Can I set up a 401(k) matching policy within my LLC?

[Jonathan Allen]

Hi BP community - 

I wanted to know who has set up solo 401(k)s within their LLCs as a way to both reduce tax exposure and add to retirement savings?    

I'm looking for a way to reduce profits into year end and the concept of retirement savings plan matching made sense. Believe you can set up a solo 401k without paying yourself a salary so I would personally contribute X and then have LLC match up to the stated IRS limits.

I may be thinking about this wrong so happy to take advice on alternative strategies!   

Thank you

[Brian Eastman]

@Jonathan Allen

A Solo 401k is a great tool for new contributions and tax savings.

So long as your LLC is producing earned income (not passive investment earnings), then you can establish and contribute to a Solo 401k.

It sounds like your LLC is a pass-through for taxation, which is fine. The net income is "compensation" to you, with no need for W-2 wages.

You personally can contribute up to $18,000 (plus an additional $$6,000 if you are age 50 or older). The LLC can contribute up to 20% of your net business income, which is gross income, minus expenses, minus the 50% of self-employment taxes paid by the LLC.

The plan maximum is $53,000 for 2016 and you can combine the employer profit sharing and employee contributions towards that goal.  If you are age 50 or order, the $6000 can be added to create a plan maximum of $59,000.

This CALCULATOR is a good way to rough estimate what your contribution potential might be.