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Solo-K - Contributions

Even with the advent of Solo-K plans, it seemed as though many CPAs still recommended their self-employed clients to create a SEP-IRA (self-directed or not), rather than a Solo-K. Sure, in the early years, many CPAs were probably not aware of the Solo-K. Fewer probably knew how they were to be operated and administered. Even more probably recommended to their clients the SEP-IRA as they viewed it as the easiest and with the path of least resistance. 


However, in almost all cases, the Solo-K outshines any other similar plan. Both in overall benefits and, specifically with new contributions. The SEP-IRA does not compare to the Solo-K in not only benefits but also contributions limits.  


Contribution Buckets


I have found that sometimes the best way to visually explain how the self-employed individual makes contributions is to explain the contribution options in the form of "buckets." Most people will have 2, but some others may have 3, 4 or 5. Most, but not all, Solo 401(k) plans can and should have at least two of these three buckets.   


Bucket #1 -- Elective Deferrals


Think of the contributions that you personally make. Most of us have, at one time or another, worked in a W-2 job where we either made 401(k) contributions or at least were made aware of this opportunity. If you made these contributions from your paycheck, these are what are called elective deferrals. In most employer plans, you have the contributions deducted from your paycheck before taxes (pre-tax) which results in a reduction in your taxable income. Many employers are starting to permit their employees to also have the option of making Roth elective deferrals. 


A user-friendly Solo-K Contribution Calculation Worksheet (courtesy of Fidelity) is at the bottom of this page. While there are different methods to calculate contributions for the sole-proprietor, I like this attached worksheet. 


Want something easier? Feel free to use our PGI Solo-K Contribution Calulator as well!

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Being self-employed, you have the same ability to make these elective deferrals to your Solo-K. You can make the same types of contributions (and, possibly, even additional types of contributions) like that old W-2 401(k) plan!


Any Business Type Permitted 


One confusing aspect for some is the concept of a sole-proprietorship or LLC (pass-through) making elective deferrals when there is no payroll. Again, most of us have had payroll deductions in an employer's 401(k) plan, but struggle with the vision of how one makes elective deferral contributions as a non-incorporated sole-proprietorship.  


Bottom line: Regardless of whether you are a sole proprietorship or any other business structure, you will be able to make Elective Deferral contributions to your Solo-K.


2019 Elective Deferral Contribution Limits 


For 2019, the elective deferral contribution limits are $19,000 for someone under the age of 50. For those individuals over the age of 50, the elective deferral contribution limits are $25,000.   


2020 Elective Deferral Contribution Limits


For 2020, the elective deferral contribution limits are $19,500 for someone under the age of 50. For those individuals over the age of 50, the catch-up contribution is an additional $6,500, for a total elective deferral contribution maximum of $26,000.     



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Bucket #2 - Employer Contributions/Profit Sharing Bucket #2 - Employer Contributions/Profit Sharing

A business is permitted to make a full profit sharing contribution or coordinate its contribution benefit with an Elective Deferral contribution by the participant. Regardless, the maximum contribution from either profit sharing or profit-sharing/elective deferral contributions is capped at $62,000 for 2019. If your business is a spouse/spouse owned business with qualifying income, both spouses could contribute up to $62,000 (or $124,000 combined).  


For 2020, the employer (e.g., sole -proprietorship, corporation) can make matching and non-matching contributions to the Solo-K plan on behalf of the participant. The contributions can exceed the participant's elective deferrals. The overall contribution limit to the Solo-K is now 100% of the participant's compensation or $57,000 whichever is lower. If over the age of 50, the overall contribution limit is now $63,500. This does include the employee's "catch-up" contribution.


Bucket #3 - After-Tax Contributions


After-tax contributions are not elective deferrals, nor are they employer matching or profit-sharing contributions. They are also not Roth contributions, but can be converted to Roth funds in the plan! They are After-Tax Contributions!  


Confused? Don't be. Read more on the benefits of After-Tax Contributions


One of the great benefits of the Solo-K is that while you will be making new contributions based on self-employment earnings, you are able to "rollover" or transfer other types of funds from other qualifying plans. Typically, most self-employed individuals may be rolling over an IRA or an old employer's 401(k), 403(b), 457 or pension plan.   


While the funds of an old employer's Roth 401(k) plan can be rolled over into your Solo-K, it is not permissible to rollover a Roth IRA into your Solo-K.

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