Speak with a Broad specialist:
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Speak with a Broad specialist:
(800) 395-5200Schedule a CallOpen an Account

November 17, 2020

Solo 401(k) - New 2020 Deadlines

Tax code can be confusing but that shouldn’t stop you from getting the maximum benefit. Let’s break down a recent tax change involving the new Solo 401(k) deadline and clarify what it means for you. (If you happen to enjoy tax law in all of its glorious complexity, you can check out the original Congressional bill here. Pay particular attention to Sec. 201.)

Two Types of Solo 401(k) Contributions

The Solo 401(k) is a little bit trickier than other self-directed plans because it involves two different kinds of contributions. The first is the Salary Deferral contribution. This is equivalent to the employee contribution that you would find in a standard 401(k). The second is the Profit Sharing contribution. This is similar to the employer contribution. What makes the Solo 401(k) unique is that it contains both elements at once, and the Solo plan participant manages both at the same time. (A Broad Specialist can help you navigate this process if you have questions.)

New Solo 401(k) Guidelines and Deadlines

The easiest way to understand the new Solo 401(k) guidelines is to remember three things:

  • There are two types of contributions (Salary Deferral and Profit Sharing) and they have different rules.
  • There are two deadlines that affect each kind of contribution: Plan Creation deadline and Contribution deadline.
  • The two deadlines can be different for the same contribution.

Now let's take a look at the two types of contributions. The Salary Deferral contribution was not changed under the new guidelines. In order to make a Salary Deferral contribution, the Solo 401(k) plan must be created by December 31. The contribution deadline is variable. If your plan is sponsored by an incorporated entity, then contributions must be made within seven days of running payroll. If it is unincorporated, then you have until the tax filing deadline (with all applicable extensions) to make your contribution.  The Profit Sharing contribution was changed under the new guidelines. Now both the Plan Creation deadline and the Contribution deadline are the same as the tax filing deadline.  Here’s a chart to help visualize the current guidelines. Note that only one deadline has changed with the new rules: the Profit Sharing Plan Creation deadline.   Table 1: Solo 401(k) Guidelines

What the New Solo 401(k) Guidelines Mean For You

The Solo 401(k) changes have different implications depending on where you’re holding in the investing process.

  • If you haven’t yet created a Solo 401(k), it would be best to do so before December 31. This will allow you to take advantage of both kinds of contributions. Further, as long as you get the plan open by then, you can wait on the actual contributions until your tax filing deadline. If for some reason you miss the December 31 deadline, you can still open the Solo 401(k) by your tax filing deadline and take advantage of the Profit Sharing contribution.
  • If you already have a Solo 401(k), then your contribution deadlines remain unchanged.

FAQ

Does 2020 have new contribution limits for the Solo 401(k)?

The contribution limits have gone up slightly. Here’s a break down:

Table 2: Solo 401(k) Contribution Limits 2020  

Source: https://www.irs.gov/retirement-plans/one-participant-401k-plans

How do I calculate my contribution limit? 

Calculating your contribution limit is a simple three-step equation. For example, if you make $50,000 income from your self-employed business, you can contribute up to $32,000 to your Solo 401(k).

To calculate, complete the following:

  1. Decide the amount of Salary Deferral contributions. If you contribute the full $19,500, you are limited to making $37,500 in profit sharing contributions (to avoid exceeding the $57,000 limit for 2020).
  2. Determine the amount of Profit Sharing contributions. If the company is a corporation, you can contribute 25% of your compensation to the plan, which is $12,500 ($50,000 multiplied by 25%).
  3. Add the contribution amounts together, summing to $32,000 ($19,500 plus $12,500).

To determine your personal contribution limit, refer to the Solo 401(k) Calculator.

Can I receive a loan from my Solo 401(k)? 

Yes! You may borrow up to $50,000 from your Solo 401(k) to use however you like. Learn more about taking a loan from your Solo 401(k) and the repayment structure.

For any additional questions, contact a Self Directed Expert.


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