Solo 401k Contributions

Transcription

1 Solo 401k Contributions In this guide, you'll learn how to calculate your Solo 401k contributions and how to document those contributions for your CPA and/or tax preparer. DISCLAIMER: Please note that this is not and should not be considered a replacement for tax, legal or investment advice. Always consult your tax advisor, CPA and/or general counsel before filing. Use the Solo 401k contribution calculator Go to and type in your infoformation to calculate your Solo401k contributions Solo 401k Contributions - 1

2 View your contribution results Read on to learn how to contribute to your Solo 401k and report your contributions. Solo 401k Contributions - 2

3 What are Solo 401k Contributions? A contribution is an amount of money you can contribute to your retirement plan. One of the big advantages to having a Solo 401k is that you can make much higher contributions than with a regular 401k plan. You can make contributions both as an employee and employer, maximizing your contributions which can be a big win for investing and tax planning. Under the rules of the Solo 401k qualified plan, you can make contributions (up to a certain amount) pre-tax or after-tax (if you are making a Roth contribution). The amount of contributions you can make falls into two categories: 1. Employee Elective Deferrals 2. Employer Profit Sharing Contributions Depending on your business structure (Sole Proprietorship, LLC Partnership, C-Corporation, or S-Corporation), there are different contributions limits. Let's discuss each contribution type: Employee Elective Deferrals A plan participant under the age of 50 can make an employee elective deferral of up to $18,000. This is the standard max contribution from a regular (non Solo) 401k plan so that number is the same for your Solo 401k. You can make your $18k employee contribution pre-tax or after-tax (if doing a Roth contribution). If you're over 50, you can contribute up to $24,000 per year into your Solo 401k. These contributions can come directly from your self-employment compensation and can add up to 100% of your compensation. In other words, up to 100% of your self-employment income can be contributed pre-tax (or after-tax if you make Roth contributions) to your Solo 401k plan as long as that number is $18,000 (if you are under 50) or $24,000 (if you are over 50). Employer Profit Sharing Contributions Since you are the employer of your Solo 401k plan in addition to being an owner-employee, you can contribute as an employer to the 401k plan as well. Your business can make a 25% contribution (or 20% if your business is a sole proprietorship or single-member LLC). What if I'm older than 50? If you are over 50, your maximum employee elective deferral (your employee contribution) can be Solo 401k Contributions - 3

4 up to $24,000 and can be pre-tax or after-tax (if a Roth contribution). On the profit-sharing side, your maximum contribution is still 25% (or 20% if you have a sole proprietorship or single-member LLC), but this increases your total annual contributions to $59,000. Yes! Can my spouse participate? YES! If your spouse participates in your Solo 401k plan (which is strongly recommended) and gets compensated by the business, then (s)he can make contributions to the Solo 401k plan just like you. Your spouse can contribute up to the same contribution limits as you, which means your combined annual contibution total can be $106,000 or $118,000 if you both are over 50! What if my business income fluctuates? You are responsible for calculating the contributions to your Solo 401k plan and you determine the contribution schedule. Since you are the plan administrator, you can contribute on whatever timeframe you choose, keeping in mind you must adhere to the IRS guidelines with respect to contribution limits and contribution deadlines. Solo 401k contributions are elective (not mandatory) which means you choose the amount to contribute, again within the IRS guidelines of contributions limits and timeframe. If you don t make enough income to contribute, you can elect to skip a contribution. Contributions are elective (not mandatory) meaning you choose the amount to contribute, again within the IRS guidelines of contributions limits and timeframe. You do not want to over-contribute to a Solo 401k plan so make sure you're calculating your revenue carefully and always consult your CPA and/or tax advisor to make sure you re contributing the correct amount with respect to revenue earned by your business. IRS SOURCE Contribution Limits for a Sole Propriertorship or Single-Member LLC Here's how to calculate your contribution limits if your adopting employer (your business) is a Sole Proprietorship or a Single-Member LLC: Employee Elective Deferral Contribution: This is what you can contribute as an employee of your business. You can contribute up to a maximum of $18,000 (or $24,000 if you're over 50) and these contributions can be up to 100% of your (as the owner) self-employment income. Solo 401k Contributions - 4

5 Employer Profit Sharing Contribution : This is what you can contribute as the employer of your business. You are limited to contributing 25% of your business' taxable self-employment income. However, if you have a Sole Prop or Single-member LLC, there's an added calculation which shakes out to 20% contribution. Here's a couple examples to illustrate the contributions: Rachel is a 38 year old Sole Proprietor. She earned $150,000 in income in her business. Her total tax-deductible contribution can be $46, (that's $18,000 employee elective deferral contribution + $28, [which is ~20% of $150,000]). That's a $46k tax-deductible contribution on $150k earnings! Remember that those contributions can double if Rachel is partiicpating in the Solo 401k (and the business) with her husband, Jeff. This means they can contribute a total of $92, Finally, let's imagine Rachel is over 50. Her numbers then can be a total of $52,128.88, which is $24,000 [employee elective deferral contribution] + the $46, [~20% of the $150k total business earnings]. You can double those contributions if both Rachel and her spouse are over 50. Contribution Limits for a Multi-Member LLC or Partnership Here's how to calculate your contribution limits if your adopting employer (your business) is a Multi-Member LLC or Partnership: Employee Elective Deferral Contribution: This is what you can contribute as an employee of your business. You can contribute up to a maximum of $18,000 (or $24,000 if you're over 50) and these contributions can be up to 100% of your (as the owner) self-employment income. These contribution limits are the same no matter your business structure (Sole Proprietorship, LLC [single or multi-member], C-Corp or S-Corp). Employer Profit Sharing Contribution: This is what you can contribute as the employer of your business. You are limited to contributing 25% of your business' taxable self-employment income. For multi-member partnerships who have to file a K-1, this is the income from self-employment earnings, not passive investments the LLC may have. Solo 401k Contributions - 5

