Harvard Law Attorney George Blower leads an in-depth discussion of the Solo 401k Contribution rules to help you determine how much self-employment income you need to make to maximize Solo 401k contributions. This webinar is geared towards self-employed businesses taxed as an S-corporation, C-corporation, LLCs taxed as S-corporations/C-corporations.

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The solo 401k plan, commonly referred to as self-directed Solo 41k is the retirement plan of choice for self-employed individuals or owner-only businesses including for the features highlighted below:

-The highest contribution limits for any defined contribution plan including up to $61,000 (or even $66,500 if you are 50 or older) for 2022 (for 2023: $66k or $73.5 if you are 50 or older).

-The ability to make pre-tax, Roth, and even Mega Backdoor Roth contributions.

-401k participant loans of up to $50,000

-Invest with checkbook control in real estate, cryptocurrencies, notes, private placements, and other types of alternative investments.

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How Much Income Do I Need to Max Out My Solo 401k Contributions?

Planning for retirement is essential to ensure a comfortable and financially secure future. One popular retirement savings option for self-employed individuals is the Solo 401k, which offers several benefits such as higher contribution limits and potential tax savings. However, determining how much income you need to maximize your contributions can be confusing, especially if you have an S-Corp, C-Corp, or an LLC taxed as an S-Corp. Let’s explore the income requirements for each scenario and understand how to make the most of your Solo 401k.

To contribute to a Solo 401k, you need to have earned income from your self-employment activities. The total compensation you receive from your business will determine the maximum amount you can contribute to your retirement account. However, the specific rules and calculations can vary based on the type of business entity you have.

1. S-Corporation:
If your business is structured as an S-Corp, your income will primarily consist of a reasonable salary and potentially some additional distributions in the form of dividends. To maximize your Solo 401k contributions, you will need to ensure your salary is sufficient.

As of 2022, you can contribute up to 100% of your salary to your Solo 401k, up to the annual limit set by the IRS. For the year 2022, the maximum contribution limit is $61,000 or $64,500 if you are 50 or older (including catch-up contributions). Therefore, your salary should be at least equal to the desired contribution amount to make the maximum contributions possible. However, keep in mind that there are limits on the amount designated as salary, so consulting with a tax professional is advisable to determine the ideal structure for your S-Corp.

2. C-Corporation:
If you have a C-Corp, the rules regarding Solo 401k contributions differ slightly. In this case, you may receive income in the form of salary and dividends, similar to an S-Corp. However, the dividend portion does not count as earned income for the purposes of Solo 401k contributions.

To maximize your contributions, you will need to set your salary at an amount that ensures you reach the desired contribution limit. The same contribution limits apply as for an S-Corp, with a maximum of $61,000 or $64,500 (including catch-up contributions) for individuals over 50 years old.

3. LLC Taxed as S-Corp:
If your business is an LLC taxed as an S-Corp, the income requirements are similar to those of a standard S-Corp. You will need to structure your compensation in the form of salary and potentially receive additional distributions or dividends.

Ensure that your salary is adequate to meet your desired contribution goals. Consult with a tax advisor to determine the best way to structure your payments, ensuring you comply with IRS regulations.

It’s important to remember that the maximum contribution limits can change from year to year, so it’s essential to stay updated on IRS guidelines. Additionally, you must make contributions within the specific tax year to take advantage of the tax benefits and potential growth of your retirement savings.

In conclusion, to maximize your Solo 401k contributions, you need to plan your income carefully and ensure it meets the necessary requirements. Whether you have an S-Corp, C-Corp, or an LLC taxed as an S-Corp, structuring your compensation appropriately and consulting with tax professionals will help you make the most of your retirement savings opportunities. By taking advantage of the higher contribution limits of a Solo 401k, you can build a robust nest egg and increase the chances of achieving a financially secure retirement.