Self-Directed Solo 401(k) Contribution Limits and Types
With a Self-Directed Solo 401(k), depending on your salary and age, you could contribute $56,000 per year or $62,000 for those 50 or older in 2019.
Contributions to a Self-Directed Solo 401(k) consist of two types
Type 1
Elective Deferral (401k) also known as Employee Contributions. For 2019, the elective deferral increased from $18,500 to $19,000 as an employee (or $25,000 if you are 50 or older), even if that is 100% of your self-employed earnings for the year. Contributions are made on a pre-tax basis, a Self-Directed Roth 401(k) allows you to invest some or all of your contributions on an after-tax basis. Pre-tax contributions and their earnings will be taxed as regular income when withdrawn in retirement; Roth contributions will be tax-free in retirement.
Type 2
Profit sharing also known as Employer Contribution. For 2019, this amount cannot exceed $56,000.
If your business type is a Corporation, the maximum profit-sharing contribution is 25% of payroll income and still subject to the above profit-sharing amounts.
If your business type is a Sole Proprietor/Partnership, the maximum profit-sharing contribution is 20% of net income and still subject to the above profit-sharing amounts.
*IMPORTANT
For 2019, If you decide to take the full $19,000 for the elective deferral (Type 1), you are limited to making $37,000 in profit-sharing contributions (Type 2) so that your contributions do not exceed $56,000
Rollover Contributions and Direct Transfer
You may “roll over” into your Self-Directed Solo 401(k) amounts you have in another 401(k), a governmental 457(b) plan or a 403(b) plan. You may also “roll over” amounts you have in an IRA (other than a Roth IRA) into your Self-Directed Solo 401(k).
There are no limits on the amount that you can Rollover or Transfer.
Claiming the Self-Directed Solo 401(k) Contribution Deduction:
Self-Directed Roth Solo 401(k) and voluntary after-tax contributions are not tax deductible, but pre-tax Solo 401(k) contributions are deductible. Claiming the pre-tax contribution deduction is driven by the type of self-employed business sponsoring the Solo 401(k) plan.
Qualifying for a Self-Directed Solo 401(k) Plan:
Q: Who can open a Self-Directed Solo 401(k) plan?
A: Generally, any business may adopt a Self-Directed Solo 401(k). The business need not assume any particular legal form. Thus, a self-employed business owner, a partnership, a limited liability company (LLC) or any type of corporation (including a Sub-chapter S corporation) may adopt a Solo 401(k).
Self-Directed Solo 401(k) Establishment Deadline:
Q: When does the Self-Directed Solo 401(k) have to be opened?
A: An employer must establish the plan by the end of the tax year for which the tax deduction is desired. For example, an employer operating the plan on a calendar-year basis must complete the plan documentation no later than December 31.
December 31, 2019 Self-Directed Solo 401(k) Setup Deadline QUESTION:
Q: I will need to set up an account by end of year correct?
A: If you are self-employed and open a Self-Directed Solo 401(k) plan by December 31, 2019, you will be able to wait until next year (2020) to contribute $56,000 plus an additional $6,000 if you turn 50 in 2019 or are already over age 50. This essentially means that you simply need to sign the Solo 401(k) documents by December 31, 2019 so that you can wait until next year to both open the Solo 401(k) bank account and make both annual Self-Directed Solo 401(k) contribution types (employee and employer).
Change in Business Name Effect on Contributions QUESTION:
Q: For 2020 I plan on getting paid through an LLC, does this have an effect on my Self-Directed Solo 401(k) if established this year? For 2019 I am an independent contractor with no LLC or corp set up.
A: You can still setup the Self-Directed Solo 401(k) in 2020 under your sole proprietor business. Next year, we can update the plan to list the new self-employed business. All else would remain the same (e.g., same plan name, same bank account for the Solo 401(k), etc.). The 2020 annual Solo 401(k) contributions would be based on your new self-employment income and you would have until 2021 to make those contributions.
Profit Sharing Contribution QUESTION:
Q: Does that mean that for 2019 my spouse and I could EACH contribute up to $112K in Type 2 contributions into our respective Solo 401(k) plans (so: $56K *2 = $112K theoretical max contributions).
