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Level 2
posted Mar 31, 2023 1:53:43 PM

Solo 401K Contibutuion allow when there is a Net Loss

My business is just starting out and I'm not turning a profit yet and I've got some income ($25k for example) but my deductions are running $35K, so I'm at a net loss of $10K for the year. Can I still make a contribution to a Solo 401K or does the business have to be at a Net Profit to do this? and if so is the outcome, that the net loss would increase as the contribution would reduce the income?

0 1 403
1 Replies
Expert Alumni
Mar 31, 2023 2:07:31 PM

You cannot contribute to your self-employed retirement if your business is not making a profit.

 

Per the IRS:

Contribution limits in a one-participant 401(k) plan

The business owner wears two hats in a 401(k) plan: employee and employer. Contributions can be made to the plan in both capacities. The owner can contribute both:

  • Elective deferrals up to 100% of compensation (“earned income” in the case of a self-employed individual) up to the annual contribution limit:
    • $22,500 in 2023 ($20,500 in 2022; $19,500 in 2020 and 2021), or $30,000 in 2023 ($27,000 in 2022; $26,000 in 2020 and 2021) if age 50 or over; plus
  • Employer nonelective contributions up to:
    • 25% of compensation as defined by the plan, or
    • for self-employed individuals, see discussion below
      • You must make a special computation to figure the maximum amount of elective deferrals and nonelective contributions you can make for yourself. When figuring the contribution, compensation is your “earned income,” which is defined as net earnings from self-employment after deducting both:
        • one-half of your self-employment tax, and
        • contributions for yourself.