What is Solo 401k Calculator? How Much Can I Contribute to a Solo 401k? [2024]

A solo 401k, also known as an individual 401k or a one-participant 401k, is a retirement savings account designed specifically for self-employed individuals and business owners with no full-time employees (exception of a spouse).

It allows sole proprietors, independent contractors, and owner-only small businesses to contribute significantly more pre-tax and tax-deferred dollars toward retirement than Traditional or Roth IRAs.

Some key features of a solo 401k plan include:

• Available only to self-employed individuals or businesses with no full-time W-2 employees (exception of a spouse)
• Acts like a regular 401k, but is customized for an owner-employee
• Allows for high contribution limits compared to other retirement accounts
• Contributions can be pre-tax, Roth after-tax, or a combination
• Assets grow tax-deferred
• Loans available up to 50% of vested balance or $50,000, whichever is less
• Distributions allowed after age 59 1⁄2 or for specific reasons

Why Open a Solo 401k?

There are several advantages to opening a solo 401k for retirement savings:

• Significantly Higher Contribution Limits: A solo 401k allows you to contribute as both employee and employer, which means you can contribute up to $61,000 per year if you’re under age 50 or $67,500 if over 50. The contributions can be 100% tax deductible for the business. This is significantly higher than the $6,000 IRA limit or even $20,500 403b/401k employee contribution limit.
• Tax-Deferred Growth: Investment earnings in a solo 401k grow tax-deferred, meaning you don’t pay taxes on capital gains, interest or dividends until you take withdrawals in retirement. Over decades, this tax protection allows for greater accumulation.
• More Affordable and Flexible: Solo 401ks have become a popular choice because they are more affordable to establish and maintain versus a full 401k. Annual filing of a Form 5500 is not required. They also offer flexible vesting schedules.
• Allows Loans: You can borrow up to 50% of your solo 401k balance (up to $50,000) via a loan provision. Loans are generally repaid at a reasonable interest rate over 5 years.
• Portable: You can roll over or transfer solo 401k funds into another eligible retirement plan, maintaining the tax-deferred status if you happen to change jobs or want to consolidate accounts.

A solo 401k works very similarly to a traditional 401k, except it is designed specially for an individual business owner or independent contractor operating without full-time W-2 staff. The key benefit is the higher savings capacity it provides through combined employer/employee contributions.

Solo 401k Contribution Limits

The IRS sets guidelines on total contributions allowed to solo 401k plans per year:

Employee Salary Deferral Contributions:

• Up to $20,500 in 2023 if under age 50
• An additional $6,500 catch-up contribution allowed if aged 50+

Employer Non-Elective Contributions:

• Up to 25% of compensation as defined by IRS (W-2 wages minus half of self-employment tax deduction)
• Combined employee + employer contribution limit = $61,000 if under age 50; $67,500 if over age 50

Solo 401k plans also allow you to contribute to the account in different ways. You can make traditional pre-tax contributions that lower your taxable income now and are taxed later in retirement.

Or you can make Roth after-tax contributions that do not reduce current taxes but allow for tax-free growth and distributions. Many choose to utilize both contribution types and allocate a percentage of funds to pre-tax vs Roth based on their current income and predicted future tax rates.

The solo 401k has higher elective deferral limits compared to SEP IRAs ($61,000 vs $61,500) but also requires slightly more administration. However, the solo 401k may make more sense depending on income sources, ability to make company contributions, or desire for loan provisions.

How Does a Solo 401k Calculator Work?

A solo 401k calculator is an online tool that allows you to estimate the total contribution amount you are eligible for based on your net business income and age. It is helpful for small business owners and independent contractors to understand how much they can potentially save in their solo 401k plan.

Here is an overview of how most solo 401k calculators work:

Step 1. Input your net self-employment income amount as defined by the IRS, which is your:

• Self-employment, 1099 income or W-2 wages
• Minus: Half your self-employment taxes

Step 2. Input your age to account for catch-up contributions if over 50.

Step 3. The calculator auto determines both your employee and employer contributions based on IRS guidelines:

• Employee Deferral: Up to 100% of compensation or $20,500 ($27,000 if 50+)
• Employer Non-Elective Contribution: Up to 25% of W-2 wages minus half SE taxes

Step 4. It combines both contribution amounts and indicates the total solo 401k contributions you can make for the year.

Advanced solo 401k calculators may allow you to input additional details like your expected contributions and distributions. They may also estimate the future value of your account over 1 year, 5 years and up until a selected retirement age.

Using an online contribution calculator can simplify the process of understanding solo 401k rules and savings potential. It’s a quick way to estimate the tax-advantaged retirement funding capacity your solo 401k provides.

How to Set Up a Solo 401k Plan

Here is an overview of the basic steps involved to establish and start making contributions to a solo 401k plan:

Choose a Provider

• Self-directed plan providers like Etrade, Schwab, Fidelity, and Vanguard all offer solo 401k account options.
• Ensure there are quality, low-cost investment choices available.
• Compare account fees, transaction charges, etc across providers.

Set Up the Account Paperwork

• Fill out the application and payroll authorization forms to establish a new solo 401k account.
• Designate beneficiaries, select investments, etc.
• No need to file a formal trust document with the IRS.

Obtain an EIN (If Needed)

• Your Social Security number can serve as your EIN for the solo 401k account.
• If preferring extra business identity protection, apply for a free EIN from IRS.

Make Contributions

• Contribute funds as the employee via salary deferrals and/or employer via profit sharing.
• Contributions for a tax year can be made until your tax filing deadline, plus extensions.

