This post discusses how much self-employment income a self-employed individual needs to maximize solo 401k contributions for a Partnership, Multi-Member LLC (1065/K-1).
Video Slides:
Scenario #1 – Maximize Solo 401k Contributions While Keeping Self-Employment Income as Low As Possible
Assumptions
- Self-employed business taxed as partnership/multi-member LLC taxed as a partnership
- One Participant
- Does not make contributions to another plan (“day job” 401k)
- Contribute 100% of self-employment compensation (i.e. Line 14 of K-1 less one-half of self-employment tax)
- Only Make Employee Contributions (Salary Deferrals)
Self-Employment Income Needed:
- Line 14 of K-1: $24,211 (or $32,281 if 50 or older)
- Self-Employment Compensation: $22,500 (or $30,000 if 50 or older)
Contribution Amounts:
- Employee (Pre-tax or Roth): 100% of Self-Employment Compensation up to $22,500 for 2023 or $30,000 if age 50 or older [100% of Self-Employment Compensation up to $22,500 for 2023 plus $7,500 catch-up contribution if age 50 or older]
- Employer Pre-tax Contributions: $0
- Voluntary After-Tax: $0
Scenario #2 – Maximize Solo 401k Contributions While Keeping Self-Employment Income Low
Assumptions
- Self-employed business taxed as partnership/multi-member LLC taxed as a partnership
- One Participant
- Does not make contributions to another plan (“day job” 401k)
- Contribute 100% of self-employment compensation (i.e. Line 14 of K-1 less one-half of self-employment tax)
- Make Employee (Salary Deferrals) and Employer (Profit-Sharing) Contributions
Self-Employment Income Needed:
- Line 14 of K-1: $30,263 (or $40,351 if 50 or older)
- Self-Employment Compensation: $28,125 (or $37,500 if 50 or older)
Contribution Amounts:
- Employee (Pre-tax or Roth): Up to (i) $22,500 for 2023 or (ii) $30,000 if age 50 or older [100% of Self-Employment Compensation up to $22,500 for 2023 plus $7,500 catch-up contribution if age 50 or older]
- Employer Pre-tax Contributions: (i) $5,625 or (ii) $7,500 if age 50 or older [20% of Self-Employment Compensation provided total contributions don’t exceed overall limit]
- Voluntary After-Tax: $0
Scenario #3 – Maximize Pre-Tax Solo 401k Contributions
Assumptions
- Self-employed business taxed as partnership/multi-member LLC taxed as a partnership
- One Participant
- Does not make contributions to another plan (“day job” 401k)
- Maximize Pre-tax Solo 401k Contributions to Reduce Taxable Income
- Make Employee (Salary Deferrals) and Employer (Profit-Sharing) Contributions
Self-Employment Income Needed:
- Line 14 of K-1: $230,520
- Self-Employment Compensation: $217,500
Contribution Amounts:
- Employee (Pre-tax): Up to (i) $22,500 for 2023 or (ii) $30,000 if age 50 or older [100% of Self-Employment Compensation up to $22,500 for 2023 plus $7,500 catch-up contribution if age 50 or older]
- Employer Pre-tax Contributions: $43,500 [20% of Self-Employment Compensation provided total contributions don’t exceed overall limit]
- Voluntary After-Tax: $0
Scenario #4 – Maximize Roth Solo 401k Contributions
Assumptions
- Self-employed business taxed as partnership/multi-member LLC taxed as a partnership
- One Participant
- Does not make contributions to another plan (“day job” 401k)
- Goal is to Maximize Roth Solo 401k and/or Voluntary After-Tax Contributions
- Note: Assume all Employer Contributions made as Pre-tax because making Employer Contributions as Roth contributions offers no substantive advantage over Mega Backdoor Roth Solo 401k Contributions.
Self-Employment Income Needed:
- Line 14 of K-1: $71,018 (or $79,088 if 50 or older)
- Self-Employment Compensation: $66,000 (or $73,500 if 50 or older)
Contribution Amounts:
- Employee (Pre-tax): Up to (i) $22,500 for 2023 or (ii) $30,000 if age 50 or older [100% of Self-Employment Compensation up to $22,500 for 2023 plus $7,500 catch-up contribution if age 50 or older]
- Employer Pre-tax Contributions: $0
- Voluntary After-Tax: $43,500 [Lesser of Self-employment compensation or the overall limit of ($66,000 for 2023) reduced by any employee or employer contributions made to the Solo 401k]
