2020 Solo 401(k) Contribution Deadline
Dylan Telerski / 9 Nov 2020 / Business
There is a new Solo 401(k) contribution deadline for 2020. 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, you have until April 15, 2021, to get a new Solo 401(k) account opened for 2020 and make contributions.
New Solo 401(k) Setup for the Year 2020 is Due 4/15/21
Your business must adopt a new Solo 401(k) by April 15, 2021, in order to make 2020 contributions. 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. After all, you can contribute 100% of your wages up to a maximum of $19,500 as an “employee” — or to a maximum of $26,000 if you’re over 50.
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 single-member LLC or C-corp Solo 401(k) in 2019, the contribution deadline was April 15, 2020. If you had an S-corp or partnership LLC, the deadline was March 15, 2020. Both of these deadlines could be extended another six months (until September or October 2020) by filing an extension request. This is a huge benefit for people who want to make 2019 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.
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 single-member LLC Solo 401(k) for her Etsy business in 2020. Josephine earned $120,000 in net income for the year — $50,000 in W2 wages and $70,000 in taxable K-1 business profits. 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 April 15, 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 W2 wage of $50,000, the company can make a 25% contribution of $12,500. The company lists this employee benefit expense on the S-Corp tax return (Form 1120S). If Josephine contributes $12,500, she will report $57,500 instead of $70,000 in net profit on her K-1 form. Assuming the same tax brackets, she would save $3,125 in tax liability as an employer, so long as she made the contributions by April 15, 2021 – the company tax return deadline. If she files an extension, she can have until October 15, 2021.
All considered, Josephine contributed $32,000 for retirement ($19,500 as employee, $12,500 as employer) and paid $7,575 less in federal and state taxes. 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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