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January 5, 2023

401k contribution limits 2023

401k contribution limits for 2023 are $22,500 per person, up from 20,500 in 2022. All 401k participants over the age of 50 can make a catch-up contribution of $7,500, for a total of $30,000

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What is 401k?

401k is a workplace retirement plan where employees and employers can make retirement contributions. These retirement plans can be one of the easiest and most effective ways to save for retirement. As an employee, you can automatically contribute your 401k directly through your company payroll. You can choose the percentage of your salary toward your retirement savings. Most 401k plans will provide you with multiple investment options in stocks and fixed income. Additionally, most companies offer a 401k match up to a certain percentage. In most cases, you must participate to receive your employer match.

There are three types of 401k contributions – traditional 401k tax-deferred, tax-exempt Roth 401k, and After-tax contributions.

You can select to make both types of tax-deferred and Roth contributions simultaneously. However, the combined annual contribution amount cannot exceed your annual limit.

Tax-deferred 401k

Most employees commonly choose to make tax-deferred 401k contributions. These payments are tax-deductible. They will lower your tax bill for the current tax year. Your investments will grow on a tax-deferred basis. Therefore, you will only owe federal and state taxes when you start withdrawing your savings.

Roth 401k

Roth 401k contributions are pretax. You will pay all federal and state taxes before making your contributions. The advantage of Roth 401k is that your retirement savings will grow tax-free. If you keep your money until retirement, you will withdraw your gain tax-free. It’s a great alternative for young professionals and workers in a low tax bracket.

After-Tax 401k Contributions

Some 401k plans will allow you to make after-tax contributions. You can make these contributions if you have maximized your annual limit. Generally, after-tax contributions are made after you pay taxes on your income. Only your future gains will be taxable as ordinary income. Due to these tax complexities, after-tax contributions are more common as part of a Mega Backdoor Roth conversion.

Mega Backdoor Roth conversion

Mega back door conversion is a two-step process that allows you to make after-tax contributions to your 401k plan and immediately transfer the money to your Roth 401k account through in-service conversion.

What are my 401k contribution limits for 2023?

401k contribution limits change every year. IRS typically increases the maximum annual limit with the cost of living adjustment and inflation. These contribution limits apply to all employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan. Additionally, the limits apply to both tax-deferred and Roth contributions combined.

Employees can contribute up to $22,500 to their 401(k) plan for 2023, a $2,000 increase from 2022.
Employees of age 50 or over are eligible for an additional catch-up contribution of $6,500 in 2023, a $1,000 increase from 2022
If an employee makes the maximum allowed contribution, the company match cannot exceed 43,,500, up from 40.500 in 2022
The maximum 401k contribution limit for 2023, including employee contributions and employer match, is $66,000, up from 61,000 in 2022
The total 401k contribution limit for 2023 from all sources, including catch-up contributions, is $73.500,000, up from 67,500 in 2022
The employee compensation limit for calculating 401k contributions is $330,000, up from $305,000 in 2022

Solo 401k contribution limits 2023

A solo 401k plan is a type of 401k plan with one participant. Those are usually solo entrepreneurs, consultants, freelancers, and other small business owners. Self-employed individuals can take advantage of solo 401k plans and save for retirement.

The maximum contribution limit in 2023 for a solo 401k plan is $66,000 or $73,500 with catch-up contributions. Solo entrepreneurs can make contributions both as an employee and an employer.
The employee contribution cannot exceed $22,500 in the solo 401(k) plan for 2022.
Self-employed 401k participants, age 50 or over, are eligible for an additional catch-up contribution of $7,500 in 2022.
The total self-employed compensation limit for calculating solo 401k contributions is $330,000.
Employer contribution cannot exceed 25% of the compensation
If you participate in more than one 401k plan simultaneously, you are subject to the same annual limits for all plans.

Please note that if you decide to hire other employees, you must include them in your 401k plan if they meet the plan eligibility requirements.

