Making Year 2021 Annual Solo 401k Contributions-Pretax, Roth and Voluntary After-Tax (a.k.a. backdoor)

General Information regarding Making Year 2021 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.

2021 Contribution Limit: The total contribution limit for tax year 2021 increased by $1,000 to $58,000. The additional catchup amount for those age 50 or older remains the same at $6,500. Thus, if you are age 50 or older, the 2021 total solo 401k contribution amount is $64,500

For 2020, the total contribution limit was $57,000 or $63,500 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.

Periodic or Lump Sum: 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.).

2021: $19,500 plus an additional $6,500 catch-up contribution if you are 50 or older.

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.

Multiple Participants

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 $58,000 for 2021, plus an additional catch-up amount of $6,500 if age 50 or older.

See more regarding making voluntary after-tax contributions below.

IMPORTANT: The annual solo 401k contribution limits depend 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-2 income from your self-employed business (“Box 1 plus any pre-tax elective deferrals NOT in Box 1).
If the entity type is an S–Corporation, it is equal to W-2 income 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 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 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.

Solo 401k Contribution Guides-Deep Dive

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 ($58,000 for 2021 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 5a and “0” in Line 4b unless there is a taxable gain. If there is a taxable gain, enter the gain amount. Finally, 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.

Mega Backdoor Roth Solo 401k Guides- Deep Dive

Slides: Partnerships, LLC taxed as Partnership, Form 1065 Schedule K-1
Video: https://youtu.be/of2J5e81pyM

Slides: S-corporations, C-Corporations and LLC taxed as S-corporation
Video: https://youtu.be/pRjTkZD5n8k

Slides: Sole Proprietors, LLC taxed as Sole Proprietorship, Independent Contractors
Video: https://youtu.be/qACxKuy8tGc

Can I Solely Make Voluntary After-Tax Solo 401k Contributions QUESTION

Are the roth solo 401k and after-tax solo 401k buckets separate? i.e. can you put funds into your after tax account even if you haven’t maxed out your Roth contribution through payroll for the year? Or must you fund the Roth fully before contributing to your after-tax account?

They are separate. The Roth solo 401k contributions must be deposited into a separate holding account specifically for holding the Roth solo 401k contributions. Same with the voluntary after-tax solo 401k funds, they must be deposited into a separate holding account. You can make just voluntary after-tax solo 401k contributions without making Roth solo 401k or pretax solo 401k contributions. In other words, you are not required to make Roth solo 401k contributions or pretax contributions at all.

Maximum Contribution QUESTION

If the total amount I earned year 2021 as an independent contractor was $20k. Can I put 100% of that amount into the solo 401k? or am I only allowed to put in some percentage of total earnings? Can 100% of that amount be converted to Roth through back door conversion?

You can make a voluntary after-tax contribution equal to 100% of your self-employment compensation not to exceed the overall limit ($58,000 for 2021) REDUCED by any employee or employer contributions made to the Solo 401k (if any). Your self-employment compensation is equal to your net income (line 31 of Sched C) reduced by one-half of the self-employment tax.

Contribute for all three solo 401k contribution types in 2022 for 2021 QUESTION

Client opened 401k with you last year. I just had a call and they still want to fund for 2021. Still doable? For all contribution types--Roth solo 401k, pretax solo 401k and voluntary after-tax solo 401k?

Hi and yes for all sources as a solo 401k is not a full-time employer 401k plan so the contribution deadline is more favorable for ALL contribution types. The business owner essentially has until his business tax return due date plus extension in 2022 to make 2021 solo contributions–e.g., pretax, after-tax and Roth.

IRS publication 560, table 1 on page 3 (the publication for self-employed retirement plans including the solo 401k plan) further confirms the above contribution deadline.

From Personal or Business Bank Account Contribution QUESTION

When making solo 401k contributions, should the company deduct it from the paycheck and deposit it in the solo 401K account, as it normally happens in a regular 401k? Or should it be deposited from the personal account?

From a solo 401k contribution perspective, id does not matter if the contribution flows from the business bank account or your personal bank account. What matters is that you had the required net-self employment income from your self-employed business to justify the annual solo 401k contribution–whether, employee or employer contributions–and that you report it on your taxes.

While solo 401k contributions are accounted for by depositing them into the solo 401k bank or brokerage account, they are reported on your personal and business tax return. See the following for each self-employed business entity type.

If the business is a sole proprietorship or an LLC taxed as a sole proprietorship:

Slides: Sole Proprietorship, Single-member LLC or 1099 Independent Contractor
Video: https://youtu.be/2TK_XmY-qc8

If the business is a partnership or an LLC taxed as a partnership:

Slides: Partnerships, LLC taxed as Partnership, Form 1065 Schedule K-1
Video: https://youtu.be/of2J5e81pyM

If the business is a C-Corporation, S-Corporation or an LLC taxed as an S-Corporation:

Slides: S-corporations, C-corporations, LLC taxed as S-corp./C-corp., W2
Video: https://youtu.be/LZHzeb-WhME

Filed Extension But Contribute After I File Business Tax Return QUESTION

I have a question about the 2021 ROTH Solo 401K contribution deadline. We are an LLC taxed as a sole proprietorship. We filed a 2021 extension by April 18, 2022, making our 2021 tax filing deadline October 17, 2022. We filed our 2021 Tax return on August 24, 2022, ahead of the October deadline. Is our deadline for 2021 ROTH Solo 401k contributions October 17, 2022? Or did we shoot ourselves in the foot by filing our 2021 tax return in August, before our October filing deadline, and can no longer make 2021 contributions to our ROTH Solo 401k?

For those business owners who timely filed a business tax return, they have until their business tax return due date plus extension to make solo 401k contributions including Roth solo 401k or voluntary after-tax contributions. Yes, one can still contribute the 2021 Roth solo 401k contributions by 10/17/2022 if he or she had previously filed for a timely business tax return extension, regardless if the business owner has already filed the business tax return.