05 Apr I’m self-employed. Can I save more in a Solo 401(k)?

Q. I’ve had an LLC with side income of about $50,000, but after deductions it’s only about $10,000 that’s taxable. Am I able to save more than the $10,000 that’s taxable in my Solo 401(k)?
— Worker

A. We’re glad to see you’re saving for retirement.

A Solo 401(k) is a good option for the self-employed.

Going under the assumption you are the only member of the LLC, you can only base your deferral contribution on the earned net income of $10,000, not the gross income of $50,000, said Joseph Sarnecki, a certified financial planner with U.S. Financial Services in Fairfield.

He said per IRS guidelines, 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.

“In addition, it is noted as a `side income,’ so we assume you may have other income from another source,” Sarnecki said. “Total deferrals among all 401(k) plans cannot exceed the annual limit of $22,500 for 2023, or $30,000 including the catch-up contribution.”

Consider talking to your tax advisor to make sure you don’t overcontribute based on the limits.

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This story was originally published on April 5, 2023.

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