Example 1: Solo 401(k) For An Unincorporated Business
For example, Tom, age 40, owns his own business and operates as a Sole Proprietor. He has not been saving for retirement but recently heard he could have his own 401(k). Tom wants to know the maximum amount of money that he could contribute to a Solo 401(k). Tom 's adjusted net profit for 2005 was $50,000. The example below shows the maximum amount Tom may contribute to his Solo 401(k) for 2006.
Step 1: Adjusted Net Profits (from IRS Form 1040-Schedule C) $50,000
after deduction for 1/2 Self-Employment Tax
Step 2: Enter Profit Sharing Contribution percentage .25
(not to exceed 25%)
Step 3: Add "1" to the percentage in Step 2 1.25
Step 4: Adjusted Net Profit (Step 1) ÷ Step 3 $40,000
Step 5: Multiply Step 4 by Step 2
Tom's Profit Sharing Contribution = $10,000
Step 6: Subtract Step 5 from Step 1 $40,000
Step 7: Enter lesser of allowable salary deferral
(from the chart below) or Step 6
Tom's Salary Deferral = $15,000
(If Tom were age 50 or over by December 31, he could also make the catch
up contribution of $5,000)
Step 8: Profit Sharing Contribution (from Step 5)
+ Salary Deferral (from Step 7)
Tom's Maximum Contribution = $ 25,000
Example 2: Solo 401(k) For An Incorporated Business
John, age 55, also owns his own business. John is interested in a Solo 401(k), but his business is incorporated. Since John is over age 50, he is allowed to make a catch-up contribution. The example below shows the maximum amount John may contribute for 2006 to his Solo 401(k).
Step 1: Enter net income as reported on IRS Form W-2 $50,000
Step 2: Enter Profit Sharing Contribution percentage
(not to exceed 25%) .25
Step 3: Multiply Step 1 by Step 2
John's Profit Sharing Contribution = $12,500
Step 4: To determine the allowable Salary Deferral, enter the
lesser of allowable salary deferral (from the chart below)
or 100% of earned wages $15,000
+ Catch-up contribution if age 50 or over $5,000
John's Salary Deferral = $20,000
Step 5: Profit Sharing Contribution (Step 3)
+ Salary Deferral (Step 4)
John's Maximum Contribution = $ 32,500
These examples are provided for illustration purposes only. These figures may be estimated for planning purposes. Consult your financial advisor or tax professional to find the amount of your maximum contribution.
Allowable Elective Salary Deferrals and Catch-up Contribution Limits
Deferral Limit Catch-up Limit
2004 $13,000 $3,000
2005 $14,000 $4,000
2006 $15,000 $5,000
2007 indexed indexed