A: Yes, provided you each separately have enough net self-employment income to satisfy said contribution amounts.
Salary QUESTION:
Q: Does my spouse need to be paid a salary from the business before the business can make a Type 2 contribution on her/his behalf?
A: Yes, in order for either spouse to contribute to the Self-Directed Solo 401(k) plan, whether employee or employer contributions, the spouse that wants to contribute to the Solo 401(k) plan has to have net self-employment income.
Employee Contribution QUESTION:
Q: If my spouse already maxed out her/his Type 1 contribution from her/his ‘day job’, and assuming I had the necessary net business income, could I theoretically make the max $56K contribution entirely as a Type 2 contribution?
A: First, your spouse’s contributions have no impact on your contributions because the contribution limits are per participant. However, correct that employee contributions (Type 1) are capped at $19,000 for tax year 2019 (plus a $6,000 catch-up if age 50 or older) between all 401(k) plans. Therefore, if your spouse has already maxed out the $19,000 employee contribution (Type 1) to her/his day job 401(k) plan, then she/he can only make the profit-sharing contribution (Type 2) to the Solo 401(k) plan and it would be based on her/his net self-employment income from the business that sponsors the Self-Directed Solo 401(k) plan. You on the other hand, can make both the employee (Type 1) and profit-sharing contributions (Type 2) to the Solo 401(k) plan if you have net self-employment income and have not contributed to any other 401(k) plan.
Do I have to Make Contributions QUESTION:
Q: What is the minimum I should contribute every year to keep my Self-Directed Solo 401(k) in good standing with the IRS?
A: While one of the benefits available under a retirement plan such as a Self-Directed Solo 401(k) plan is the ability to make annual contributions even if you are over age 70 1/2, you are not required to make annual Solo 401(k) contributions in order to continue with the Solo 401(k) plan.
Contribute for Spouse QUESTION:
Q: Do I need to make equal Self-Directed Solo 401(k) contributions for me and my spouse or can they be different?
A: Because a Self-Directed Solo 401(k) plan is only for owner-only businesses, equal contributions do not apply; therefore, just one spouse can contribute while the other does not.
Contribute to Self-Directed Solo 401(k) and Day-Time Job 401(k) QUESTION:
Q: As a W-2 employee, participating in her/his employer’s 401(k) already, how much can she/he contribute to our Self-Directed Solo 401(k) plan each year? She/he is 58 years old.
A: Your spouse’s ability to contribute to a Self-Directed Solo 401(k) depends on the self-employment income that she/he receives from the partnership. Specifically, in order to determine how much she could contribute to the Solo 401(k) she/he would take the amount reported on her/his K-1 and reduce it by one half of the self-employment tax. Of that number, she/he could contribute for 2019: (i) up to $25,000 as an employee contribution (less any amount contributed as an employee contribution to her/his 401(k) plan sponsored by her/his daytime employer); and (ii) a profit-sharing contribution to the Self-Directed Solo 401(k) equal to 20% of that same number (i.e. from her/his K-1 -1/2 of the self-employment tax) provided that her overall contribution to the Solo 401(k) cannot exceed $62,000.
Self-Directed SIMPLE IRA and Self-Directed Solo 401(k) Contribution QUESTION:
Q: I wanted to confirm if I’m correct in making contributions into my Self-Directed Solo 401(k) for this year. For this year, I’m guessing I will just deposit my annual contributions into the Solo 401(k) account?
A: Have you made any Simple IRA contributions for 2019? If you have not, do not make it to the Self-Directed Simple IRA if the Simple IRA is also for your self-employed business, as the IRS rules do not allow contributions in the same year to both a Self-Directed Solo 401(k) and a Simple IRA.
Documenting Contribution QUESTION:
Q: I set up the Self-Directed Solo 401(k) bank account and I deposited $18K for annual contribution for 2019. Do you need any information on this or would it just be year-end reporting?
A: While we do not report contributions made to 401(k) plans to the IRS, we recommend that you include information about the type of contribution (example-whether it is a salary deferral or an employer contribution), so that we can record it accordingly on your account statements. Any reporting to the IRS would be done when you file your tax returns.
