If you’re running your own business or freelancing, understanding how much you can save into a self-employed 401(k), or Solo 401(k), is crucial for your financial planning. Here’s what you need to know for the year 2024:
The IRS caps the total contributions to a self-employed 401(k) at $69,000 for 2024. This limit includes both the employee’s elective deferrals and the employer’s contributions. Specifically, you can contribute up to $23,000 as an employee. As the employer, you can add a further 20% of your operating profits, but the total employer contribution can’t exceed $46,000. To max out these contributions, your business needs to be profitable enough—around $230,000 in operating profits is necessary to reach the $46,000 employer contribution cap.
For individuals over 50, there’s an additional catch-up contribution allowed, which is $7,500 for 2024. This is on top of the standard limits, giving older business owners a chance to save more as they near retirement.
Calculating how much you can contribute isn’t straightforward and involves understanding your net business profits. For instance, if your gross income is $100,000 and you have $30,000 in business expenses, your operating income would be $70,000. From this, you can determine your allowable contributions based on specific IRS formulas.
Remember, it’s not just about how much you can technically contribute. Your actual contribution amounts might need to be adjusted based on other retirement plans you have or the specific tax benefits you’re aiming for. And if you over-contribute, the IRS allows you until April 15 of the following year to correct this mistake without penalty.
If you’re new to this or juggling multiple income streams, it can be tricky to get your contributions just right. That’s why it might be wise to consult with a financial advisor or accountant who can help navigate these waters, ensuring you make the most of your retirement savings opportunities without overstepping IRS rules.
