Solo 401k Contribution Deadline
If you have a Solo 401(k), you should watch out for the Solo 401(k) contribution deadline to avoid penalties. Here is everything you need to know.
If you have had a traditional 401(k), you are probably aware that you cannot contribute to the retirement plan after the IRS deadline. Now that you are self-employed, you could be wondering when the Solo 401(k) contribution deadline is. Unlike a 401(k), a Solo 401(k) offers greater flexibility when making contributions to the retirement account. Depending on the type of business structure, you could have a longer period to make Solo 401(k) contributions during the year.
Plan participants must formally elect to make Solo 401(k) contributions by December 31 of the year when they want to make contributions. However, actual employee deferral contributions can be made by April 15 for sole proprietorships (Single LLC and C-corps), or March 15 for partnership LLC and S-corps. The IRS may also allow an extension of six months from the personal tax-filing deadline, to October 15, or September 15.
Solo 401(k) Deadlines for 2021
The following are the Solo 401(k) contribution deadlines based on the type of business and contribution method:
Sole Proprietorship (Single Member LLC & C-Corporation)
If your business is structured as a Sole Proprietorship, you have until the personal tax return due date i.e. April 15th, or request an extension until October 15th. If you want to make Roth contributions, you should check with the Solo 401(k) plan to ensure it allows these contributions. However, regardless of when you make Solo 401(k) contributions, you must formally elect to make an employee deferral contribution by December 31, which is the end of a business year.
A self-employed individual can make profit-sharing contributions to own Solo 401(k) account and their spouse’s accounts. The deadline for making profit-sharing contributions is April 15, or October 15 if an extension is requested. Profit-sharing contributions are capped at 25% of the revenue earned by a business.
Partnership LLC & S-Corporation
The employee salary deferrals of an S-Corp and partnership LLC must be made via payroll at any time when income is earned. If the business uses a payroll service, the elective deferrals will be deducted automatically from the employee’s payroll. However, if there is no payroll service in place, an employee can contribute to the retirement account at any time they elect. For example, if an employee elects to make deferral contributions on Dec 20, they must ensure that the payroll is sufficient to cover the Solo 401(k) contribution by this date. The Department of Labor guidelines provide that a deferral contribution to a Solo 401(k) should be made within 7 days from the date when an employee elects to make the deferral contribution. Pretax and after-tax funds can be used to make deferral contributions.
Corporations can make profit-sharing contributions for their owners or employees, up to 25% of the employee's compensation. The corporation must make these contributions by the business tax filing date i.e. March 15, or September 15.
Solo 401(k) Employee vs. Employer Contribution Levels and Limits
To maximize your Solo 401(k), you must understand the IRS limits for a Solo 401(k) account. When contributing as an employee, you can contribute up to $19,500 (up to 100% of compensation) in 2021 and an additional $6,500 in catch-up contributions if you are above 50. You can make the employee deferral as pre-tax or after-tax/Roth contributions to the Solo 401(k).
As an employer, you make profit-sharing contributions of 25% of the revenues earned, up to $58,000 for 2021. If you are above 50, you can make catch-up contributions to increase this limit to $64, 500. The business earnings are calculated as the net profit minus half of the self-employment tax and employer contributions to your Solo 401(k), other business owners, and participating spouses in the Solo 401(k) plan. The limit on business earnings is capped at $290,000 for 2021.
Solo 401(k) Contribution Example
John owns a food truck business that is structured as a sole proprietorship; he opened and set up a Solo 401(k) for his business in 2020. His salary from the business amounted to $70,000. John has not made Solo 401(k) contributions and would like to know how much he can contribute to his retirement account in 2020.
John can make elective deferrals up to the IRS contribution limit of $19,500 by April 15, 2021. The employee contribution reduces John’s taxable income to $50,500. Assuming that John is single, the taxable income will be taxed at 22%, which amounts to $11,100.
Contributing as an employer
John can make profit-sharing contributions as an employer in the food truck business, as long the total contributions for 2021 do not exceed $58,000. He can contribute up to 25% of his compensation, which amounts to $17,500. In total, John can contribute up to $37,000 by April 15 2021.