You can contribute to both an employer-sponsored 401(k) plan and a solo 401(k) plan if you meet the eligibility requirements. A solo 401(k) is a retirement savings plan for self-employed individuals or sole proprietors. If a person is eligible for both plans, they can maximize their retirement savings by contributing to both accounts. The maximum contribution limit for employer-sponsored 401(k) plans is set by the IRS each year. For 2023, the limit is $22,500, plus an additional $7,500 catch-up contribution for those age 50 or older. The maximum contribution limit for solo 401(k) plans is also set by the IRS each year. For 2023, the limit is $66,000, plus an additional $7,500 catch-up contribution for those age 50 or older.
Employer-Sponsored 401(k) Contribution Limits
Employer-sponsored 401(k) plans have annual contribution limits set by the Internal Revenue Service (IRS). These limits apply to both employee and employer contributions combined:
- 2023 limit: $66,000 ($73,500 for individuals age 50 and older)
- Catch-up contributions (for individuals age 50 and older): $7,500
If your employer’s 401(k) plan allows employee after-tax contributions, the total combined limit (employee and employer contributions) is:
- 2023 limit: $71,000 ($78,500 for individuals age 50 and older)
| Contribution Type | 2023 Limit | Age 50+ Catch-up |
|---|---|---|
| Employee Pre-Tax | $22,500 | $7,500 |
| Employer Match | $66,000 | N/A |
| Employee After-Tax | $49,000 | N/A |
| Total Combined | $66,000 | $73,500 |
It’s important to note that these limits apply to the total amount contributed to all 401(k) plans from a single employer. If you have multiple employer-sponsored 401(k) plans, the combined contributions cannot exceed the annual limits.
Solo 401(k) Contribution Limits
Solo 401(k) plans allow self-employed individuals to contribute more to their retirement savings than traditional IRAs. However, there are limits on how much you can contribute each year.
The contribution limits for solo 401(k) plans are as follows:
- Employee contributions: Up to $22,500 in 2023 ($30,000 if you are age 50 or older)
- Employer contributions: Up to 25% of your net self-employment income, up to a maximum of $66,000 in 2023 ($73,500 if you are age 50 or older)
You can contribute to both your employee and employer accounts. However, the total amount of your contributions (employee + employer) cannot exceed the annual contribution limit.
| 2023 | 2024 | |
|---|---|---|
| Employee contributions | $22,500 | $23,500 |
| Employer contributions | 25% of net self-employment income, up to $66,000 | 25% of net self-employment income, up to $75,000 |
Eligibility Requirements for Solo 401(k)
A solo 401(k) is a retirement savings plan that is available to self-employed individuals and small business owners. Solo 401(k) plan contributions offer tax advantages to eligible individuals, and they can be a valuable tool for saving money for retirement. However, there are certain eligibility requirements that you must meet in order to contribute to a solo 401(k) plan.
- You must be self-employed. This means that you must earn income from your own business or from freelance work.
- You must not have any employees. If you have even one employee, you are not eligible to contribute to a solo 401(k) plan.
- You must net less than a certain amount of income. The income limits for solo 401(k) plans vary from year to year, so it is important to check with the IRS for the most current limits.
If you meet all of the eligibility requirements, you can contribute to a solo 401(k) plan. There are two types of contributions that you can make: employee contributions and employer contributions. Employee contributions are deducted from your paycheck before taxes are taken out. Employer contributions are made by your business on your behalf. Both types of contributions are tax-deductible, up to certain limits.
To make employer contributions to your solo 401(k) plan, you must establish the plan as an eligible retirement plan. This means that you must file Form 5500-EZ with the IRS each year. In addition, you must contribute to the plan on the same terms and conditions that you offer to your employees if you have any.
| Employee Contributions | Employer Contributions | |
|---|---|---|
| Contribution Limits | $22,500 in 2023, plus a catch-up contribution of $7,500 for individuals age 50 and older | 25% of your net income, up to a maximum of $66,000 in 2023, including employee contributions |
| Deductibility | Tax deductible from your income | Tax deductible from your business income |
Contributing to Both Employer 401(k) and Solo 401(k)
Individuals who have access to an employer-sponsored 401(k) plan and are self-employed may consider contributing to both a solo 401(k) and their employer’s 401(k) plan.
Tax Implications
Contributions to both plans are tax-advantaged:
- Employer 401(k) contributions are made pre-tax, reducing current taxable income.
- Solo 401(k) contributions made by self-employed individuals are tax-deductible as business expenses.
Withdrawals from both plans are subject to income tax when made. However, withdrawals from a solo 401(k) may also be subject to self-employment tax.
Considerations
- Contribution Limits: There are different contribution limits for employer 401(k)s and solo 401(k)s.
- Employer Matching: Employer contributions to a 401(k) may be matched by the employer, typically up to a certain percentage of the employee’s contribution.
- Investment Options: Employer 401(k)s typically offer a limited range of investment options, while solo 401(k)s offer more flexibility and allow self-directed investments.
- Fees: Employer 401(k)s often charge account management fees, while solo 401(k)s may have higher administrative fees.
Comparison of Contribution Limits
| Plan Type | Employee Contribution Limit | Employer Contribution Limit |
|---|---|---|
| Employer 401(k) | $22,500 ($30,000 for those age 50 and older) | Varies depending on plan |
| Solo 401(k) | $66,000 (or 100% of self-employment net income, whichever is less) | N/A |
It’s important to consult with a financial advisor to assess the best course of action based on individual circumstances and financial goals.
Well, there you have it! Now you’re armed with the knowledge you need to navigate the complex world of employer 401ks and solo 401ks. Remember, it’s all about maximizing your savings while minimizing your tax burden. If you have any more questions or want to dive even deeper into the world of retirement planning, be sure to swing by again soon. We’ve got a wealth of information waiting for you. Thanks for reading!