To understand the contribution limits, you need to remember that as a self-employed person, you are both employee and employer.
The total solo 401k contribution limit for 2021 is $57,000 in 2020 and $58,000 in 2021 with an additional $6,500 catch-up contribution if you are 50 or older.
Within that total contribution limit, there are limits for each of your roles
When you calculate your contribution percentage as the employer, the max amount of compensation you can use for 2020 is $285,000 and it’s $290,000 for 2020. Like other retirement plans, you can expect solo 401k contribution limits to make regular cost-of-living adjustments.
To help you understand how the contribution limits work, let me give you an example.
You’re a blogger who earned $85,000 from your blog in 2020. As the employee, you contribute $19,500 which is the max employee contribution.
Then as the employer, you contribute an additional $21,250. That amount is figured as 25% of your total compensation. $85,000 x 25% = $21,250
Your total solo 401k contribution for 2020 is $19,500 + $21,250 = $40,750. If you were 50 or older, you can make an additional contribution of $6,500 as a catch-up contribution, for a total of $47,250.
The last thing you need to understand about your solo 401k contributions is that if you’re also employed and participating in your company’s 401k plan, the contribution limits apply across all retirement plans. Your contributions to your solo 401K and company 401k cannot exceed the total limit for the year.
This content was originally published here.