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 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. The formula for calculating the total amount that can be contributed to a solo 401(k) in a given year is as follows: 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.Solo 401(k) Contribution Limits
Solo 401(k) Contribution Limits Formula
Is a Solo 401(k) a Profit-Sharing Plan? FAQs
A Solo 401(k) plan is a qualified retirement account for small-business owners who do not have any employees other than themselves and their spouse. It offers similar benefits as a traditional 401(k) with the added benefit of being self-directed, allowing individuals to make investments that are not typically available in most employer-sponsored plans.
No, it is not. A Solo 401(k) is an individual retirement account which allows individuals to save for retirement without having to rely on an employer’s matching contribution. It does not offer profit sharing features like those found in a Profit Sharing Plan.
A Solo 401(k) offers plenty of tax advantages such as pre-tax contributions and deferred taxation on investment gains and income until withdrawal. Additionally, it provides self-directed investing opportunities with a wide range of investments available to choose from, including real estate, precious metals and alternative assets like cryptocurrency.
Yes, the annual contribution limit is currently $19,500 per participant plus an additional $6,500 catch up contribution if you are over 50 years old. This includes both pre-tax contributions as well as any employer contributions that may be made.
Yes, it requires an initial set-up fee and may have other regular administrative costs associated with the plan. Some financial institutions also charge additional fees for services such as investment advice or asset management. Additionally, certain investments may have their own transaction fees that must be taken into consideration when making decisions about contributions to a Solo 401(k).
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.