Is a Solo 401(k) a Profit-Sharing Plan?

Written by True Tamplin, BSc, CEPF® | Reviewed by Editorial Team

Updated on December 13, 2022

All 401(k) plans are profit-sharing plans by nature. Qualified plans can either be pension plans or profit-sharing plans. 401(k) plans fall into the latter category. It doesn't matter if the plan has one participant or ten thousand. It is still designed to allow plan participants to share in the profits of the employer.

Solo 401(k) Contribution Limits

Solo 401(k) contribution limits are ultimately based on the amount of revenue generated by the business each year. A sole proprietor can contribute up to $19,500 in elective salary deferrals for 2020, and then contribute an additional $6,500 as a "catch-up" contribution if the proprietor is at least 50 years old. Then the proprietor could make an additional employer contribution on top of that.

Solo 401(k) Contribution Limits Formula

The formula for calculating the total amount that can be contributed to a solo 401(k) in a given year is as follows: net income equals all earned income for the year minus half of self-employment tax and all plan contributions that the proprietor made for him or herself up to the maximum allowable amount. For 2020, this amount is $57,000 or $63,500 for those aged 50 and above. The grand total that a sole proprietor can therefore contribute to a solo 401(k) in 2020 is $83,000.

Is a Solo 401(k) a Profit-Sharing Plan FAQs

What is a 401(k) plan?

A 401(k) plan is a retirement plan offered by an employer designed to help employees save for retirement.

Is a Solo 401(k) a Profit-Sharing Plan?

All 401(k) plans are profit-sharing plans by nature.

What is the difference between a Roth 401(k) and traditional 401(k)?

With a Roth 401(k), taxes are paid as money is put into the retirement account. With a traditional 401(k), taxes are paid as money is taken out.

Are there other retirement savings plans other than a 401(k) plan?

Alternatives to 401(k) plans include traditional IRAs, Roth IRAs, pension plans (if your employer offers one), and 403(b) retirement plans for employees of non-profit organizations.

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.

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