Guaranteed Payments Partnership QUESTION:
Q: Can you count guarantee payments from a partnership for purposes of the Self-Directed Solo 401(k) contribution calculation?
A: It depends on whether or not those guaranteed payments are reported on the correct line of the K-1, as contributions to a Self-Directed Solo 401(k) plan must be based on earned income from self-employment activity not passive or investment income.
S-Corp Contribution QUESTION:
Q: We are an LLC taxed as an S-Corp. It appears that I may make a Solo 401(k) contribution for myself and my spouse, but we have to take w-2 income from the company, Correct?
A: Correct since earned income for an S-corp is reported on a W-2. Both the employee and profit-sharing contribution is based on W-2 wages, and each spouse, provided they receive W-2 wages from the self-employed business, can make Self-Directed Solo 401(k) contributions.
S-Corp Tax Return Amendment QUESTION:
Q: I am a CPA – I have a client (s-Corp) who has a Self-Directed Solo 401(k). They went on extension but there was a mix-up and the return was filed without a Solo 401(k) deduction and without the contribution being made. Since it is still in the extension period can the contribution be made, and the return amended?
A: Yes, since a timely business tax return extension was filed. The Self-Directed Solo 401(k) contribution rules allow for contributions of both the employee and employer by September 15 if a tax return extension is timely filed. See IRS Publication 560 for more information surrounding the contribution deadlines.
Tax Deductible IRA Contributions if I have a Solo 401(k) QUESTION:
Q: As my spouse and I are not contributing to our Self-Directed Solo 401(k) plan, does that mean that we are not active participants and IRA contributions are tax deductible? (We do exceed the MAGI levels.)
A: Yes, you are still considered “covered by a retirement plan at work” even if you are not making Self-Directed Solo 401(k) contributions.
While you can still contribute to a Traditional IRA, your Traditional IRA contribution deductions will be reduced (phased out) if your AGI is a certain amount.
For 2019, if you are covered by a retirement plan, your deduction for contributions to a Traditional IRA is reduced (phased out) if your AGI is:
- More than $103,000 but less than $123,000 for a married couple filing a joint return or a qualifying widow(er),
- More than $64,000 but less than $74,000 for a single individual or head of household, or
- Less than $10,000 for a married individual filing a separate return.
Vesting and Safe Harbor QUESTION:
Q: We can have all contributions vest immediately correct? And I can do profit sharing etc. without worrying about any Safe Harbor provisions (because this is a Self-Directed Solo 401(k). So as long as I do not have any employees I will have full flexibility correct?
A: A Self-Directed Solo 401(k) is not subject to the safe harbor rules since it is a 401(k) for owner-only employees. Same with vesting, all contributions are fully vested immediately because it is a 401(k) plan sponsored by a self-employed business with no common law employees.
Already Paid Payroll Tax Through Employer QUESTION:
Q: I think I should be able to contribute more to my Self-Directed Solo 401(k) than is shown in online calculators because I have already paid all my payroll taxes through an employer so my SE tax due is only $798 (per Turbo tax (not yet filed) vs. $2,104 (shown in the online calculator) which reduces how much it says I can contribute.
A: While you have already paid all of your payroll taxes (i.e., social security and Medicare) through your W-2 employer, this has no impact when calculating the Self-Directed Solo 401(k) contribution as the contribution still requires the reduction of 1/2 of self-employment tax if the self-employed business is a sole proprietorship.
In other words, the fact that you have already paid some or the maximum payroll tax through your day job means that you may or may not owe additional social security and Medicare tax, but this does not mean that 1/2 of self-employment tax does not need to be reduced from Schedule C when performing the Solo 401(k) contribution calculation.
Existing Self-Directed Solo 401(k) QUESTION:
Q: If I have an existing individual 401(k) plan at a brokerage, can I adopt your plan as a restatement of my existing plan? Do I need to do that by end of this year in order to make after-tax non-Roth contributions (which are not stated as an option in my current plan)?
A: Yes, you would need to change/restate the individual 401(k) to our Self-Directed Solo 401(k) plan this year in order to preserve the right to make Roth and/or after-tax contributions for 2019 by your tax return deadline next year.
