Explore the Contribution Limits in a Solo 401(K) Plan

Updated on March 25, 2023
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Among various retirement savings accounts, a one-participant 401(k) plan may look attractive for its several benefits. You can call it Solo 401(k), Solo-k, One-participant k, or Uni-k. The account is relevant for business owners with no employees working for them except their spouses. Most rules are similar to any other 401(k) plan. If you want some tax benefits, this plan can help. Before this, let’s understand how much you can contribute.

Contribution limits in a plan

Under a 401(k) plan, you can contribute your income as an employer and employee. As a business owner, you can contribute 100% of your earned income up to the annual threshold of USD $22,500 in 2023. The contribution limit has increased in the last two to three years. Hence, it is to your advantage. You could add USD $20,500 in 2022 and USD $19,500 in 2021 and 2020. If your age is 50 or more, you can pay USD$30,000 in the current year compared to USD $27,000 in 2022 and USD $26,000 in 2021 and 2020. Employers can use 25% of their compensation.

Remember, overall contributions to an account (excluding catch-up contributions applicable for people aged 50 and more) cannot be more than USD $66,000 in the present situation. Earlier, it was USD $ 61,000 in 2022 and USD$ 58,000 in 2021. 

Contribution limits relevant for self-employed individuals

Compensation refers to the income you earn. You can call it net earnings made from your business. You can deduct your contributions and a specific percentage of your self-employment tax during this calculation. When computing the figures, take the higher side of elective and nonelective deferral contributions.

A few critical considerations

You don’t have to do nondiscrimination testing for this type of account, which usually applies when you have employees. However, this advantage will become inaccessible once you hire someone. No matter what type of 401(k) plan your broker offers, the Internal Revenue Code rules will remain the same. If you hire someone and they are eligible for the plan, you must add them to the retirement account and practice nondiscrimination testing. As a holder of a one-participant 401(k) plan, you must file your income return using Form 5500-EZ. However, the asset value has to be at least USD $250,000 by year-end for this. You don’t have to worry about filing if your asset value is less.

Whether you are a new small business owner or a seasoned player, saving for retirement is crucial. People usually focus on either savings or the growth of their money. However, practice both to maximize your income for a secure future. Choose a retirement savings plan like a solo 401(k) that allows you to make handsome contributions and save on your taxes until you withdraw. Many plan providers offer this option but choose someone trustworthy and helpful. With retirement savings accounts like this, self-employed people can take a sigh of relief even without employer-sponsored retirement plans. So, create your account after learning how it works and what you will incur. Once you get clarity, it will be easy to manage your account.  

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The Editorial Team at Healthcare Business Today is made up of skilled healthcare writers and experts, led by our managing editor, Daniel Casciato, who has over 25 years of experience in healthcare writing. Since 1998, we have produced compelling and informative content for numerous publications, establishing ourselves as a trusted resource for health and wellness information. We offer readers access to fresh health, medicine, science, and technology developments and the latest in patient news, emphasizing how these developments affect our lives.