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Solo(k) Contributions Explained

The Specialized Solo(k) offers unprecedented flexibility when making contributions to your account. Below you can find some helpful information to understand how contributions work.

Two Contribution Components

Employee Contribution – You are an employee of your business and can contribute as such. This type of contribution is referred to as a salary deferral.
Employer Contribution – As the employer of your business you also are entitled to contribute to the plan. This type of contribution is referred to as profit sharing contribution.

Catch-up Contributions

As an employee if you are age 50 or over, you are able to make an additional contribution to the plan referred to as a catch-up contribution.

Tax Deductible Contributions

– Contributions to your Specialized Solo(k) can provide substantial tax savings when making tax deductible contributions.

– Employee contributions can be tax deductible. Simply indicate on the contribution form Traditional (tax deductible) for contribution type.

– Employer Profit Sharing contributions are always made as tax deductible (traditional) type contributions.

– Unincorporated businesses such as sole proprietors can generally deduct salary deferral and profit sharing contributions from personal income.

Roth Contributions

– Sometimes referred to as a Roth 401(k), contributions to your Solo(k) can provide you the opportunity to designate your employee contributions as Roth (after tax).

– By making contributions after tax (Roth) all future earnings are distributed tax free. (Qualified Distributions)

– Unlike the Roth IRA, there are no income limits on contributions to an Solo(k). This feature allows high income earners not eligible to make direct contributions to a Roth IRA to make Roth contributions to a Solo(k).

In Service Conversions

– Profit Sharing contributions made by you, as an employer, must be made as a tax deductible (traditional) contribution.

– In 2013 the rules were amended that allow the employer profit sharing contributions to be converted to your Roth (tax free) bucket.

Contribution Deadlines

For a sole proprietorship, partnership, or an LLC taxed as a sole proprietorship…

– Employee salary deferral contributions can be deposited up to your personal tax filing deadline plus extensions.

– Employer profit sharing contributions can be deposited up to your personal tax filing deadline plus extensions.

For a S or C Corp or an LLC taxed as a corporation…

– Employee salary deferral contributions must be deposited as soon as reasonably possible after each W-2 pay period.

– Employer profit sharing contributions can be made up to the corporate tax filing deadline plus extensions. For entities with a calendar year, that means March 15th plus available extensions.

Solo 401k contribution deadline can vary depending on the business type (sole proprietorship, single-member or multiple-member LLC, C or S Corporation) and the way in which the contribution is made, such as by employee deferral or profit-sharing component of contribution. Let’s look at the various deadlines according to business and contribution type:

Sole Proprietorship

Employee Deferral

The owner of a sole proprietorship who is under the age of 50 may make employee deferral contributions of as much as $18,000 to a Solo 401(k) plan for 2015 (Those 50 and older can tack on a $6,000 annual catch-up contribution, bringing their annual deferral contribution to as much as $24,000). Solo 401k contribution deadline rules dictate that plan participant must formally elect to make an employee deferral contribution by Dec. 31. However, the actual contribution can be made up until the tax-filing deadline. Pretax and/or after-tax (Roth) funds can be used to make employee deferral contributions.

Profit Sharing Contribution

A sole proprietorship may make annual profit-sharing contributions to a Solo 401(k) plan on behalf of the business owner and spouse. Internal Revenue Code Section 401(a)(3) states that employer contributions are limited to 25 percent of the business entity’s income subject to self-employment tax. Schedule C sole-proprietors must base their maximum contribution on earned income, an additional calculation that lowers their maximum contribution to 20 percent of earned income. IRS Publication 560 contains a step-by-step worksheet for this calculation. In general, compensation can be defined as your net earnings from self-employment activity. This definition takes into account the following eligible tax deductions: (1) the deduction for half of self-employment tax and (2) the deduction for contributions on your behalf to the Solo 401(k) plan. A business entity’s Solo 401(k) contributions for profit sharing component must be made by its tax-filing deadline.

Single Member LLC

Employee Deferral

The owner of a single member LLC who is under the age of 50 may make employee deferral contributions of as much as $18,000 to a Solo 401(k) plan for 2015 (Those 50 and older can tack on a $6,000 annual catch-up contribution, bringing their annual deferral contribution to as much as $24,000). Solo 401k contribution deadline rules dictate that plan participant must formally elect to make an employee deferral contribution by Dec. 31. However, the actual contribution can be made up until the tax-filing deadline. Pretax and/or after-tax (Roth) funds can be used to make employee deferral contributions.

Profit Sharing Contribution

A single member LLC business may make annual profit-sharing contributions to a Solo 401(k) plan on behalf of the business owner and spouse. Internal Revenue Code Section 401(a)(3) states that employer contributions are limited to 25 percent of the business entity’s income subject to self-employment tax. Schedule C sole-proprietors must base their maximum contribution on earned income, an additional calculation that lowers their maximum contribution to 20 percent of earned income. IRS Publication 560 contains a step-by-step worksheet for this calculation. In general, compensation can be defined as your net earnings from self-employment activity. This definition takes into account the following eligible tax deductions: (i) the deduction for half of self-employment tax and (ii) the deduction for contributions on your behalf to the Solo 401(k). A single member LLC’s Solo 401(k) contributions for profit sharing component must be made by its tax-filing deadline.

Solo 401k Contribution Deadline for Multi-Member LLC

Employee Deferral

The owner of a multiple member LLC who is under the age of 50 may make employee deferral contributions of as much as $18,000 to a Solo 401(k) plan for 2015 (Those 50 and older can tack on a $6,000 annual catch-up contribution, bringing their annual deferral contribution to as much as $24,000). Solo 401k contribution deadline rules dictate that plan participant must formally elect to make an employee deferral contribution by Dec. 31. However, the actual contribution can be made up until the tax-filing deadline. Pretax and/or after-tax (Roth) funds can be used to make employee deferral contributions.

Profit Sharing Contribution

A multiple-member LLC business may make annual profit sharing contributions to a Solo 401(k) plan on behalf of its business owners. Internal Revenue Code Section 401(a)(3) states that total contributions are limited to 25 percent of the business entity’s income subject to self-employment tax. A multiple-member LLC must make any profit-sharing contributions before its tax-filing deadline.

C-Corporation & S-Corporation

Employee Deferral

Using a W-2 form, an employee of a C Corporation or S Corporation can make a deferral contribution at any time within the year when the income to be contributed is earned. Timing of the contribution typically will depend on the corporation’s payroll structure. If the corporation uses a payroll company, a deferral contribution generally will be deducted from the employee’s paycheck. If the company does not use a payroll company, an employee can elect to make a deferral contribution at any time during the year. The Department of Labor’s safe harbor guidelines stipulate that a deferral contribution to a Solo 401(k) account is to be made within seven days of the date on which the employee elects to make the contribution. An employee who elects to make a deferral contribution in a given pay period — on Dec. 30, for example — should be sure that his or her paycheck for that period is sufficient to cover the contribution. Pretax and/or after-tax (Roth) funds can be used to make employee deferral contributions.

Profit Sharing Contribution

The corporation may make annual Solo 401(k) contributions for profit sharing component for its owner(s)/employee(s). Internal Revenue Code Section 401(a)(3) states that total contributions are limited to 25 percent of the compensation paid. The corporation must make any profit-sharing contributions before its tax-filing deadline.