What is a solo 401(k) plan?
A solo 401(k) plan is designed for self-employed or involved in a business with partners and/or a spouse. IRS rules say you can't contribute to a solo 401(k) if you have full-time employees, though you can use the plan to cover you and your spouse. The IRS refers to these plans as one-participant 401(k) plans. In some cases, they are also referred to as individual 401(k) plans.
Solo 401(k) contribution limits
The total solo 401(k) contribution limit is up to $58,000 in 2021 and $61,000 in 2022. There is a catch-up contribution of an extra $6,500 for those 50 or older. To understand solo 401(k) contribution rules, you want to think of yourself as two people: an employer (of yourself) and an employee (yes, also of yourself). Within that overall $58,000 contribution limit in 2021 and $61,000 in 2022, your contributions are subject to additional limits in each role: As the employee, you can contribute up to $19,500 in 2021 and $20,500 in 2022, or 100% of compensation, whichever is less. Those 50 or older get to contribute an additional $6,500 here. As the employer, you can make an additional profit-sharing contribution of up to 25% of your compensation or net self-employment income, which is your net profit less than half your self-employment tax and the plan contributions you made for yourself. The limit on compensation that can be used to factor your contribution is $290,000 in 2021 and $305,000 in 2022. If you're side-gigging, employee 401(k) limits apply by person rather than by plan. That means if you're also participating in a 401(k) at your day job, the limit applies to contributions across all plans, not each individual plan.
What Are the Benefits of a Solo 401(k)?
A solo 401(k) is an excellent way for someone self-employed to open a 401(k) account with most of the same features and benefits of a 401(k) offered by companies and employers. These benefits include:
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