Updated: Feb 28
A one-participant 401(k) plan is sometimes called a:
The one-participant 401(k) plan isn't a new type of 401(k) plan.
It's a traditional 401(k) plan covering a business owner with no employees, orthat person and his or her spouse. These plans have the same rules andrequirements as any other 401(k) plan.
Contribution limits in a one-participant 401(k) plan
The business owner wears two hats in a 401(k) plan: employee and employer.
Contributions can be made to the plan in both capacities.The owner can contribute both:
Elective deferrals up to 100% of compensation (“earned income” in the case of a self-employed individual) up to the annual contribution limit:
$19,500 in 2020 and 2021, or $26,000 in 2020and 2021 if age 50 or over; plus
Employer nonelective contributions up to: 25% of compensation as defined by the plan, or for self- employed individuals.
Total contributions to a participant’s account, not counting catch-up contributions for thoseage 50 and over, cannot exceed $57,000 (for 2020; $58,000 for 2021).
Example: Ben, age 51, earned $50,000 in W-2 wages from his S Corporation in 2020. Hedeferred $19,500 in regular elective deferrals plus $6,500 in catch-up contributions to the 401(k) plan. His business contributed 25% of his compensation to the plan, $12,500.
Total contributions to the plan for 2020 were $38,500. This is the maximum that can be contributed to the plan for Ben for 2019.A business owner who is also employed by a second company and participating in its 401(k) plan should bear in mind that his limits on elective deferrals are by person, not by plan.
He must consider the limit for all elective deferrals he makes during a year.
You must make a special computation to figure the maximum amount of elective deferralsand nonelective contributions you can make for yourself. When figuring the contribution,compensation is your “earned income,” which is defined as net earnings from self-employment after deducting both, one-half of your self-employment tax, and contributions for yourself.
SOLO 401(K) BENEFITS
One of the main advantages is that contribution limits are typically the highest among retirement plans. Like an employer-sponsored 401(k), contributions can be made from the employee and employer.
With a solo 401(k), you wear both hats and can make contributions in both roles.