How to Calculate Self-Directed Solo 401(k) Contribution Amounts

The Self-Directed Solo 401(k) allows for pretax contributions to be made two different ways: Salary Deferral and Profit-Sharing. Here is the 2020 contribution limit breakdown for each and how they are calculated.

Salary Deferral - With salary deferral, the account holder can contribute:

- 100% of net earnings from self-employment up to a maximum of $19,500.

- Those who are 50 years old or older qualify for the additional catch-up contribution of $6,500, bringing the salary deferral limit to $26,000.

Profit-Sharing - In addition to salary deferral, the account holder can also make a profit-sharing contribution:

- For those set up as an LLC, Partnership or Sole Proprietor, they can contribute up to 20 percent of their net earnings (**calculation below) from self-employment.

- Those set up as C-Corporations and S-Corporations can contribute up to 25 percent of their salary from self-employment.

Combined Limit - The contribution limit for the salary deferral and profit sharing, combined, cannot exceed $57,000 for those under 50 years old or $63,500 for those 50 years old and over. Again, this is the maximum amount allowed; the account holder doesn’t have to contribute the full amount.

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Here are a few examples:

Example 1 – Stone is 40 years old, has an LLC and will make $100,000 in net earnings (after deductions and less ½ self-employment tax) from his one-person business in 2020.

Salary deferral calculation: 100 percent of net earnings ($100,000) not to exceed the $19,500 limit

Salary deferral amount: $19,500

Profit-sharing calculation: $100,000 * 20% (but not to exceed $57,000)

Profit-sharing amount: $20,000

Combined contribution calculation: $19,500 + $20,000 (but not to exceed $57,000) =

Combined contribution amount allowed: $39,500

*If Stone is 50 or over, add $6,500 to the salary deferral amount and overall contribution limit.

*If Stone’s company is taxed as an S-corp or C-corp, multiply $100,000 by 25%.

Example 2 – Stone is 40 years old, has an LLC and will make $300,000 in net earnings (after deductions and less ½ self-employment tax) from his one-person business in 2020.

Salary deferral calculation: 100 percent of ne