Contribution limits for a Solo 401(k) are the lesser of $58,000 in 2021 ($57,000 in 2020) or 25% of your net adjusted self-employed income. This total rises to $64,500 in 2021 ($63,500 in 2020) if you’re 50 or older. This includes contributions as both an employee and as an employer—as a self-employed individual, you are both “employer” and “employee.”
As an employee, you can contribute up to $19,500 in 2020 and 2021, or up to $26,000 if you’re 50 or older. As an employer, you can only contribute up to 25% of your net adjusted self-employed income. The IRS calculates this as your net earnings from self-employment minus one-half of your self-employment tax and employee contributions you made for yourself.
Together, employee and employer contributions cannot exceed $58,000 or $64,500 for those 50 or older in 2021. In 2020, these totals were $1,000 lower: $57,000 or $63,500 for those 50 or older.
You have until the tax filing deadline for that tax year to complete all contributions (April 15th, or October 15th if you file for an extension), but you must establish the 401(k) plan before the end of a calendar year to make contributions for that year.
With a Solo 401(k), depending on your salary and age, you could contribute $57,000 per year or $63,500 for those 50 or older in 2020.
For 2021, the contribution limit increased to $58,000 or $64,500 if age 50 or over.
Solo 401k contributions are based net- income from self-employment (i.e. you can’t contribute more than you make).
Contributions to a Solo 401(k) consist of two types
Elective Deferral (401k) also known as Employee Contributions. The maximum elective deferral is $19,500 in 2020, or $26,000 if age 50 or older. For 2021, the elective deferral remains the same at $19,500, or $26,000 if age 50 or older.
Profit sharing also known as Employer Contribution. This amount cannot exceed $57,000 for 2020. For 2021, this amount cannot exceed $58,000.
If your business type is a Corporation, the maximum profit sharing contribution is 25% of gross income and still subject to the above profit sharing amounts.
If your business type is a Sole Proprietor/Partnership, the maximum profit sharing contribution is 20% of net income and still subject to the above profit sharing amounts.
Solo 401(k) Contribution Limits If You Participate In Another 401(k) Plan
If you have a Solo 401(k) but you also work for another company and participate in the company’s 401(k), the limits on 401(k) employee contributions are cumulative across all your accounts. As an employee, you can only contribute up to $19,500 ($26,000 if you’re 50 or older) across all of your 401(k) plans.
However, employer contribution limits are based on plans, meaning two unrelated employers can contribute up to the employer maximum annually. As an employer, you can contribute up to 25% of your net-adjusted self-employment income or $58,000 in 2021 ($57,000 in 2020).
Note that anyone who is considering a Solo 401(k) to save earnings from a side job for retirement should check first with a tax professional or a CPA, who can help confirm your proper eligibility for the account, including your self-employment status.