“My business made $10,000 this year, so I can contribute $10,000 to my Solo 401(k), right?”
Not necessarily. I recently had a client ask this exact question.
He operates as a single-member LLC (reported on Schedule C) and expects to earn about $10,000 in net profit this year. His goal was simple: contribute $10,000 to his Solo 401(k) and reduce his taxable income.
Unfortunately, it’s not that straightforward.
One of the biggest misconceptions about Solo 401(k)s is that your contribution limit is simply equal to your business profit.
For a self-employed individual without an S corporation election:
• Your employer contribution is not based on your Schedule C net profit alone.
• It is calculated using your adjusted net earnings from self-employment, after considering the deduction for self-employment tax.
• The type of contribution (employee vs. employer) and your business structure both affect the maximum amount you can contribute.
Another question came up:
“What if I only have $5,000 in my business bank account? Can I still contribute $10,000?”
Your bank balance does not determine your contribution limit.
Your eligibility is based on your qualified compensation, not the amount of cash currently sitting in your business account. However, you’ll still need sufficient cash available to actually make the contribution.
These are four different concepts that are often confused:
✔️ Business profit
✔️ Business cash balance
✔️ Eligible compensation
✔️ Solo 401(k) contribution limit
Understanding the difference can help you maximize your retirement savings while avoiding excess contribution corrections.
The best time to plan your Solo 401(k) contribution is before year-end, not when you’re preparing your tax return.
Have questions about Solo 401(k) contributions? Feel free to leave a comment or send me a message.
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