State/City Tax Contributions QUESTION:
Q: For contributions, is the Self-Directed Solo 401(k) also tax exempt for state and local income tax purposes? Non-income tax?
A: Pre-tax contributions to a 401(k) are exempt from federal taxes as well as most state and local taxes. You may wish to check with your state and/or local tax agencies. Here is a link to the state tax agencies: https://www.irs.gov/tax-professionals/government-sites
Flow of Contributions QUESTION:
Q: I know that since my self-employed business is an S-corporation that the contributions are based upon W-2 earnings, but do they have to come out of payroll or can they be made from my personal bank account?
A: From a Self-Directed Solo 401(k) perspective, what matters is that the contributions (employee and employer) are made based on W-2 wages. Therefore, regardless if the funds first flow from the Corporation bank account to your personal bank account and then to the Solo 401(k) plan, it will still satisfy the Self-Directed Solo 401(k) contribution rules (i.e., both the employee and employer contributions were made by your business tax return due date and were based on W-2 wages from the S-corporation).
Extension Apply to Both Contribution Types QUESTION:
Q: My LLC filed for a tax extension-does that mean I do not need to make any contributions (including my personal share) until the extension deadline?
A: Self-Directed 401(k) contributions (both employee and employer) deadlines are based on the type of entity sponsoring the Solo 401(k) so you are correct. Please see the following.
- If the entity type is a Sole Proprietorship, the annual Self-Directed Solo 401(k) contribution deadline is April 15, or October 15 if tax return extension is timely filed.
- If the entity type is an LLC taxed as an S-Corporation (calendar year), the annual Self-Directed Solo 401(k) contribution deadline is March 15, or September 15 if tax return extension is timely filed.
- If the entity type is an LLC taxed as a Partnership (calendar year), the annual Self-Directed Solo 401(k) contribution deadline is March 15, or September 15 if tax return extension is timely filed.
- If the entity type is a Partnership (calendar year), the annual Self-Directed Solo 401(k) contribution deadline is March 15, or September 15 if tax return extension is timely filed.
- If the entity type is an S-Corporation (calendar year), the annual Self-Directed Solo 401(k) contribution deadline is March 15, or September 15 if tax return extension is timely filed.
- If the entity type is a C-Corporation (calendar year), the annual Self-Directed Solo 401(k) contribution deadline is April 15, or September 15 if tax return extension is timely filed.
Do Direct-Rollovers Impact Annual Contribution Limits QUESTION:
Q: I would like to move $35K into my Self-Directed Solo 401(k) from an existing IRA. Would that have any impact on my contribution limits this year? And, is there a certain form I should use?
A: No, direct-rollovers from an IRA to a Self-Directed Solo 401(k) plan do not count towards your annual contribution to the Solo 401(k) plan. You can directly rollover unlimited amounts from an IRA to a Solo 401(k) plan without affecting your annual Solo 401(k) contribution limits. We will prepare an IRA transfer form as your Self-Directed Solo 401(k) provider.
Mega Back Door Roth Solo 401(k) Contribution Limit QUESTION:
Q: If I contribute to my day-job (full-time employer) 401(k) plan, can I do the Mega Roth IRA rollover thru my Solo 401(k)? (IE, contribute the maximum to the other 401(k) and get their company match), contribute extra to the Solo 401(k) plan, and then immediately roll it over to a Roth IRA?
A: Yes, see the following.
- The overall limit in 415C (i.e. $55,000 for 2018, and $56,000 for 2019) applies on a per employer basis provided that the employers are unrelated.
- This limit is applied without consideration of contributions made to a plan sponsored by an unrelated employer.
- The elective deferral limit in 402G (i.e. $19,000 for 2019) applies only to elective deferrals and does not impact after-tax contributions.
- Here is an Example:
- For 2019, individual contributes $19,000 of the elective deferrals to a 401(k) plan sponsored by his/her W-2 employer & additional matching and profit-sharing contributions are made up to the limit of $56,000.
- Individual has an S-corp side business with no employees that generates self-employment income (i.e. compensation) greater than $56,000.
- Individual can contribute after-tax contributions up to $56,000 to the Solo 401(k) sponsored by side business.