As a self-employed business owner, you’re probably always looking for ways to save money and prepare for your retirement plan.
Maybe you’ve heard about Solo 401k plans, but you’re not sure how they work or how they can benefit you.
Solo 401(k) plans are retirement savings accounts for self-employed individuals and small business owners.
With a Solo 401(k) plan, you can make tax-deductible contributions to your retirement account and reduce your taxable income.
In this blog post, we’ll cover the advantages of Solo 401(k) plans, contribution limits and deadlines, and tips for boosting your retirement savings.
- Solo 401(k) plans are retirement savings accounts that allow self-employed individuals and small business owners to save for retirement and reduce their taxable income.
- The Solo 401k contribution deadline varies depending on your business type. The deadlines are March 15th, 2023, for S-Corp and partnership LLCs.
- April 18th, 2023, is the deadline for sole proprietors, single-member LLCs, or C-corp. Both deadlines allow a six-month extension until September 15th, 2023, and October 17th, 2023.
- For 2023, the limit for employee deferral contributions is $19,500, and the total contribution limit is $66,000 and $73,000 if you’re 50 or older, including employee and employer contributions.
What is Solo 401(k) Contribution?
Solo 401(k) plans are retirement savings account that allows self-employed individuals and small business owners to save for retirement.
Unlike traditional 401(k) plans, which employers typically offer, Solo 401(k) plans are designed for self-employed individuals or own a small business with no employees.
With a Solo 401(k) plan, you can make total contributions as an employer, which can help you maximize your retirement savings.
Profit Sharing Contributions
Profit-sharing contributions are contributions made by the employer to the plan, which are then allocated to eligible employees based on a predetermined formula.
These contributions can be an excellent way for employers to reward their employees for their hard work and dedication.
Employer profit-sharing contributions can be made in addition to employee contributions and can provide significant tax benefits for both the employer and employee.
But how much can an employer contribute as profit sharing?
If you are taxed as an unincorporated business, such as a sole proprietor or partnership, you can contribute up to 20% of your net business income.
This means the amount on Line 31 of Schedule C or Line 14 of K-1, after deducting one-half of self-employment tax.On the other hand, if you are taxed as S-corp/C-corp, you can contribute up to 25% of your W-2 income.
Solo 401k Contribution Limits
One of the key benefits of a Solo 401(k) plan is the high contribution limits. For the tax year 2023, the limit for employee deferral contributions is $22,500 or $30,000 for 50 and older.
In addition to employee deferral contributions, you can also make these contributions to your Solo 401k plan.
Solo 401k Contribution Deadline in 2023
Mark your calendars – the deadline for 2023 is fast approaching!
However, the deadline varies depending on your business type, so knowing the deadlines is essential to ensure you contribute to your retirement plans.
If you are an S-Corporation or partnership LLC, your deadline is March 15th, 2023.
On the other hand, if you are a sole proprietor, single member LLC, or C-corporation, your deadline is April 18th, 2023.
But what if you need more time to make your contributions?
No need to worry – both are the deadlines for filing for a six-month extension.
The extensions allow for an extension to the Solo 401k contribution deadlines until September 15th, 2023, and October 17th, 2023, respectively.
It’s important to note that while these extensions provide more time for contributions, employer contributions must still be made by the due date of the business’s tax return, including attachments.
Interact with Employee Contribution
As discussed earlier, the Solo 401k contribution deadline is the personal tax filing deadline, typically on April 15th.
However, something to keep in mind is that the W-2 deadline can complicate the employee contribution process.
You must file W-2 forms, including employee contributions, by January 31st, 2023. If you plan on making employee contributions for 2022, you must ensure they are made by January 31st, 2023, so they can be included in the W-2 form.
But what if you still need to make the employee contributions by January 31st, 2023? Don’t worry; you still have options.
You can choose the amount you plan to contribute to ensure your employee contribution is included in your W-2 form.
Even if you miss the January 31st, 2023 deadline, you still have time to make employee and employer contributions until the federal tax filing dates (including extensions).
Where Should You Start Contributing Solo 401(k)
First, one way to fund your Solo 401k is through rollovers. This is the quickest and easiest way to support your plan and involves rolling over retirement funds from other sources.
You can roll over funds from an existing SDIRA, Solo 401k, traditional IRA, 401k, etc. and more.
Consolidating all your retirement accounts into one self-managed fund can make it easier to manage your retirement plan.
Another way to fund your plan is through new contributions. Your Solo 401k offers three contribution choices: pre-tax, Roth, and voluntary after-tax.
Pre-tax contributions are tax-deferred, reducing your taxes in the year taken. After-tax Roth contributions go into your Solo 401k Roth sub-account and are tax-free when withdrawn.
Voluntary after-tax contributions are after-tax contributions that grow tax-deferred until withdrawals begin.
The best part? No minimum contributions exist, so you can contribute as much or as little as you’d like.
You must follow the IRS-established Solo 401k contribution deadlines; otherwise, you can contribute on your schedule.
In conclusion, Solo 401(k) plans offer great benefits for self-employed individuals and small business owners, providing an excellent way to save for retirement and reduce their tax bills.
By comprehending this article’s employee and employer contribution limits and deadlines, you can optimize your contributions and ensure a stable financial future.
If you need clarification on setting up your Solo 401(k) plan or have any questions, feel free to contact us.
Our team of financial advisors and tax professionals can help you navigate the process and ensure that you’re on track to meet your retirement goals.
So, what are you waiting for? Start planning and contributing to your Solo 401(k) plan today and take advantage of its many benefits. Contact us now to get started on securing your financial future!