January 8, 2022January 5, 2023

401k contribution limits 2022

401k contribution limits for 2022 are $20,500 per person. All 401k participants over the age of 50 can add a catch-up contribution of $6,500.

Retirement Calculator

What is 401k?

401k plan is a workplace retirement plan where both employees and employers can make retirement contributions. These retirement plans can be one of the easiest and most effective ways to save for retirement. As an employee, you can make automatic contributions to your 401k directly through your company payroll. You can choose the percentage of your salary that will go towards your retirement savings, Most 401k will provide you with multiple investment options in stocks and fixed income. Additionally, most companies offer a 401k match up to a certain percentage. In most cases, you need to participate in the plan in order to get the match.

There are two types of contributions – traditional 401k tax-deferred and tax-exempt Roth 401k contributions.

Tax-deferred 401k

Most employees, typically, choose to make tax-deferred 401k contributions. These payments are tax-deductible. They will lower your tax bill for the current tax year. Your investments will grow on a tax-deferred basis. Therefore, you will only owe federal and state taxes when you start withdrawing your savings.

Roth 401k

Roth 401k contributions are pretax. It means that you will pay all federal and state taxes before making your contributions. The advantage of Roth 401k is that your retirement savings will grow tax-free. As long as you keep your money until retirement, you will withdraw your gain tax-free. It’s a great alternative for young professionals and workers in a low tax bracket.

What are my 401k contribution limits for 2022?

Employees can contribute up to $20,500 to their 401(k) plan for 2022, a $1,000 increase from 2021.
Employees of age 50 or over are eligible for an additional catch-up contribution of $6,500 in 2022, the same amount as 2021
The employee compensation limit for calculating 401k contributions is $305,000, $15,000 more than 2021
Companies can make a matching contribution up to the combined limit of $61,000 or $67,500 with the catch-up contribution. If an employee makes the maximum allowed contribution, the company match cannot exceed $40,500 in 2022.

Solo 401k contribution limits 2022

The maximum contribution limit in 2022 for a solo 401k plan is $61,000 or $67,500 with catch-up contributions. Solo entrepreneurs can make contributions both as an employee and an employer.
The employee contribution cannot exceed $19,500 in the solo 401(k) plan for 2021.
Self-employed 401k participants, age 50 or over are eligible for an additional catch-up contribution of $6,500 in 2021.
The total self-employed compensation limit for calculating solo 401k contributions is $290,000.
Employer contribution cannot exceed 25% of the compensation
If you participate in more than one 401k plan at the same time, you are subject to the same annual limits for all plans.

Please note that if you are self-employed and decide to hire other employees, they will have to be included in the 401k plan if they meet the plan eligibility requirements.

January 7, 2021November 7, 2022

401k contribution limits 2021

401k contribution limits for 2021 are $19,500 per person. All 401k participants over the age of 50 can add a catch-up contribution of $6,500.

Retirement Calculator

What is 401k?

There are two types of contributions – traditional 401k tax-deferred and tax-exempt Roth 401k contributions.

Tax-deferred 401k

Roth 401k

How much can I contribute to my 401k in 2021?

Employees can contribute up to $19,500 to their 401(k) plan for 2021, the same amount as 2020.
Employees of age 50 or over are eligible for an additional catch-up contribution of $6,500 in 2021, the same amount as 2020
The employee compensation limit for calculating 401k contributions is $290,000, $5,000 more than 2020
Companies can make a matching contribution up to the combined limit of $58,000 or $64,500 with the catch-up contribution. If an employee makes the maximum allowed contribution, the company match cannot exceed $38,500 in 2021.

Solo 401k contribution limits 2021

The maximum contribution limit in 2021 for a solo 401k plan is $57,000 or $63,500 with catch-up contributions. Solo entrepreneurs can make contributions both as an employee and an employer.
The employee contribution cannot exceed $19,500 in the solo 401(k) plan for 2021.
Self-employed 401k participants, age 50 or over are eligible for an additional catch-up contribution of $6,500 in 2021.
The total self-employed compensation limit for calculating solo 401k contributions is $285,000.
Employer contribution cannot exceed 25% of the compensation
If you participate in more than one 401k plan at the same time, you are subject to the same annual limits for all plans.

