Contributing to a solo 401(k) as an employer

[cmallow17]

Hello!

I am currently an employee and I already contributed the maximum limit for 2023 to my employer's 403(b). Next month I will leave my job and become a freelance consultant. I am planning to register as a single-member LLC.

I am interested in opening a solo 401(k) this year and wanted to ask:

1) I cannot contribute anything as an employee of my LLC since I already maxed out the 403(b) limit this year, correct?

2) As an employer, am I allowed to contribute up to 25% of net self-employment income? (even if I don't contribute this year as an employee of my LLC?)

3) Are both the employee and employer contributions to a solo 401(k) deductible?

Thank you!

[Andrew_W]

Hi @cmallow17!

You are correct - if you have already maxed out your 403(b) for 2023, then you will not be able to contribute to another type of account as an employee. For 2023, employee contributions are up to $22,500 ($30,000 if over 50 with catch-up contributions). This limit is shared amongst the various types of accounts (401k, 403b, etc., including Solo 401k). 

With a Solo 401(k), you can, on the employer side, make nonelective company contributions of up to 25% of compensation as defined by your plan. This compensation doesn’t include retirement plan contributions or the self-employment tax, which are deducted from your income. This contribution can be made regardless of any employee contributions (or lack thereof). Total solo 401(k) plan contributions, excluding catch-up contributions for those age 50 and over, can't exceed $66,000 for 2023. 

NOTE - since you have a 403(b) with your current employer, there is an Aggregation Rule that applies specifically to 403(b) plans in these scenarios. Essentially, the contributions you made to the 403(b) will also count against the limit for the Solo 401(k). So for 2023, you would be able to contirbute a maximum of $43,500 ($66,000 Solo 401(k) limit - $22,500 maxed 403(b) contribution) or up to 25% of compensation as defined by your plan, whichever is less. 

Assuming it's a traditional Solo 401(k), and not a Roth, the contributions are deductible and reduce your taxable income for the year.

[cmallow17]

Hi Andrew, thank you for the quick and helpful response!

When you say "This compensation doesn’t include retirement plan contributions" - does that mean that the amounts contributed by the employer would not be included as a business expense on Schedule C (under pensions and profit sharing)? Thanks!

[Andrew_W]

You're welcome! Glad to help.

That is correct, the employer contributions for a Solo 401(k) are not included as Schedule C expenses under pensions and profit sharing. They are reported on Schedule 1, Line 16, Self-employed SEP, SIMPLE, and qualified plans (as of 2022). They are an adjustment to your overall income.