Sunday, October 9, 2011

Contribution Types: Self-Directed 401k | Self-Directed Solo 401k | Solo 401k | Solo K

A Solo 401k, often referred to as a self-directed Solo 401k plan, Self-Directed 401k or Solo K, allows for the following three (3) types of contributions:


1. Discretionary profit sharing contributions

2. Salary deferral contributions
3. Designated Roth contributions
Each contribution types have separate limits, and, when combined, cannot exceed the maximum Solo 401k contribution amount.
The maximum contribution allowed for a self-employed business in 2011 is 25 percent of compensation, plus a $16,500 of employee salary deferral or designated Roth contributions not to exceed $49,000 plus catch-up contributions of $5,500 if eligible (i.e., your are age 50 or older in 2011 ) for a total of $54,500.
Solo 401k Contribution Types Explained
1.Profit Sharing Contributions
In accordance with IRC Sec. 404 the profit sharing contribution cannot exceed 25% of income derived from business activity.
Salary deferral contributions are not included with profit sharing contributions when calculating the 25 percent deductible contribution.
Profit sharing contributions to Solo 401k plan are not required to be made each year.
2. Salary Deferral Contributions
The salary deferral feature found under IRC Sec. 402(g) permits business owners to contribute up to 100 percent of compensation not to exceed $16,500 to the Solo 401k plan for 2011.
The rules also allow for catch-up contributions provided you are age 50 or older. For 2011, the maximum catch-up amount is $5,500 per IRC Sec. 414 (v).
3. Designated Roth Contributions
Since 2006, the self-employed (and spouse if applicable) have been allowed to treat all or some portion of their salary deferral limit (the $16,500 portion) as designated Roth 401(k) contributions.
The designated Roth contributions are outlined in IRC Sec. 402A, and treated as after-tax contributions (that is, you cannot take a tax deduction for the contribution).
However, all earnings resulting from the Roth contributions can be distributed tax-free.
Deferrals and Roth contributions together cannot exceed the $16,500, plus the $5,500 catch-up contribution if age 50 or older.






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