Solo 401(k) Contributions

The Solo 401(k) strategy is a retirement plan contribution that a business makes on behalf its sole employee, who is typically the business owner. The business deducts the contribution to reduce taxable income, resulting in tax deferrals or avoidance for the business owner. This deduction is available to sole proprietorships (including independent contractors and freelancers), partnerships, and S or C corporations.

Confirm these points before using this strategy:

• You’re the sole employee of a business that generates self-employment income (Schedule C or Partnership); or
• You’re the sole employee of an S corporation or corporation.

Do the following to use this strategy:

• Confirm that the participating business doesn’t have full-time employees (contractor don’t count).
• Establish the plan with an administrator that will file IRS Form 5500-EZ annually.
• The plan must be established by the last day of the business’s tax year.
• Contributions must be made by the business’s federal income tax return original due date.

Your employee contributions (i.e. “elective deferrals”) are limited to the lesser of:

• 100% of compensation; or to the contribution limit of
• $22,500, with a catch-up contribution for those aged 50 and older of $6,500.

Employer contributions are limited to 25% of your compensation as defined by your plan.

For 2023, total contributions to the plan cannot exceed $61,000, or $67,500 for those aged 50 and over.

I.R.C § 401 Qualified pension, profit-sharing, and stock bonus plans -

”A trust created or organized in the United States and forming part of a stock bonus, pension, or profit-sharing plan of an employer for the exclusive benefit of his employees or their beneficiaries shall constitute a qualified trust under this section.”