Please note that if you are self-employed and decide to hire other employees, they will have to be included in the 401k plan if they meet the plan eligibility requirements.

May 21, 2020November 7, 2022

401k contribution limits 2020

401k contribution limits for 2020 are $19,500 per person. All 401k participants over the age of 50 can add a catch-up contribution of $6,500.

Retirement Calculator

What is 401k?

There are two types of contributions – traditional 401k tax-deferred and tax-exempt Roth 401k contributions.

Tax-deferred 401k

Roth 401k

How much can I contribute to my 401k in 2020?

Employees can contribute up to $19,500 to their 401(k) plan for 2020, $500 more than 2019.
Employees of age 50 or over are eligible for an additional catch-up contribution of $6,500 in 2020, $500 higher than 2019
The employee compensation limit for calculating 401k contributions is $285,000, $5,000 more than 2019
Companies can make a matching contribution up to the combined limit of $57,000 or $63,500 with the catch-up contribution. If an employee makes the maximum allowed contribution, the company match cannot exceed $37,500 in 2020.

Solo 401k contribution limits 2020

The maximum contribution limit in 2020 for a solo 401k plan is $57,000 or $63,500 with catch-up contributions. Solo entrepreneurs can make contributions both as an employee and an employer.
The employee contribution cannot exceed $19,500 in the solo 401(k) plan for 2020.
Self-employed 401k participants, age 50 or over are eligible for an additional catch-up contribution of $6,500 in 2020.
The total self-employed compensation limit for calculating solo 401k contributions is $285,000.
Employer contribution cannot exceed 25% of the compensation
If you participate in more than one 401k plan at the same time, you are subject to the same annual limits for all plans.

Please note that if you are self-employed and decide to hire other employees, they will have to be included in the 401k plan if they meet the plan eligibility requirements.

April 25, 2019November 8, 2022

8 reasons to open a solo 401k plan

8 reasons why entrepreneurs should open a solo 401k plan

What is a solo 401k plan

The solo 401k plan is a powerful tool for entrepreneurs to save money for retirement and reduce their current tax bill. These plans are often ignored and overshadowed by the more popular corporate 401k and SEP IRA plans. In fact, there is a lack of widely available public information about them. Simply put, not many people know about it. In this article, I will discuss 8 reasons why entrepreneurs should open a solo 401k plan.

Solo or one participant 401k plans are available to solo entrepreneurs who do not have any personnel on staff. If a business owner employs seasonal workers who register less than 1,000 hours a year, then he or she may be eligible for the solo 401k plans as well. The solo plans have most of the characteristics of the traditional 401k plan without any of the restrictions.

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What are some of the most significant benefits of the self-employed 401k?

Maximize your retirement savings with a solo 401k

Self-employed 401k allows a business owner to save up to $56,000 a year for retirement, plus an additional $6,000 if age 50 and over. How does the math work exactly?

Solo entrepreneurs play a dual role in their business – an employee and an employer. As an employee, they can contribute up to $19,000 a year plus catch-up of $6,000 if over the age of 50. Further, the business owner can add up to $37,000 of contribution as an employer match. The employee’s side of the contribution is subject to 25% of the total compensation, which the business owner must pay herself.

Example: Jessica, age 52, has a solo practice. She earns a W2 salary of $100,000 from her S-corporation. Jessica set-up a solo 401k plan. In 2017 she can contribute $18,000 plus $6,000 catch-up, for a total of $24,000 as an employee of her company. Additionally, Jessica can add up to $25,000 (25% x $100,000) as an employer. All-n-all, she can save up to $49,000 in her solo 401k plan.

One important side note, if a business owner works for another company and participates in their 401(k), the above limits are applicable per person, not per plan. Therefore, the entrepreneur has to deduct any contributions from the second plan to stay within the allowed limits.