6 IRS Code Section 401(a)(3) SOURCE Contribution Limits for an S-Corp or C-Corp Here's how to calculate your contribution limits if your adopting employer (your business) is an S-Corp or C-Corp: Employee Elective Deferral Contribution: This is what you can contribute as an employee of your business. You can contribute up to a maximum of $18,000 (or $24,000 if you're over 50) and these contributions can be up to 100% of your (as the owner) self-employment income. These contribution limits are the same no matter your business structure (Sole Proprietorship, LLC [single or multi-member], C-Corp or S-Corp). Employer Profit Sharing Contribution: This is what you can contribute as the employer of your business. You are limited to contributing 25% of your business' compensation. This is an important distinction because the 25% is not taken by the company's overall profits, but the W-2 earnings are what can be contributed. Here's an example of how to calculate contributions: Jason is 49 and owns Get Money, Inc and he gets $300,000 of compensation from the company. His tax-deductible contribution can total $53,000 per year (which breaks down to $18,000 from elective employee deferral contributions + $35,000 employer profit sharing contributions). Now let's imagine that Kevin had his birthday and he's 51. If Jason is 51, owns Get Money, Inc and gets $300,000 of compensation from the company then his tax-deductible contribution can total $59,000 per year (which breaks down to $24,000 from elective employee deferral contributions + $35,000 employer profit sharing contributions). Finally, those numbers can double ($106,000 [if both spouses are under 50] or $118,000 [if both spouses are over age 50]) if Jason's wife participates in the plan. Talk about maximum contributions! IRS Code Section 401(a)(3) SOURCE Solo 401k Contributions - 6

7 How do I document the contribution on my taxes? How you claim / report your tax-deductible Solo 401k contribution depends on the type of business that adopted your Solo 401k plan (i.e. Sole Proprietorship, single-member LLC, multi-member LLC, partnership, C-Corp or S-Corp). Sole Proprietorship or Single-Member LLC: Deduct the contribution for yourself on your income tax return. Remember that you need to calculate your earned income from self-employment because the 20% calculation of your employer profit sharing contributions comes from that number. In addition to your tax form 1040, you may also need to file a Schedule C (Profit or Loss From Business), which is an attachment for the IRS Form Your Schedule C will show the net earnings from your business. Multi-Member LLC or Partnership: Each membe of your partnership or multi-member LLC will receive a K-1 (Partner's Share of Income, Deductions, Credits, etc) which is a part of the IRS Form Schedule K-1 will show each partner's earnings from the business and can document the plan contribution. C-Corp or S-Corp: Deduct your Solo 401k contributions on your corporate tax return. Important note: If you are an owner in a Subchapter S-Corp, then you can only use your W-2 income for your Solo 401k contributions. You cannot use your pass-through income. (IRS Source- Revenue Rulings and ) You do not need any special form or file to document a contribution for internal purposes, although airtight record keeping is strongly recommended for any type of business you run. When making a contribution to your Solo 401k, appropriate for your business entity structure, inform your CPA and/or tax preparer so they have it for your company (and tax) records. For further questions on how to document a Solo 401k contribution, please consult your legal counsel and/or tax advisor. Solo 401k Contributions - 7

8 When is the deadline to contribute to my Solo 401k? You have to make any and all contributions by no later than the tax return due date, including any extensions. For a Sole Proprietorship or Single-Member LLC, this means April 15th (or October 15th if you filed an extension). For multi-member LLCs, partnerships and corporations, this means April 15th (or September 15th if you filed for an extension). IRS Source Solo 401k Contributions - 8

9 Who writes the contribution check? Employee Elective Deferrals: Sole Proprietorship: Individual or DBA Account Partnership (LLC): Individual or DBA Account Corporation (C-Corp / S-Corp): Corporation Employee Roth Contribution: Sole Proprietorship: Individual or DBA Account Partnership (LLC): Individual or DBA Account Solo 401k Contributions - 9

10 Corporation (C-Corp / S-Corp): Corporation Employer Profit Sharing Contribution: Sole Proprietorship: Individual or DBA Account Partnership (LLC): Individual or DBA Account Corporation (C-Corp / S-Corp): Corporation Solo 401k Contributions - 10