From a contribution side, the self-employed primarily establish a solo 401k plan to make tax-deductible contributions. If not eligible for the tax deduction, they decide not to contribute to the plan at all. This is often the case because they are not aware the contribution can still be made just not deducted. The deduction eligibility rules differ from the contribution eligibility rules.
Solo 401k Contribution Eligibility
Whether the solo 401k contribution is tax deductible or not, the solo 401k participant first has to be eligible to contribute to a solo 401k plan. The participant must have self-employment income from services rendered. The 70 1/2 age limit does not apply to solo 401k plans which means the participant can contribute past age 70 1/2 as long as she has self-employment income.
Solo 401k Contribution Limit
The solo 401k participant may contribute up to 100 percent of her eligible compensation up to the statutory maximum amount per year—$55,000 for 2018 and $56,000 for 2019, plus an additional $6,000 catch-up contribution if age 50 or older.
All of the solo 401k participant’s contribution sources (i.e., pretax, Roth and voluntary after-tax) are aggregated for purposes of the annual contribution limits.
Solo 401k Deduction Eligibility
Once self-employment income eligibility is satisfied, part of all of the solo 401k contribution may be tax deductible. The following factor affects whether or not the solo 401k contribution is deductible (pretax).
- Contributing to other qualified plans such as a full-time employer 401k plan
Currently Contributing to a Full-Time Employer 401k Plan
Someone who is participating in or receiving contributions from a full-time employer 401k plan is an active participant. The IRS will know if you are also contributing to your day-time job 401k plan by reviewing box 13 (this box will be checked off) of your W-2 which is issued by your day-time job employer.