Rocket Dollar Knowledge Base

How much do I need to make to max out the contributions to my Self-Directed Solo 401(k)?

I want to max out my Self-Directed Solo 401(k). How much do I need to earn?

There are three types of contributions to your Self-Directed Solo 401(k): employee salary deferral, employer contribution or profit sharing, and after-tax.

The maximum employee salary deferral is $18,500 for 2018. You can contribute 100% of your income up to the $18,500 limit. Catch-up contributions of $6,000 are possible for persons aged 50 and over. The IRS calls these "elective deferrals".

If your business is an C Corp or LLC taxed as a corporation you can contribute 25% of your net profit from the business as the employer nonelective contribution (sometimes called the profit sharing contribution) to your Self-Directed Solo 401(k). You can make employer contributions up to $36,500. You'd need compensation (earned income) of $146,000 to make the full contribution of $55,000. Note that for an S-Corp, including an LLC taxed as an S-Corp, both your nonelective contributions and your profit sharing contribution need to come from your salary so if your goal is to maximize your Self Directed Solo 401(k) plan contributions you'll need to pay yourself a salary that is high enough to do both your nonelective contribution and your profit sharing contribution.

If your business is an LLC taxed as a sole proprietorship, a sole proprietorship, or a partnership you can contribute 20% of the net profit from the business as the employer contribution or profit sharing contribution to your Self-Directed Solo 401(k). You can make employer contributions up to $36,500. You'd need compensation (earned income) of $182,500 to make the full contribution of $55,000.

Your elective deferral and employer contributions can be pre-tax, to get a tax deduction, or Roth, with no tax deduction but the funds can be distributed at retirement age with no tax burden.

Another option available to a Self-Directed Solo 401(k) account holder is to add their spouse to their plan if the spouse is earning an income from the same business as the account holder. Adding the spouse to the plan allows for a doubling of the contributions. The spouse can make the same contributions as the account owner as long as the spouse has earned enough income. If your business is an S-Corp, C Corp, or LLC taxed as a corporation you can now contribute up to $110,000. To contribute the full amount the married couple would need to generate compensation (earned income) of $292,000 to make the full contribution of $110,000. If your business is an LLC taxed as a sole proprietorship, a sole proprietorship, or a partnership the married couple would need to generate compensation (earned income) of $365,000 to make the full contribution of $110,000.

You can have a Self-Directed Solo 401(k) even if you work a 9 to 5 for another company as long as you have a side business including a cash business or 1099 income. If you have a company sponsored 401(k) plan and Self-Directed Solo 401(k) you have even more tools to save for retirement and build wealth. If your company offers a match it may make sense to contribute to your company plan, get the matching contributions, and then make a profit sharing contribution to your Self-Directed Solo 401(k) from your side business or 1099 income.

If you're not contributing $55,000 (or $110,000 as a married couple) you may still be able to make after-tax contributions. See the article here on the Mega Roth.

As always, consult a tax advisor.