Self-Directed Solo 401k | Solo 401k Contribution Rules & Facts

Periodic or Lump Sum: Annual Solo 401k contributions can be made throughout the plan year or lump sum by the self employer tax return due date plus extensions.

IRC Sec. 415(c)(1)(A) defines contribution limit for Self-Directed Solo 401k which is $54,000 for 2017, and $55,000 for 2018.

The contribution limits apply separately to each Solo 401kparticipant and are made up of salary deferral and employer profit sharing contributions.

The section 415 limits are determined on a limitation year basis. The “limitation year” can be defined by the plan as any 12-month period.

Catch-up contributions can be made to Solo 401k by each participant in accordance with Treas. Reg. 1.414 (v)-1, and to qualify for catch-up contribution, the Solo 401k participant must be age 50 or older. So if you turn 50 by the end of the year, you are considered eligible to make a catch-up contribution because you are deemed to have reached age 50 as of January 1 of that year.

SPECIAL RULE:Permitted to maximize deferrals to both 457 and 401k plans, including Solo 401k.

457 Plan is a type of retirement plan for governmental employers.

IRS Information letter 2001-0232 contains language that allows you to defer the maximum salary deferral amount [up to $18,500 for tax year 2018] to an IRC Sec. 457 plan and up to an additional $18,500 to a 401k plan for 2018, including a Solo 401k; of course, you first have to meet the Solo 401k eligibility requirements.

Effective January, 2006, Roth Solo 401k contributions may be made to 401k including Solo 401k. See Treas. Reg. 1.401(k)-1(f) of the final 401 (k) and 4019m) regulations.

When calculating profit sharing contribution amount(25% profit sharing amount), effective January 1, 2002 and after, compensation used to calculate the employer’s maximum contribution [$54,00 for 2017 and $55,000 for 2018] to a plan (including a Solo 401k plan) includes salary deferrals [$18,000 for 2017 and $18,500 for 2018]. Put simply, when calculating profit sharing contribution portion do not subtract the salary deferral [$18,500 for 2018] figure as it will reduce the allowable salary deferral limit.

The Annual Solo 401k contribution limit is not cumulative. For example, if you do not make your full annual contribution for a particular year, you cannot make it up in the following year’s contribution. Each year a participant’s annual contribution is limited to the IRC 415(c) [ $54,000 for 2017 and $55,000 for 2018] limit in effect for such year.

Rollovers and transfers are not included in the annual additions/contributions category. Also, direct transfers from one retirement plan to a Solo 401k plan are not annual additions. Rollovers form IRAs (including direct rollovers) also do not fall under the annual additions category. See Treas. Reg.1.415(c)-1(b)(3)(i).

Loan repayments are not considered annual additions/contributions. Solo 401k participant Loan payments made by the participant for repayment of a participant loan are not annual additions. See Treas. Reg. 1.415(c)-1(b)(3). Reason being, the participant is paying back money that he or she borrowed from the solo 401k plan, and the amount borrowed was part of the Solo 401k account balance that you had already contributed under the section 415 limits or rolled/transferred over. You are simply repaying amounts to the Solo 401k account.

Contributions other than cash also fall under the annual additions/contributions category. A contribution of property (e.g., real estate) by the employer or Solo 401k participant is accounted for at fair market value to ascertain the amount of annual additions attributable to the contributions. See Treas. Reg. 1.415(c)-1(b)(5). However, thread carefully because if the property rules are not followed, the contribution might result in a prohibited transaction under IRC 4975. For more information, See Commissioner v. Keystone Consolidated Industries, Inc., 113 S.Ct. 2006 (1993) and DOL Reg. 2509.94-3 (Interpretive Bulletin 94-3).

IRC 404(a)(8) contains special rules for applying the deduction limits to plans (e.g., Solo 401k plan) that cover at least one self-employed individual.

IRC 401(c)(1) defines self-employed individual

IRC 401 (c)(2) defines deduction limits based on compensation of self-employed.

IRC Sec. 404 defines profit sharing deduction limits (employer contributions)

IRC Sec. 415 defines salary deferral limits (employee contributions)

IRC 401(c)(1) defines owner-employee as an employee who owns all of a business or, if a partnership, more than 10 percent of partnership or its profits.

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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