401(k)s

How Much Can You Contribute to a Solo 401(k) for 2019?

Some self-employed savers can put away as much as $62,000 for retirement in a solo 401(k) in 2019, depending on age and compensation.

A solo 401(k), also known as an individual 401(k) or a one-participant 401(k), is designed for self-employed people who have no employees other than a spouse. The plan allows these small-business owners to salt away much more for retirement than they could stash in a traditional IRA or even a SEP IRA -- another generous retirement plan designed for the self-employed -- while avoiding the expense and paperwork of setting up a full traditional 401(k) plan.

Solo 401(k) Contribution Limits for 2019

The maximum amount a self-employed individual can contribute to a solo 401(k) for 2019 is $56,000 if he or she is younger than age 50. Individuals 50 and older can add an extra $6,000 per year in "catch-up" contributions, bringing the total to $62,000. (Amounts are higher for 2020.) Whether you're permitted to contribute the maximum, though, will be determined by your self-employment income.

You are allowed to sock away so much because you can make contributions as both an employee and an employer, though each type of contribution to a solo 401(k) has its own IRS rules.

For instance, you can contribute up to $19,000 for 2019 as an employee (or $25,000 if you're 50 or older), even if that is 100% of your self-employed earnings for the year. Contributions are made on a pre-tax basis, although some solo 401(k) providers also offer a Roth 401(k) option that allows you to invest some or all of your contributions on an after-tax basis. Pre-tax contributions and their earnings will be taxed as regular income when withdrawn in retirement; Roth contributions will be tax-free in retirement.

In addition, you effectively can contribute up to 20% of your net self-employment income as an employer (your business income minus half your self-employment tax), though those contributions must be made with pre-tax dollars. These pre-tax contributions lower your taxable income and help cut your tax bill.

To set up a solo 401(k), you just complete an application to open one with a financial institution, says Todd Youngdahl, a certified financial planner in Falls Church, Va. Most large investment firms have such accounts available for business owners, he says. Youngdahl recommends Fidelity because it does not charge a fee to open a solo 401(k), nor does it charge annual plan fees. You can invest the money in mutual funds, certificates of deposit or other investments offered by the plan provider.

Employee contributions generally must be made by the end of the calendar year, but you have until the tax-filing deadline to make employer contributions.

A solo 401(k) can help you build a sizable nest egg. Say a 30-year-old contributes $10,000 a year to a solo 401(k) and has an annual return of 6%. By age 65, he or she will have contributed $350,000, but the nest egg will have grown to nearly $1.2 million.

Though a solo 401(k) takes little paperwork to set up, you should be aware that once your plan exceeds $250,000 in assets, you must file Form 5500 with the IRS every year, according to Jim Shagawat, a certified financial planner in Paramus, N.J.

Who Should Invest in a Solo 401(k)?

Mark Beaver, a certified financial planner in Dublin, Ohio, says a solo 401(k) can be a very good option for someone who has self-employment income and is trying to maximize their pre-tax retirement savings.

It's also a good savings option for someone who works for a company that has a 401(k) plan but who also does contract work on the side, says Scott Frank, a certified financial planner in Encinitas, Calif.

Just keep in mind that 401(k) contribution limits apply per person, not per plan. If your solo 401(k) is for a side job, and you're also participating in a 401(k) at your day job, the contribution limits apply across all plans, not each individual plan.

Most Popular

Are You Still Chasing the Almighty Dollar, Even Though You Have Plenty to Retire?
retirement

Are You Still Chasing the Almighty Dollar, Even Though You Have Plenty to Retire?

In our experience, many have saved enough money to retire comfortably. Yet too many worry about their money running out and want more. Maybe it’s tim…
May 6, 2021
Child Tax Credit 2021: Who Gets $3,600? Will I Get Monthly Payments? And Other FAQs
Coronavirus and Your Money

Child Tax Credit 2021: Who Gets $3,600? Will I Get Monthly Payments? And Other FAQs

People have lots of questions about the new $3,000 or $3,600 child tax credit and the advance payments that the IRS will send to most families in 2021…
May 4, 2021
9 Tax Deadlines for May 17 (It's Not Just the Due Date for Your Tax Return)
tax deadline

9 Tax Deadlines for May 17 (It's Not Just the Due Date for Your Tax Return)

Between due dates for extension requests, IRA or HSA contributions, and other deadlines, there's more to do by May 17 than just filing your federal in…
May 4, 2021

Recommended

7 Money-Smart Ways to Spend Your Tax Refund
Tax Breaks

7 Money-Smart Ways to Spend Your Tax Refund

Since this year's tax deadline was pushed back to May 17, many people are just now filing their tax return. That means there are a lot of tax refunds …
May 8, 2021
33 States with No Estate Taxes or Inheritance Taxes
retirement

33 States with No Estate Taxes or Inheritance Taxes

Even with the federal exemption from death taxes raised, retirees should pay more attention to estate taxes and inheritance taxes levied by states.
May 6, 2021
9 Tax Deadlines for May 17 (It's Not Just the Due Date for Your Tax Return)
tax deadline

9 Tax Deadlines for May 17 (It's Not Just the Due Date for Your Tax Return)

Between due dates for extension requests, IRA or HSA contributions, and other deadlines, there's more to do by May 17 than just filing your federal in…
May 4, 2021
Saver's Credit: A Retirement Tax Break for the Middle Class
Tax Breaks

Saver's Credit: A Retirement Tax Break for the Middle Class

Your retirement contributions could be the key to a lower tax bill.
May 3, 2021