How are Solo 401k limits calculated?
Edited

There are multiple factors that go into calculating your Solo 401k contribution limit. Let's break them down.

Calendar Year

The IRS sets contribution limits by calendar year, with the maximum limits generally increasing year to year. For 2024, the most you can put into a Solo 401k is $69,000, unless you are 50 or older (more on that later).

Business Profitability

Generally, your self-employment / business activity needs to be profitable in order for you to contribute to a Solo 401k -- your Solo 401k contributions can never exceed your profits.

Taxation / Incorporation Type

How your self-employment / business activity is taxed and incorporated also plays a role, with incorporated businesses (C-Corp, S-Corp) able to contribute a slightly higher amount as a percentage of earnings. We'll break that down below.

Employer vs. Employee Contribution Type

As a self-employed individual (or owner-only business), you can contribute as both the "employee" (through employee salary deferrals) and as the "employer" (through "profit-sharing" contributions).

Employee Contributions

Employee contributions are capped at $23,000 for 2024, and limited by up to 100% of your net income from self-employment. If you are turning 50 or older by the end of the calendar year, you get an extra +$7,500, for an employee contribution maximum of $30,500 for 2024.

Employee contributions can be made either on a pre-tax or Roth basis.

One way to get past this limit is the "mega backdoor Roth" strategy, which involves making additional employee after-tax contributions. This is a more advanced strategy, and we cover it more here.

Employer Contributions

Employer contributions are capped as a percentage of your business's profits. Employer contributions are made on a pre-tax basis.

If you are taxed as an S-Corp or C-Corp, this is measured as up to 25% of your W-2 salary.

If you are taxed as a Sole Proprietorship (pass-through / disregarded entity) or Partnership, this is measured as up to 20% of your net income (and must factor in a certain amount of self-employment taxes -- our calculator does this for you).

Other Plans

The employee contribution limit is shared across all 401(k) plans you contribute to. This means that if you have a "day job" 401(k), or make employee elective salary deferral 401(k) contributions to any other 401(k) plan, you must aggregate all employee contributions and ensure you are not above the $23,000 limit for 2024 ($30,500 if turning 50 or over).

Total Limit

As mentioned earlier, for 2024 the most you can put into a Solo 401k is $69,000. This means that making one type of contribution -- for example, employee Roth -- may decrease the maximum amount you have "remaining" to contribute to employer pre-tax.

As you can see, there are many factors that go into calculating your annual Solo 401k contribution limit. The contribution election flow in the Carry application can generate an estimate for your contribution limit each year, and if you have any questions we always recommend checking with your accountant or another qualified professional.