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How Much to Contribute to Your Solo 401k in 2016

By Dmitriy Fomichenko, President and Founder of Sense Financial


The IRS recently announced the contribution limits to retirement plans in 2016, including the Solo 401k plan for small business. For 2016, the contribution limit will remain at the current level, as the increase in costs of living was not high enough in 2015 to trigger an adjustment.

The Solo 401k plan allows the plan owner, the sole employee of the business, to make both elective salary deferral and profit sharing contributions. In 2016, the elective salary deferral is limited to $18,000. For the profit sharing contribution, business owners can contribute up to 20-25% of the business earning, depending on the type of sponsoring business. The total contribution limit remains $53,000 in 2016. Those who are 50 years or older are also allowed a catch-up contribution of $6,000, bringing the total limit to $59,000.

Understand Contribution Limit

It is important that plan holders understand their contribution limit. The numbers above are the maximum level for all Solo 401k plans. Each individual Solo 401k plan may have a lower limit, depending on the type of sponsoring business and annual income.

If the business is a sole proprietorship or a single member LLC, the owner can contribute up to 20% of the business income as profit sharing contribution. For corporations, this contribution can be as high as 25% of the business compensation for the year.

To help plan owners decide how much they can contribute to their plans, there are calculators available. Plan owners can use a Solo 401k calculator which will determine their contribution limit based on the plan owner age, business type, and business income.

Solo 401k Contribution Limit Remains High Among Qualified Plans

Even without any increase this year, the Solo 401k contribution limit remains one of the highest among qualified plans. The high contribution limit can benefit plan owners in many ways.

First, they will be able to maximize their tax benefits. By contributing to the Solo 401k plan, plan owners will be able to lower their taxable income for the year. That means a simple and quick way to save on taxes that year. For some plan owners, the large total contribution can even push them to a lower tax bracket and help them save even more.

Secondly, with a large contribution every year, plan owners can quickly accumulate their savings for retirement. This allows them to also build up enough funds to invest and grow their wealth exponentially. Some plan owners decide to go with a self directed account and invest in alternative investments, such as real estate or private lending. With enough funds, such capital-intensive investments are now within reach.

How Much Should You Contribute?

How much you should save for retirement can depend on many factors, such as your current savings, any debt, your income, and your retirement goals. The more you can afford to save, the faster you will reach your retirement goals.

The Solo 401k plan gives plan owners a lot of control and flexibility, which also include a generous contribution limit. To take advantage of this generous limit and maximize your savings, however, you need to plan ahead. Keep up with the maximum limit updates from the IRS and calculate your contributions accordingly. Plan ahead to allocate money for your retirement savings and stay on track with your plan.

Dmitriy Fomichenko is President and Founder of Sense Financial, a leading provider of retirement accounts with "Checkbook Control": the Solo 401k and the Checkbook IRA. To learn more about the Solo 401k plan, please visit sensefinancial.com or email us at info@sensefinancial.com.

More information on Solo 401k plans can be found by clicking here.


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