Solo 401(k)s allow for two types of contributions: (1) employee contributions; and (2) employer contributions. Both types of contributions have certain maximum amounts and other limitations.
- Employee Contributions. These are often called “elective deferrals” or “employee deferrals”. If you are under the age of 50 you can contribute a maximum of $24,500 and if you are over 50 you can contribute an additional $8,000 (total of $32,500). However, these amounts are limited to 100% of compensation or “earned income”.
- Employer Contributions. An employer can contribute up to 25% of compensation which is defined in the plan document. Typically, it is based on W2 income. For self-employed individuals, the amount is limited to 20%.
However, total contributions are subject to annual maximums. The maximum contribution for each employee is $72,000 if under the age of 50 and $80,000 if age 50 or older. These amounts are all subject to change each year.