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Contributions

Contribution basics

As the year comes to a close, we'd like to remind you to plan for your contributions to your Solo 401k. In this article, we'll discuss the following questions:

  1. How do I calculate my contributions for this year?
  2. How do I actually make contributions to my Solo 401k?
  3. When is the deadline to make contributions?

How do I calculate my contributions for this year?

  • Solo 401k contributions are comprised of two components:
    • On the employee side – employee salary elective deferral
    • On the employer or business-owner side – employer profit sharing
  • Contributions can only be made from the business earnings of the adopting business
  • The Contributions Calculator explains the maximum employee and employer contributions that can be made to the Solo 401k
  • Always check the totals with your CPA.

For more information:

How do I actually make contributions to my Solo 401k?

  • The way to make contributions to your Solo 401k depends on the type of adopting business.
  • If your Solo 401k is sponsored by a corporation:
    • Employee salary elective deferrals must be processed through payroll. Speak with your payroll provider to request this.
    • If payroll has already been processed for the year, the only option is to amend the Q4 reports to reflect the contributions to the 401k. Keep in mind that contributions will affect the taxes paid as well as other numbers.  Speak with your payroll provider about making this correction.
  • If your Solo 401k is sponsored by another type of business (e.g. sole proprietorship, LLC), all contributions must come from your adopting business's bank account.
  • All contributions must be elected and documented via the appropriate form.
  • There are two forms, depending on the type of contribution made.
  • All elections to contribute must be made before December 31st of the year. This means the date on your contributions form must be before December 31st.
  • As Plan Administrator, keep the completed contribution forms as part of your record-keeping for the plan.
  • Issue a check payable to your 401k trust (refer to the IRS letter for the exact spelling)

For more information:

When is the deadline to make contributions?

  • The Solo 401k contribution deadline can vary depending on two factors:
    • Type of adopting business (e.g. sole proprietorship, single-member or multiple-member LLC, C or S Corporation)
    • How the contribution is made, e.g. as an employee salary elective deferral or employer profit-sharing
  • Review our “Contribution Deadline” article for the specific deadlines

For more information:

Am I required to contribute every year to my Solo 401k plan?

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Am I required to make annual contributions to my Solo 401k Plan?

Answer:

Contributions are not required every year. However, the plan will not be considered qualified if it appears from surrounding facts and circumstances that the plan was established as a temporary program.

A plan will be considered temporary if:

  • The plan is abandoned within a few years after being established for reasons other than business necessity
  • Substantial and recurring contributions are not made to the plan

A plan will be considered permanent as long as substantial contributions are being made occasionally, even if contributions are not made every year.  The employer reserves the right to discontinue the profit sharing contributions without jeopardizing its status as a permanent program.

Matching contributions for a Solo 401k?

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Are there any matching contributions for a Solo 401k?

Answer:

No.  Matching contributions are listed in the Solo 401k Plan as not applicable.

There are no matching contributions because the plan is designed to be as flexible as any retirement plan can be allowed by law in the U.S. This might mean that some years you will make employer contributions and in other years you won’t. This allows the greatest flexibility within the plan. Employer contributions are known as "Profit Sharing".  Please review the following link to learn more:

Contribution Basics

Separate accounts

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I read in the banking instructions that I need to have separate account for different type monies in my plan. I understand the difference between pre-tax contributions vs. post-tax (Roth), but why do I need separate account for profit sharing contributions?

Answer:

Separate accounts are set for each type of contribution because of the different plan and IRS rules for each type of contribution.  The regulations require this for qualified plans.

For example, elective deferrals cannot be distributed as an in-service distribution prior to the participant attaining age 59 ½; whereas, profit sharing contributions can be distributed as an in-service distribution with no age restriction.

Another example:  if the plan allows for hardship distributions for elective deferrals, you can only distribute the contributions, not the earnings.

Can profit sharing contributions be made to my Solo 401k throughout the year?

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Can profit sharing contributions to my Solo 401k be made throughout the year, or do I have to wait until the end of the year to make them?

Answer:

Profit sharing contributions can be made throughout the year. However, note that the profit sharing contributions are limited to a percentage of your compensation (25% for corporations, 20% for single member LLCs or sole proprietors) at the time you are making them.

 

For example, if your compensation (i.e. the wages you take from the company) up to date are $16,000, your corporation can put up to $4,000 in profit sharing contributions.

What happens when my spouse stops working for my business?

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Answer:

If you and your spouse work in your business together and your spouse stops working in the business, (s)he can still participate in the plan in terms of directing their existing assets in the plan. Your spouse has all the rights of the participant except the ability to make contributions into the plan.

Your spouse does not need to transfer their funds out of the plan and stop being a participant. However, (s)he can not make contributions.

Solo 401k contribution from self-employment income

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Is it correct that a Solo 401k only allows me to contribute based on my self-employment income?

Answer:

Yes. The Solo 401k plan is an employer-sponsored plan. The employer is the plan sponsor which you used to adopt the plan.  This is your self-employment, either you as sole-proprietor or a business entity (LLC, corporation, etc).

All contributions to your Solo 401k must come from the business earnings of your self-employment. You cannot contribute any additional funds from full-time employment W2 wages elsewhere or any other funds not related to the sponsoring entity.

In additional to large contributions limits from your self-employment income, you are able to roll over existing funds from other qualified retirement plans such as a Traditional or SEP IRA, 403B, 401k, etc.

Contributions from my corporation

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Can you please explain how to make contributions to my 401k from my corporation. Can I get paid by the corporation as an independent contractor via 1099 and then claim the state taxes on my personal return or do I need to do the payroll deductions and submit them to the state?

Answer:

Since your 401k plan is sponsored by the corporation, all employee elective deferrals must be made through the payroll.

Profit sharing contributions are made by the company and are 100% deductible.

Since you own a corporation you must take reasonable salary, please consult your CPA or tax advisor for details. Be sure to inform your payroll service provider (payroll company or your CPA) that you intend to make contributions into the 401k. Contributions made by the employee must be reflected on the payroll and the funds must be deposited to 401k account within 7 days of payroll.

Below is an example of a paystub showing the deduction from wages, into the Roth 401k:

Pay-stub-sample

Below is an example of the W2 showing $18,000 contribution made to a Roth 401k in the box 12a:

(In the example below there are Roth contributions (Box 12a code AA). In this case, the amount would be included in box 1. If the deferrals are pre-tax the code used in box 12a would be "D" and then amount in box 1 would be reduced by the amount in box 12a.)

W2-sample

Contributions to both SEP and Solo 401K in the same year

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Does the IRS allow contributions to both SEP IRA and Solo 401K in the same year?

Answer:

Yes, you may contribute into the SEP IRA and Solo 401K plan in the same year. However, you cannot exceed limitations of contributions in total.

The Solo 401K plan is more advantageous and allows you to maximize your contributions quicker since it includes both an employee deferral and a profit sharing component. The SEP IRA only has a profit sharing component. Most individuals will stop utilizing the SEP IRA and use only the Solo 401K plan. There is no reason to keep the SEP IRA open.

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