Self-Employed 401K Contribution Limits

Last updated Mar 22, 2021 0

As a self-employed individual, you have the option to participate in a 401k and contribute more than the average person to your account. This type of account is also sometimes referred to as the solo 401k. With this type of account, you can make a salary deferral as well as share profits from your company.

Function

The purpose of the self-employed 401k is to provide a way to set aside money on a pre-tax basis. With this type of account, your contributions are deducted from your annual income. The money that you set aside can then be invested in various securities.

The money grows on a tax-deferred basis as well. You can start taking distributions from the account once you reach the age of 59 1/2. The money you take out will be taxed at that point.

Salary Deferral

The salary deferral portion of the solo 401k is just like the salary deferral for regular employees. With this portion of your contribution, you can put as much as $16,500 per year into your account as of 2010. If you are over the age of 50, you can bump up your contribution by another $5,500 per year. This allows you to set aside a maximum of $22,000 per year out of your pay.

Profit Sharing

In addition to a salary deferral, you can also contribute a profit sharing contribution to your account. Since you are the owner of your business, you get to decide how much this contribution is. You can contribute another 25 percent of your W-2 income for the year with this contribution. This number is on top of the $16,500 or $22,000 maximum, depending on how old you are.

Total Dollar Limit

With the solo 401k, you have to abide by a total dollar contribution limit. This limit applies to the amount of money that can go into your account from salary deferral as well as the profit sharing contribution. As of 2010, this total dollar limit is $49,000 per year. If you are over the age of 50, the total dollar limit is $54,500 per year.

Considerations

The self-employed 401k also allows you to make contributions for a spouse if your spouse works with you in your business. The spouse can set aside the same amount of money as the owner of the business. For example, if a self-employed man over the age of 50 set aside $54,500 in a year, his spouse could also set aside another $54,500. As a couple, this allows you to put away $109,000 per year for retirement.