A Solo 401k must be established by December 31st of the calendar year in which the business is established and contributions are made. Contributions cannot be made after the tax filing deadline, including extensions. If an extension is filed, contributions must still be made by the original tax filing deadline. This is to ensure that contributions are made on a timely basis and that the business is taking advantage of all eligible tax benefits.
Year-End Contributions
Solo 401(k)s offer a unique opportunity to make year-end contributions for the current and prior year’s contribution limits. This can be a valuable strategy to maximize retirement savings and reduce tax liability.
Contribution Limits
- Employee (participant) elective deferral limit: $22,500 (age 50 or older: $30,000)
- Employer non-elective contribution limit: $66,000 (age 50 or older: $73,500)
Contribution Timing
Employer contributions must be made by the business’s tax filing deadline, including extensions. For most businesses, this deadline is April 15th.
Employee contributions can be made up until the individual’s tax filing deadline, including extensions. For most individuals, this deadline is April 18th (in 2023).
Contribution Allocation
Solo 401(k) contributions can be allocated to either a pre-tax or Roth account.
- Pre-tax contributions reduce current taxable income but are subject to income tax upon withdrawal.
- Roth contributions are made after-tax, so they don’t reduce current taxable income. However, qualified withdrawals in retirement are tax-free.
Table of Year-End Contribution Deadlines
| Contribution Type | Final Deadline |
|---|---|
| Employer non-elective | Business tax filing deadline |
| Employee elective | Individual tax filing deadline |
## Self-Employment Income Threshold
To establish a solo 401(k) plan, you must meet specific self-employment income requirements. The threshold varies depending on the type of business structure you operate:
- Sole Proprietors and Single-Member LLCs: No minimum income requirement
- Multi-Member LLCs and Partnerships: At least 92.35% of the combined net income must be derived from self-employment during the plan year
## Additional Requirements
In addition to meeting the self-employment income threshold, you must also meet the following requirements:
- Be an eligible individual, such as a self-employed individual or an owner-only LLC
- Have earned less than the compensation limit ($330,000 for 2023, $340,000 for 2024)
- Be under age 50 (or age 50 or older if the business is unincorporated)
## Solo 401(k) Contribution Limits
The contribution limits for solo 401(k) plans are as follows:
| Contribution Type | 2023 | 2024 |
|---|---|---|
| Employee Contribution Limit | $22,500 | $23,500 |
| Employer Matching Contribution Limit | $66,000 | $68,000 |
| Total Contribution Limit | $61,000 ($73,500 for individuals age 50 or older) | $62,500 ($75,500 for individuals age 50 or older) |
Business Legal Structure
The business legal structure you choose will determine when you need to set up a solo 401(k) plan. Here’s a breakdown:
- **Sole Proprietorship:** If you’re a sole proprietor, you’re not required to set up a solo 401(k) plan. However, you may choose to do so if you want to contribute more to retirement than what’s available with an IRA.
- **Partnership:** If you’re a partner in a partnership, you’re not required to set up a solo 401(k) plan. However, the partnership may choose to offer a 401(k) plan to its partners.
- **Limited Liability Company (LLC):** If you’re an LLC, you’re not required to set up a solo 401(k) plan. However, you may choose to do so if you want to contribute more to retirement than what’s available with an IRA.
- **S Corporation:** If you’re an S corporation, you’re not required to set up a solo 401(k) plan. However, you may choose to do so if you want to contribute more to retirement than what’s available with an IRA.
- **C Corporation:** If you’re a C corporation, you’re not required to set up a solo 401(k) plan. However, you may choose to do so if you want to contribute more to retirement than what’s available with an IRA.
| Business Legal Structure | Required to Set Up a Solo 401(k) Plan? |
|---|---|
| Sole Proprietorship | No |
| Partnership | No |
| LLC | No |
| S Corporation | No |
| C Corporation | No |
Eligibility Requirements for a Solo 401k
To establish a solo 401k, you must meet certain eligibility requirements. These requirements are:
- Self-employed: You must be self-employed, either as a sole proprietor or as an independent contractor.
- No full-time employees: You cannot have any full-time employees other than yourself and your spouse.
- Compensation: You must have earned income, either from self-employment or from a passive source.
If you meet these requirements, you may be able to open a solo 401k and take advantage of the tax benefits it offers.
Well, folks, there you have it. Now you know all about the ins and outs of setting up a solo 401k. It’s not rocket science, but it’s always helpful to have a little guidance.
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