Maximum 401k Contribution Facts and Tips

One of the most important factors to consider when starting up a Solo 401k retirement plan is the maximum 401k contribution. Self-employed individuals or those who own small businesses without fulltime employees working for them are qualified to get this Ultimate Retirement Plan. The upsides of securing this type of pension plan are the overflowing benefits and potential growth of your retirement dollars. It is essential that you know how your contributions must be done and other terms to learn and understand about the plan.

401k Contributions

There are two categories for this type of contribution. It is essential to learn the maximum 401k contribution for each category so that you know how much you are required to pay per annum.

·Employee Deferral

Sole proprietors under 50 years old could make contributions for employee deferral up to $17,500 which is an updated amount for 2013. For sole proprietorship owners who are above 50 years old, they could add a total of $5,500 to their yearly contribution as catch-up amount which could bring their annual deferral to $23,000. It is imperative that those who want to make an employee deferral contribution must elect to do so by December 31st. The employee elective deferral can be made with pre-tax or after-tax (Roth) funds.

·Profit Sharing

For this particular category, the annual profit-sharing maximum 401k contribution for an individual 401 k plan could be made in behalf of the spouse or the owner of the small business or sole proprietorship. According to the Internal Revenue Code Section, the 401k contributions are under the 25% limitation of the business income which is also subject to the self-employment tax. As for schedule C sole proprietors, their overall contribution must be based on the earned income of the business which is in addition to the calculation lower than 20% of their overall contribution. There are eligible tax deductions for this amount including the deductibles for the 50% of self-employment tax and deductibles for contributions to Solo 401k on the behalf of the proprietor.

The yearly overall and maximum 401k contribution for account holders above 50 years old is $56,000. Account owners who are below 50 years of age are allowed to contribute a total of $51,500 in an annual basis. The additional $5,500 contribution for those above 50 years old is called the catch-up contribution which they could opt to make.