up contributions for those age 50 and over, cannot exceed $61,000 for 2022 and $66,000 for 2023.

Can I still participate in my employee’s 401(k) plan?

If your self-run business is in addition to your full-time job, you can still contribute to both 401(k) plans. Just be aware that the contribution limit is per person, not per plan.

Is the “solo 401(k)” plan tax-deductible?

It depends. As an “employee”, you can elect to make Traditional or Roth contributions from your compensation. The Traditional contributions are deductible now and withdrawals with be fully taxable when taken out. The Roth contributions are after-tax but are tax-free including gains when withdrawn.

All contributions you make as the "employer" will be tax-deductible to your business.

Wondering if you can benefit from a Solo 401(k)? We can help. Contact us.

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