Solo-K Contribution Limits for 2020

For those of you who are self-employed, the IRS increased the contribution limits for 401(k) plans, including Solo-Ks, for 2020. These changes also positively affect 403(b), most 457 plans and government Thrift Savings plans well.

Contributions to your Solo-K are made into 2 buckets:

#1 – Elective Deferrals

Effective for January 1, 2020, the elective deferrals for your Solo-K has increased from $19,000 to $19,500.

If you are over the age of 50 during 2020, the “catch-up” contribution limit was increased from $6,000 to $6,500. As a result, the total elective deferral contribution (based on income, of course) and “catch-up” contribution is $26,000.

Elective deferrals can be made in either a pre-tax or Roth manner…or a combination thereof.

#2 – Profit-Sharing

Most people associate Profit Sharing as “Employer Contributions”, and understandably so. Employer contributions are based on the compensation paid to the self-employed individual, whether a sole proprietor (including a single-member, pass-through LLC), a multi-member LLC or corporation (C or S-Corp). Effective 2020, the maximum employer contribution that can be made is $37,500….this is regardless of whether you are under or over the age of 50 but, again, it is based on compensation paid to the participant.

If your business is….

Sole Proprietorship or Single-Member LLC — the maximum profit sharing the business is allowed to contribute is up to 20% of your IRS 1040 Schedule C income.

Corporation (C or Sub-S) or Multi-Member LLC — the maximum profit sharing the business is allowed to contribute is up to 25% of your W-2 or Partnership (multi-member LLC) income.

As a result, for 2020, here is the total amount of contributions that can be made:

Elective Deferral — $19,500

Profit Sharing — $37,500

“Catch-Up Contribution — $6,500

For someone under the age of 50, the total, maximum contribution from any and all sources is limited to $57,000.

For someone over the age of 50, the total, maximum contribution (plus catch-up contribution) from any and all sources is limited to $63,500.

*The $19,500 limit is what is referred to as your 402(g) limit.

**50 years of age is if you turn 50 years of age at any time during the 2020 year.

*** Total contributions from any and all sources may not exceed 100% of a participant’s compensation/income.

Spouse-Spouse Owned Business

Many self-employed businesses are spouse-spouse owned with both spouses participating in the business. Provided both spouses materially participate in the business, they are both eligible for the aforementioned elective deferral contributions. Again, based on qualifying compensation. This is an attractive feature to a spouse-spouse owned business for those who qualify.

As always, the information provided is not intended, nor should it be considered tax, legal, financial or investment advice. You should seek such advice from a professional in that field.