Add your spouse

A business owner can add his or her spouse to the 401k plan subject to the same limits discussed above. To be eligible for these contributions, the spouse has to earn income from the business. The spouse must report a wage from the company on a W2 form for tax purposes.

Reduce your current tax bill

The solo 401k plans contributions will reduce your tax bill at year-end. The wage contributions will lower your ordinary income tax. The company contributions will decrease your corporate tax.

This is a very significant benefit for all business owners and in particular for those who fall into higher income tax brackets. If an entrepreneur believes that her tax rate will go down in the future, maximizing her current solo 401k contributions now, can deliver substantial tax benefits in the long run.

Opt for Roth contributions

Most solo 401k plans allow for Roth contributions. These contributions are after taxes. Therefore, they do not lower current taxes. However, the long-term benefit is that all investments from Roth contributions grow tax-free. No taxes will be due at withdrawal during retirement.

Only the employee contributions are eligible for the Roth status. So solo entrepreneur can add up to $19,000 plus $6,000 in post-tax Roth contributions and $37,000 as tax-deductible employer contributions.

The Roth contributions are especially beneficial for young entrepreneurs or those in a lower tax bracket who expect that their income and taxes will be higher when they retire. By paying taxes now at a lower rate, plan owners avoid paying much larger tax bill later when they retire, assuming their tax rate will be higher.

No annual test

Solo 401k plans are not subject to the same strict regulations as their corporate rivals. Self-employed plans do not require a discrimination test as long as the only participants are the business owner and the spouse.

If the company employs workers who meet the eligibility requirements, they must be included in the plan. To be eligible for the 401k plan, the worker must be a salaried full-time employee working more than 1,000 hours a year. In those cases, the plan administrator must conduct annual discrimination test which assesses the employee participation in the 401k plan. As long as solo entrepreneurs do not hire any full-time workers, they can avoid the discrimination test in their 401k plan.

No annual filing

Another benefit of the 401k plans is the exemption from annual filing a form 5500-EZ, as long as the year-end plan assets do not exceed $250,000. If plan assets exceed that amount, the plan administrator or the owner himself must do the annual filing. To learn more about the annual filing process, visit this page.

Asset protection

401k plans offer one of the highest bankruptcy protection than any other retirement accounts including IRA. The assets in 401k are safe from creditors as long as they remain there.

In general, all ERISA eligible retirement plans like 401k plan are sheltered from creditors. Non-ERISA plans like IRAs are also protected up to $1,283,025 (in aggregate) under federal law plus any additional state law protection.

Flexibility

You can open a self-employed 401k plan at nearly any broker like Fidelity, Schwab or Vanguard. The process is relatively straightforward. It requires filling out a form, company name, Tax ID, etc. Most brokers will act as your plan administrator. As long as, the business owner remain self-employed, doesn’t hire any full-time workers and plan assets do not exceed $250,000, plan administration will be relatively straightforward.

As a sponsor of your 401k plan, you can choose to manage it yourself or hire an investment advisor. Either way, most solo 401k plans offer a broader range of investments than comparable corporate 401k plans. Depending on your provider you may have access to a more extensive selection of investment choices including ETFs, low-cost mutual funds, stocks, and REITs. Always verify your investment selection and trading costs before opening an account with any financial provider.

About the author:

Stoyan Panayotov, CFA, MBA is a fee-only financial advisor in Walnut Creek, CA, serving clients in the San Francisco Bay Area and nationally. Babylon Wealth Management specializes in financial planning, retirement planning, and investment management for growing families, physicians, and successful business owners.

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September 21, 2017May 24, 2020

6 Saving & Investment Practices All Business Owners Should Follow

In my practice, I often meet with small business owners who have the entire life savings and family fortune tied up to their company. For many of them, their business is the only way out to retirement. With this post, I would like to offer 6 saving & investment practices all business owners should follow.

