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Self-employed 401k FAQ: Which Solo 401k contributions function to lower my income? I ask because I want to keep my income below the threshold for the 199a tax deduction.
The threshold issue is that in order to set up a Solo 401k, one must be eligible (i.e. self-employed individual with no full-time w-2 employees working for any business owned by such person or a spouse if any).
If the goal is to make contributions to reduce taxable income now, the self-employed owner could make pre-tax Solo 401k employee contributions and/or Solo 401k employer contributions (which employer contributions are always pre-tax contributions0.
For example, for 2022 a solo 401k owner may contribute 100% of his or her self-employment compensation up to $20,500 (plus an additional $6500 if such person is 50 or older) as a pre-tax Solo 401k employee contribution (provided that such person is not making contributions to another plan such as a 401(k) plan that such might have through a day job).
On top of that, if such a person has the self-employment compensation to justify it, the Solo 401k owner may also make an employer contribution equal to 20% of the self-employment compensation provided that the total of all Solo 401k contributions does not exceed the lesser of self-employment compensation or the overall limit (e.g. $61,000 for 2022).