While easy to establish, be sure to understand IRS solo 401k compliance responsibilities regarding contributions, non-discrimination testing, required minimum distributions, and annual filing requirements.

Solo 401k vs SEP IRA vs SIMPLE IRA

Self-employed individuals looking to maximize retirement savings often compare the solo 401k plan against two other popular account options – the SEP IRA and SIMPLE IRA. Here is an overview comparing the key features:

Solo 401k

• Only for self-employed with no full-time W2 employees (exception of spouse)
• Allows up to $61k ($67.5k over 50) in total annual contributions
• Must file annual IRS Form 5500 once over $250k in assets
• Loans allowed from the 401k balance
• More administrative complexity than an IRA

SEP IRA

• Open to any self-employed individuals and small businesses
• Allows up to $61,000 in employer contributions per year
• No annual IRS filings required at any asset level
• All contributions are employer only; employees cannot contribute
• Does not allow for loans

SIMPLE IRA

• For self-employed or small employers with 100 or fewer employees
• Employee contribution limit of $14,000 + employer match required
• Available even if sponsoring another retirement plan
• No annual filing requirement
• Can be set up as late as October 1st of the year

The solo 401k is best for someone who wants both employer and employee contributions. The SEP IRA is simpler and likely the better choice if you have full-time W2 employees. The SIMPLE IRA is the most basic small business retirement plan.

Keep in mind it is possible to have both a solo 401k and a SEP IRA or SIMPLE IRA. However, the combined contribution limits to all would still apply based on your income.

Solo 401k Loan Provisions and Rules

One unique feature the solo 401k offers over IRA accounts is the ability to take out a loan from yourself using your 401k balance. Here are some key aspects around solo 401k plan loans:

Loan Amounts

• Can borrow up to 50% of your solo 401k vested account balance
• Maximum loan amount capped at $50,000
• Most providers will allow one open loan at a time

Interest Rates

• Interest rate must be similar to what you may be able to attain in the open market
• Typically seeing solo 401k loan rates from Prime + 1% to 3%

Loan Terms

• Loan payback term maximum is 5 years
• Payments made go directly back into your 401k balance
• If employment ends, full loan balance typically due immediately

Qualifications

• You must have sufficient funds in your solo 401k plan (> $10,000)
• Hardship withdrawals differ in rules from loan provisions

Failing to make loan payments as scheduled can default the loan balance, count as a distribution, add penalties, and negatively impact your credit. Solo 401k loans allow access to your savings if critically needed but should be used cautiously.

When Can I Take Solo 401k Distributions?

As a retirement vehicle designed for long-term savings, the IRS applies rules and potential penalties to discourage accessing solo 401 funds too early. Typical scenarios when you can begin withdrawing without the early penalty include:

• Age 59 1⁄2: Reached the standard retirement milestone age to start taking distributions.
• Separation of Service: No longer operating the sponsoring self-employed business full-time.
• Disability: Physician deems your disability prevents gainful employment.
• Death: Beneficiaries and next-of-kin take required minimum distributions.

Outside of those scenarios, solo 401k distributions taken prior to age 59 1⁄2 trigger the 10% early withdrawal penalty along with being subject to ordinary income tax rates for that year.

For example, taking $10,000 from your solo 401k at age 45 would add $1,000 early withdrawal penalty + $2,000 in federal income taxes (based on a 22% rate). This totals an immediate 30% reduction in value in additional to losing further tax-deferred investment growth.

Some common exceptions to the 10% early withdrawal penalty include using funds towards:

• Medical expenses exceeding 7.5% of AGI
• Certain military obligations
• Payment of back taxes
• College or vocational school tuition

Exceptions should be validated carefully before accessing 401k funds before age 59 1⁄2 unless facing critical financial distress worth the taxes and penalties. Generally, your balance is better off continuing tax-deferred growth without distribution until older ages.

Solo 401k Required Minimum Distributions (RMD)

Once reaching age 72, strict IRS rules require you to begin withdrawing minimum amounts from your solo 401k account to avoid penalties:

• The RMD is based on life expectancy factor and total account balance
• Withdrawals amounts generally increase each subsequent year
• 50% penalty applies to any shortfall in distributions
• No RMD while still working for sponsoring employer

Providers send notifications as you near required minimum distribution age. Some tips when managing solo 401k RMDs:

• Take your first RMD by April 1st of year after turning 72
• Subsequent RMDs must be withdrawn by December 31st of that year
• Can satisfy RMDs by taking more than the minimum
• Inherited solo 401k balances also have their own RMD rules

Conducting yearly RMDs applies to most retirement accounts. Required minimum distributions ensure taxes eventually get paid on your traditional pre-tax retirement contributions and investment gains that have grown tax-deferred over decades.

Filing Solo 401k Tax Returns

Solo 401k rules require filing annual IRS Form 5500 once plan assets exceed $250,000 to stay in compliance. Some key 5500-EZ form responsibilities include:

Who Must File

• Solo 401k plans with total assets > $250,000 at year end
• Final return also required even if under threshold

Deadline

Form 5500-EZ due by the last day of the 7th month after plan year ends. For calendar year plans, this qualifies as July 31.

What it Covers

• Plan financial statements
• Information on required contributions made
• Funded status and balances

Filing Method

IRS Form 5500-EZ filings can submit electronically or by paper, but electronic is recommended. Failure to file an annual return when required can lead to IRS penalties.

Most solo 401k providers automatically issue 1099-R forms reporting any taxable distributions exceeding $10. But individuals must track requirements around contribution amounts, administration, and mandatory IRS reporting timelines.

Solo 401k Frequently Asked Questions (FAQs)