Solo 401(k) Contribution Limits and Rules: A Complete Guide

Estimated reading time: 3 minutes(Last Updated On: May 10, 2023)

Saving for retirement is something many people put off until later, but that’s a mistake. About one-quarter of American adults don’t have a pension or any retirement savings. It’s important to not only save but to put your money to work in appropriate investment vehicles. Are you a business owner without employees? A solo 401K is a good way to save for retirement.  

It’s important to understand the rules for a solo 401k before you get started. Keep reading to if a solo 401k is a good retirement plan for you.  

What’s a Solo 401K?

A regular 401k is a type of retirement account sponsored by an employer. Most big companies offer a 401k instead of a pension plan. When you save a percentage of your paycheck, the company usually matches up to a specified percent.  

If you’re self-employed, there is no employer setting up a retirement plan for you but that should not stop you from saving! 

Who is Eligible for a Solo 401k?

Anyone who is self-employed or owns a business with no employees is eligible for a Solo401k.This type of plan helps you save more than you can with a traditional individual retirement account (IRA).  

There are no restrictions on age or income. Your spouse is also eligible if earning income from the business.

Contribution Limits and Rules for a Solo 401k

In 2023, you can put as much as $66,000  into your solo 401k. Are you 50 or older? There’s a catch-up contribution of $7,500. 

That means you can put an extra $7,500 beyond the $66,000.  

Since you’re the employee, your contribution limit is $22,500 or even 100% of your compensation, whichever number is less. If you’re 50 or older, this is where you contribute the additional $7,500 if you want.  

You’re also the employer, which means you can make additional contributions up to 25% of your net self-employment income. That’s essentially your net profit minus half of your self-employment tax as well as the plan contributions for yourself.  

The 2023 limit for factoring your contribution is $330,000.  

Prohibited Transactions

The solo 401k is for growing your retirement savings. You can’t take money out to pay your credit card bill! You can invest in stocks, bonds, and mutual funds as well as real estate and other non-traditional assets. Always do your due diligence before making any investments! 

Opening a Solo 401k

Most online brokers and some custodians can help you set up a solo 401k. You’ll need an employer identification number (EIN) first. 

The broker provides the paperwork, which includes a plan agreement and account application. Set up your account before December 31st to make an employee contribution for the year.  

How a Solo 401k Boosts Your Retirement Savings

A solo 401k is a great tool for investing in your retirement. Adhere to the rules for a solo 401K, and you’ll have many years of sound investing.  

Avoid prohibited transactions and save as much as you can per year. Do your due diligence before investing your solo 401k, and get help from an expert if you don’t understand your investment choices.  

The earlier you start saving for your retirement, the better! Need help getting started with your solo 401k? To learn more about how to get started investing with a self-directed IRA, schedule a 1-on-1 consultation with an IRA Specialist. 

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