2020 Solo 401k Contributions-Pretax, Roth & Voluntary After Tax

General Information regarding Solo 401k Contributions:

NET INCOME: Solo 401k contributions are based net- income from self-employment (i.e. you can’t contribute more than you make).

Business or Personal Bank Account: You can make the contributions from your business or personal checking account as long as the funds stem from self-employment income.

2020 Contribution Limit: The total contribution limit for tax year 2020 is $57,000 plus an additional $6,500 catch up if age 50 or older. For 2019, the total contribution limit was $56,000 or $61,000 if age 50 or older.

Making Contributions: To make the contribution, you will make the check payable in the name of the solo 401k and write “Annual Contribution” on the memo section of the check.

Solo 401k contributions can be made periodically or in one lump sum.

Solo 401k Contribution Calculator

You can use our on-line solo 401k contribution calculator to calculate the contribution amount. CLICK HERE.

You may also use the online annual contribution form located on our website to internally document the contribution. This form is for your records only.

https://www.mysolo401k.net/wp-content/uploads/2014/09/Solo_401k_Annual_Contribution_Form.pdf

Additional information regarding the solo 401k contribution rules.

Solo 401k Contributions

The business owner acts in both capacities in a solo 401k plan: employee and employer.  As such, the business owner can make both contribution types: employee and employer. (Note: Matching contributions do not apply to a Solo 401kplan).

Type 1 Contribution (Employee): Employee contributions also known as elective deferrals up to 100% of net earnings from self-employment income up to the annual contribution limit; Note: See information below regarding how to determine your self-employment income for contribution purposes since it depends on how your self-employed business is organized (e.g. sole proprietor, S-Corp, etc.).

2020: $19,500 plus an additional $6,500 catch-up contribution if you are 50 or older; and

Note: If the Solo 401k participant is participating in another qualified plan such as a 401k plan offered through a w-2 “day job,” any employee contributions made by the individual to such plan will be aggregated with any employee contributions made to the Solo 401k plan in determining whether the limit has been met.

Type 2 Contribution (Employer): Employer profit sharing contributions up to:

  • If taxed as an unincorporated business (e.g., sole proprietor or partnership) then 20% of net business income (i.e. from Line 31 on Schedule C or Line 14 of K-1 as applicable) after deducting one-half of self-employment tax; or
  • If taxed as a corporation, then 25% of w-2 income.

Note: For a solo 401k with multiple participants (e.g. husband and wife), the employee & employer contribution limits are calculated for each participant individually (i.e., based on each person’s self-employment income).

Total Contributions: Total contributions to a solo 401k plan cannot exceed $57,000 for 2020, plus an additional catch-up amount of $6,500 if age 50 or older.  Please note that if you intend to also make Roth and/or after-tax contributions, please contact us for more information on making such contributions.  See more regarding making voluntary after-tax contributions below.

IMPORTANT:  The annual solo 401k contribution limits depends on the type of entity sponsoring the solo 401k plan.

  • If the entity type is a Sole Proprietor, it is equal to line 31 of Schedule C(after deducting one-half of self-employment tax).
  • If the entity type is a C-Corporation, it is equal to W-2income from your self-employed business (“Box 1 plus any pre-tax elective deferrals NOT in Box 1).
  • If the entity type is an SCorporation, it is equal to W-2income from your self-employed business (“Box 1 plus any pre-tax elective deferrals NOT in Box 1).
  • If the entity type is a Partnership, it is equal K-1 (Form 1065) line 14 from your self-employed business (after deducting one-half of self-employment tax).

Note: To determine the amount equal to one-half of the self-employment tax, please take the following steps:

  • Navigate to our online calculator: VISIT HERE.
  • For Business Type: select “Unincorporated Sole Proprietorship”
  • Enter your net income as applicable (e.g. for a Sole Proprietor enter net income from line 31; for a Partnership enter Line 14 from your K-1).
  • Enter your age
  • Click “View Report”
  • In the sentence beginning “*Calculated as net business income…” the amount equal to one-half of the self-employment tax will appear in the phrase “Self-Employment Tax of ___”

 

Solo 401k Contribution Deadlines:

The self-directed 401k contribution deadlines are based on the type of entity sponsoring the solo 401k.

  • If the entity type is a Sole Proprietorship, the annual solo401k 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 solo401k contributiondeadline 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 solo401k 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 solo401k 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 solo401k contribution deadline is March 15, or September 15 if tax return extension is timely filed.
  • If the entity type is an C-Corporation (calendar year), the annual solo401k contribution deadline is April 15, or September 15 if tax return extension is timely filed.

Making Voluntary After-Tax Contributions

What is the maximum amount of voluntary after-tax contributions that I can make?

You can contribute up to the lesser of (i) 100% of your self-employment compensation (i.e. see below information regarding how to determine your self-employment compensation) or (ii) the overall limit ($57,000 for 2020 contributions) reduced by any pre-tax or Roth employee contributions/salary deferrals and any pre-tax employer/profit sharing contributions.

The amount of self-employment compensation depends on the type of entity sponsoring the solo 401k plan [SEE ABOVE].

 

When is the deadline to make voluntary after-tax contributions?

The self-directed 401k contribution deadlines are based on the type of entity sponsoring the solo 401k. [SEE ABOVE].

How do I make the voluntary after-tax contributions?

