Having a retirement plan is a great way to save for retirement, and also to maximize tax benefits for the year. Most retirement plans, including a Solo 401k, offer tax-deferral or tax-free benefits. To make the most of the plan, plan holders are recommended to contribute as much as they are allowed to. This way, the funds can grow faster, and with the compounding effect, a small increase in contribution now can turn into a much bigger sum years later. Plus, by contributing to a retirement plan, plan holders can also save on taxes for the year with the tax-deferral benefits. An individual 401k calculator can help plan holders to determine the exact contribution limit for their plan.
Solo 401k contribution limit
The Solo 401k plan has a maximum contribution limit of $53,000 per year as of 2015. This includes a salary deferral contribution and a profit sharing contribution. Plan holders who are over 50 years old can also make a catch-up contribution of $6,000, bringing the total maximum limit to a total of $59,000.
Keep in mind, however, that not everyone will be able to reach this limit. While the salary deferral contribution is limited to a fixed number of $18,000 as of 2015, the profit sharing contribution limit varies depending on the business income. This portion of the contribution limit is restricted to 20 to 25% of the owner’s compensation from the business.
Because of these rules, the exact contribution limit will depend on the business income level, the plan holder’s age, and also the type of business that sponsors the plan. Account holders, therefore, are recommended to use an individual 401k calculator to find out their exact limit.
How to use the individual 401k calculator
An individual 401k calculator is available here. To use this calculator, plan holders can simply submit their information to calculate their contribution limit. First, enter the plan name and specify the year that you would like to calculate the contribution limit. This is because the exact limit may vary from year to year. The IRS reviews the limit yearly and sometimes makes adjustments according to the estimated living cost.
Then, select the type of business that sponsors your Solo 401k plan by choosing Corporation, Sole Proprietorship, or Partnership. The exact percentage of the business income that you can contribute to your plan depends on which of these types of business you are operating. Then enter your income and age for the year. That’s all the information you need to submit. Just hit the submit button and let the individual 401k calculator do its work.
Knowing the exact contribution limit for the year can help plan holders to plan ahead and maximize their contribution for the year. Using an individual 401k calculator, this step only takes minutes to complete. Therefore, stop delaying your planning process and take the next step toward a better, wiser financial plan today.