Recent news has focused on 401(k) contribution levels in conjunction with discussions regarding the proposed tax law changes. With all the tax talk, we wanted to remind you that a Solo 401(k) is a great way for sole proprietorships and their spouses to reduce taxable earnings. In a sole proprietorship, the business owner wears two hats in a 401(k) plan, employee and employer, and contributions can be made to the plan in both capacities. Under the 2017 contribution rules, a plan participant under age 50 can make a maximum annual employee deferral contribution of $18,000. That amount can be made in pretax, after-tax, or Roth.
The business can also make a 25 percent annual profit-sharing contribution up to a combined maximum (including the $18,000) of $54,000 in 2017. Plan participants age 50 and over can make a maximum annual employee deferral contribution of $24,000 (includes catch-up contribution of $6000) with a combined maximum of $60,000. Next year, individuals under age 50 will be able to make a maximum combined contribution of $55,000 and those older than 50 can max contributions of $61,000.
For example: Joe, age 54, earned 100,000 in W-2 wages from his S corporation in 2017. He deferred $24,000 in regular elective deferrals to the 401(k) plan. His business contributed 25% of his compensation to the plan, $25,000. Total contributions to the plan for 2017 would be $49,000. This is the maximum that can be contributed to the plan for Joe in 2017.
The Solo 401(k) is unique because it only covers the business owner(s) and their spouse(s). Be aware if you have full-time employees, Solo 401(k) is not an option for you.
One last note, business owners who are also employed by a second company and participating in its 401(k) plan should bear in mind that limits on elective deferrals are by person, not by plan. Their max deferral is still $18,000 (under age 50) and 24,000(over age 50).
Investing in a Solo 401(k) can be a very effective strategy. You minimize the tax sting while building your retirement fund. However, a Solo 401(k) is more complicated to set up and can cost more than a traditional SEP or simple IRA to maintain.
Give us a call if we can answer questions or get you started on saving for your future. Olson Wealth Group is a full service wealth management firm. With wise counsel and clear strategies, our experienced specialists provide tailored approaches that strive to maximize wealth.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
Securities and advisory services offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.