As a self-employed individual, you can set up a 401(k) account for yourself, often referred to as a Solo 401(k) or Individual 401(k). The amount you can contribute annually depends on your age, your income, and whether you are contributing as both the employee and the employer. Here's the breakdown for 2024:
Employee Contributions
- You can contribute up to $23,000 if you are under age 50.
- If you are 50 or older, you can contribute an additional $7,500 as a catch-up contribution, for a total of $30,500.
Employer Contributions
- As the employer, you can contribute up to 25% of your net self-employment income (which is your net profit minus half of your self-employment tax and your employee contribution).
- The combined employee and employer contributions cannot exceed $66,000 for 2024, or $73,500 if you are eligible for catch-up contributions.
Contribution Limits Recap
- Total Limit (employee + employer): $66,000 (under age 50) or $73,500 (50 or older).
- Employee contributions are capped at $23,000 ($30,500 with catch-up).
- Employer contributions depend on your net income but cannot exceed the total limit.
Example Calculation:
If your net self-employment income is $100,000:
- Employee Contribution: $23,000.
- Employer Contribution: 25% of $92,935 (after deducting half of self-employment tax, which is approximately 7.065%), which is roughly $23,234.
- Total Contribution: $46,234 (under age 50).
This allows high savings potential if your income supports it. Always consult with a tax professional or financial advisor to optimize your contributions and ensure compliance with IRS rules.
