2020 Solo 401(k) Contribution Deadline
Dylan Telerski / 9 Nov 2020 / Business
The 2020 tax year has shifted the deadline for when sole proprietors can start Solo 401(k) plans and how long they have to contribute.
Previously, you would have had until December 31, 2020, to establish your Solo 401(k) plan, which would allow you until April 15, 2021 (the Tax Filing Deadline) to make contributions. Now, Solo 401(k)s can be established up until the tax filling deadline–which for sole proprietors has been extended until May, 17 2021.
The New 2020 Solo 401(k) Setup Deadline for Sole Proprietors is 5/17/21
Your business must adopt a new Solo 401(k) by your tax deadline, in order to make 2020 contributions.
- Sole Proprietors: 5/17/21 (unless you’ve filed an extension)
- Partnerships: 3/15/21 (unless you’ve filed an extension.
If you haven’t adopted a Solo 401(k) yet, you should start now so your documents will be completed, and you can spread out your contributions over the next six months. If you establish a plan in 2021 for tax year 2020, you are past the deadline to make salary deferral contributions as an “employee”–but that doesn’t mean you can’t contribute to your plan.
As “employer,” you can set aside an additional 25% of the business entity’s income (to a maximum of $57,000) as a profit-sharing contribution. If you have a spouse working for the business, the same allowances may be made on his or her behalf to maximize your household retirement savings.
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Deadline Extended for Existing Solo 401(k)s
If you had a sole proprietorship Solo 401(k) in 2020, the contribution deadline is May 17, 2021. If you had an S-corp or partnership LLC, the deadline is March 15, 2021. Both of these deadlines could be extended another six months (until September or October 2021) by filing an extension request. This is a huge benefit for people who want to make 2020 contributions but won’t have the funds available until later in the year.
What You Should Be Doing Now to Prepare
Even though employer and employee contributions can be extended until the company tax return deadline, you will still need to file a W2 for your “employee” wages by January 31, 2021. This W2 details your wages and deductions for employee retirement plan contributions in box 12. At the very least, you should determine the amount you plan to contribute by this deadline.
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Solo 401(k) Contributions Example
Here’s an example of how Solo 401(k) contributions might work out:
Josephine is 33 years old and set up a sole proprietorship Solo 401(k) for her housekeeping business in 2020. Josephine paid herself a wage of $50,000 for the year. She hasn’t made her contributions yet, but she wants to now to reduce her taxable income for the year and save for retirement. She can max out her 2020 Solo 401(k) contribution limit by:
Contributing as an Employee
Josephine plans to save $19,500 by the tax filing deadline of May 18, 2021, which will reduce her W2 taxable income from $50,000 to $30,500. Assuming she is in a 20% federal tax bracket and a 5% state tax bracket, she’d save $4,450 in tax liability for the year AND setup a considerable nest egg that will compound interest for the next 30+ years. Way to go, Josephine!
Contributing as an Employer
Josephine can save up to 25% of wage compensation not to exceed $57,000 as an employer profit sharing contribution. Since Josephine has taken a wage of $50,000, the company can make a 25% contribution of $12,500. The company lists this employee benefit expense on the tax return.
All considered, Josephine contributed $32,000 for retirement ($19,500 as employee, $12,500 as employer) and paid less in federal and state taxes as both an individual and as a business. That’s a pretty great deal!
If you’d like to maximize your savings, then now is the ideal time to begin coordinating with your accountant and 401(k) plan provider.
Ubiquity is happy to help you set up a new Solo 401(k). We’ve offered a low, flat monthly fee since 1999.
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