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Self-Employed 401k Question: I have a single member LLC taxed as a sole proprietor. I have been contributing to a SEP IRA and have already filed my 1040 for 2021. I just learned I can do a Solo 401k in an LLC. Am I correct in thinking that I can establish a Solo 401k for 2022, fund it in 2023 before my 1040 is due (with extension), and fund it 100% with after-tax contributions up to $67,500? My Schedule C Line 31 will be over that amount and I over 50 years of age.
One of the top reasons that self-employed persons open Solo 401k plans with us is the ability to make Solo 401k contributions, including Roth and Mega Backdoor Roth plans.
For those who are eligible to set up a Solo 401k (i.e. self-employed person with no full-time non-owner and non-spouse w-2 employees working for any business owned by such person or a spouse (if any)), they will virtually always choose to open a Solo 401k over a SEP IRA because of the advantages of a Solo 401k including higher contribution limits including Roth and/or Mega Backdoor Roth 401k contributions, the ability to take a solo 401k loan, the option to invest in alternative investments, etc.
If the SEP IRA is a safe harbor SEP IRA (i.e. the SEP IRA provider used Form 5305 to set up the SEP IRA), a self-employed person can’t make contributions to the SEP IRA and a Solo 401k for the same year. Learn more: https://www.mysolo401k.net/sep-ira-vs-solo-401k/
With our plan, it is certainly possible to make 100% of the Solo 401k contributions as after-tax contributions (assuming that such person has the self-employment income to justify such contributions). Please note that the voluntary after-tax Solo 401k contribution limit is 100% of the self-employment compensation not to exceed the overall limit (i.e. $61,000 for 2022) and that such limit does not increase when one is 50 or older (the $6500 catch-up contribution must be made as a pre-tax or Roth 401k employee contribution).