Solo 401(k) Contributions

Tax Strategy
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Retirement
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Updated
2/18/2023

How It Works

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.

Eligibility

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.

Action Items

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.

Limits (2023)

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.

IRC References

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.”

This content is for informational purposes only and does not constitute legal, business, or tax advice. You should consult your own attorney, business advisor, or tax advisor regarding matters mentioned in this post. We take no responsibility for actions taken based on the information provided.

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