Having all your eggs in one basket, however, may not be the best way to manage your finances and family fortune. Think about bookstores. If you owned one 20-30 years ago, you probably earned a decent living. Now, bookstores are luxuries even in major cities like New York and San Francisco. Technology, markets, consumer sentiments, and laws change all the time. And that is why it is vital that you build healthy saving and investment routines to grow your wealth, protect your loved ones, and prepare yourself for the years during retirement.

Start Early

I always advise my clients to start saving early and make it a habit. Saving 10-20 percent of your monthly income will help you build and grow your wealth. For instance, by starting with $20,000 today, with an average stock market return of 6 percent, your investments can potentially accumulate to $115,000 in 30 years or even $205,000 in 40 years.

Saving and investing early in your career can build a buffer to correct for any sidesteps or slip-ups. Starting to build your wealth early will provide the necessary protection against market drops and economic recessions and prepare you for large purchases like a new home, college tuition, a new car or even expanding your business.

Build a Safety Net

Life can often be unpredictable in good and bad ways. Having an emergency fund is the best way to guard your wealth and maintain liquidity for your business. I typically recommend keeping 6 to 12 months of basic living expenses in your savings account.

Even though my firm does not offer insurance, I often advise my clients especially those who are sole bread earners or work in industries prone to accidents to consider getting life and disability insurance. Good insurance will guarantee protection and supplemental income for yourself and your loved ones in case of unexpected work or life events.

Manage Your Debt

The last eight years of a friendly interest environment has brought record levels of debt in almost every single category. Americans now owe more than $8.26 trillion in mortgages, $1.14 trillion in auto loans, and $747 billion in credit cards debt. If you are like me, you probably don’t like owing money to anyone.

That’s great, however, taking loans is an essential part of any enterprise. Expanding your business, building a new facility or buying a competitor will often require external financing. Keeping track of your loans and prioritizing on paying off your high-interest debt can save you and your business a lot of money. It may also boost your credit score.

Set-up a Company Retirement Plan

The US Government provides a variety of options for businesses to create retirement plans for both employees and owners. Some of the most popular ones are employer-sponsored 401k, self-employed 401k, profit-sharing, SIMPLE IRA, and SEP IRA.

Having a company retirement plan is an excellent way to save money in the long run. Plan contributions could reduce current taxes and boost your employees’ loyalty and morale.

Of the many alternatives, I am a big supporter of 401(k) plans. Although they are a little more expensive to establish and run, they provide the highest contribution allowance over all other options.

The maximum employee contribution to 401(k) plans for 2017 is $18,000. The employer can match up to $36,000 for a total of $54,000. Individuals over 50 can add a catch-up contribution of $6,000. Also, 401k and other ERISA Plans offer an added benefit. They have the highest protection to creditors.

Even if you already have an up-and-running 401k plan, your job is not done. Have your plan administrator or an independent advisor regularly review your investment options.

I frequently see old 401k plans that have been ignored and forgotten since they were first established. Some of these plans often contain high-fee mutual funds that have consistently underperformed their benchmarks for many consecutive years. I typically recommend replacing some of these funds with low-fee alternatives like index funds and ETFs. Paying low fees will keep more money in your pocket.

Diversify

Many business owners hold a substantial amount of their wealth locked in their business. By doing so, they expose themselves to what we call a concentrated risk. Any economic, legal and market developments that can adversely impact your industry can also hurt your personal wealth.

The best way to protect yourself is by diversification. Investing in uncorrelated assets can decrease the overall risk of your portfolio. A typical diversified portfolio may include large-, mid-, small-cap, and international stocks, real estate, gold, government, and corporate fixed income.

Plan Your Exit

Whether you are planning to transfer your business to the next generation in your family or cash it in, this can have serious tax and legal consequences. Sometimes it pays off to speak to a pro.

Partnering with someone who understands your industry and your particular needs and circumstances, can offer substantial value to your business and build a robust plan to execute your future financial strategy.

The article was previously published in HVACR Business Magazine on March 1, 2017