  • To make the contribution, you will make the check payable in the name of the solo401k and write “Annual Contribution” on the memo section of the check.
  • Deposit the amount of the voluntary after-tax contributions that you elect to make in the separate voluntary after-tax sub-account.
  • You will then transfer the funds to the Roth sub-account for the Solo401k.  Please let us know right away when you do so that we can send you the applicable forms to capture the information that we need to handle the required 1099-r (which we will do as part of our services for no additional charge).

Where do I report the voluntary after-tax contributions?

  • For self-employment income reported on a w-2, you may (but are not required to) report voluntary after-tax contributions in Box 14 of the w-2.
  • For all others, there is no place to report voluntary after-tax contributions.

Where do I report the conversion of funds form the voluntary after-tax sub-account to the Roth sub-account?

  • A Form 1099-R is used to report the conversion to the IRS.
  • On Form 1040, report the amount converted in Line 4c and “0” in Line 4d unless there is a taxable gain.  Enter the word “Rollover” next to line 4b.
  • A taxable gain would result if the funds in the after-tax account accrued a gain after being contributed to such account in which case the amount of such gain is a taxable and needs to be listed on Line 16b.

Voluntary After-Tax vs Roth QUESTION:

Are there any advantages of Roth solo 401k over Mega Backdoor Roth solo 401k?

 In order to make Mega Backdoor Roth contributions you must make voluntary after-tax contributions and then transfer the funds to the Roth subaccount. The advantage of transferring the funds to the Roth subaccount is that the funds have the potential to grow tax-free whereas gains inside the after-tax subaccount are taxable. The following forms apply to the conversion of after-tax solo 401k funds.

After-Tax to Roth IRA Conversion Form

After-Tax to Roth Solo 401k Conversion Form

Distributing Voluntary After-Tax Funds QUESTION:

Can I take a distribution anytime with the Mega Backdoor, and what are the parameters?

  • You can distribute after-tax contributions at any time (e.g. transfer the funds to a Roth IRA) whereas you generally cannot distribute funds in the Roth subaccount until you are 59 ½ years of age.

Roth and Voluntary After-Tax Contributions are not Deductible QUESTION:

If I make an employee contribution to my Roth solo 401k (or Mega Backdoor Roth) does that become a salary deferral on my tax return, thus reducing my wages/salary and total income on my personal tax return?

Employee contributions made to the Roth subaccount are made on a post-tax basis so they will not reduce your taxable income. Since they are made on a post-tax basis (and don’t reduce your taxable income) there is no need for a separate line item on the tax return. Please note that Roth contributions are reported on the W-2 so you will need to inform your payroll provider of the amount of the Roth contributions that you will make so that they can report such contributions on your W-2.

Pro-Rata Rule Voluntary After-Tax Contributions QUESTION:

Regarding the Pro-rata Rule, i've seen some varying opinions from online sources about the applicability of the pro-rata rule to 401k Roth conversions with some saying it does apply. Is there something definitive to hang our hats on to support non-applicability re 401k conversions?

If the after-tax contributions are separately accounted for, the pro-rata rule only applies to the after-tax sub-account (and if there are no gains on the after-tax contributions the pro-rata rule effectively does not apply).  Sources: (i) 72(d)(2) allows for separate accounting; and (ii) Per IRS Notice 2014-54 the pro-rata rule applies at the account level

Make Just Employer Profit Sharing Contributions QUESTION:

My company is taxed as an S-corporation. Can the company make a profit sharing contribution up to 25% of my wages, without having to make my solo 401k employee contribution portion?

For example:
My wages is $100,000
My 401-k contribution is zero
Company profit sharing contribution is $25,000.
So total contribution for the year is $25,000.
Or do I have to first have 401-k contribution of up to $26,000 (over 50), then calculate the profit sharing contribution?

Yes, just employer profit sharing contributions can be made without having to make employee contributions.  Both the employee and employer profit sharing contributions are based on your W-2 wages when the self-employed business is taxed as an S-corporation. Your calculation is correct too. 

S-Corp W-2 Wages Calculation QUESTION:

My question is, if my business made 400k but I only paid myself 45k on a W2 is the 25% applicable to company gross income of 400k or the 45K from the W2?

Solo 401k contributions (both employee and employer) are based on your W-2 wages not the business gross income; therefore, if you pay yourself $45,000, the solo 401k contributions will be based on $45,000 not on $400,000. 

Annual Compensation Wages Calculation QUESTION:

We just opened the solo 401k plan in February 2021 and want to make the employer profit sharing contribution. For 2020, the tax firm wants to know what's minimum $ amount that needs to be specified on each partners' K1 in section 14A in order to make the $57K contribution possible for 2020? We have some flexibility on how we distribute the profits hence the question above regarding what's the minimum for section 14A for each partner?

 
Since only profit sharing contributions can be made for 2020 because the plan was  adopted in 2021, each partner will need to make at least $285,000 of line 14 code A in order to contribute the maximum allowed amount of $54,529.25.
 
Unfortunately, you will not be able to get to the $57,000 ceiling amount because the income limit for 2020 is $285,000. In other words, you can only base the contribution on this income amount of $285,000.
 

About Mark Nolan

Each day I speak with energetic entrepreneurs looking to take the plunge into a new venture and small business owners eager to take control of their retirement savings. I am passionate about helping others find their financial independence. Having worked for over 20 years with some of the top retirement account custodian and insurance companies I have a deep and extensive knowledge of the complexities of self-directed 401ks and IRAs as well as retirement plan regulations. Learn more about Mark Nolan and My Solo 401k Financial >>

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