For those who are self-employed (i.e., own their own business with no, full-time, W-2 employees), an important deadline is approaching (in less than 60 days) that will afford the self-employed business owner(s) the opportunity to save thousands of dollars in taxable income for tax year 2016. If you are self-employed and open a solo 401k plan by December 31, 2016, you will be able to wait until next year (2017) to contribute $53,000 plus an additional $6,000 if you turn 50 in 2016 or are already over age 50. Yes you read this correctly. Specifically, you just need to sign the solo 401k adoption documents to be able to wait until your business tax return due date plus timely filed extensions to make both the profit sharing and employee contributions for tax year 2016.
A solo 401k is not subject to Department of Labor rules because a solo 401k is for owner-only businesses with no common-law employees. As a result the contribution deadlines are more favorable for a solo 401k. For example, as long as the solo 401k is set up/adopted by December 31, both the salary deferral and employer contributions can be made up until the due date of the self-employed business tax return plus any timely filed extensions. See the following chart found on page 3 of IRS Publication 560- Retirement Plans for Small Businesses.
When looking at the chart, look at the row labeled “Defined Contribution Plan” as a solo 401k plan falls under this umbrella.
|Type of Plan||Last Date for Contribution||Maximum Contribution||When To Set Up Plan|
|Qualified Plan: Defined Contribution Plan||Elective deferral: Due date of employer’s return (including extensions)Employer contribution: Money Purchase or ProfitSharing: Due date of employer’s return (including extensions).||Employee contribution: Elective deferral up to $18,000, $24,000 if age 50 or over.Employer contribution: ProfitSharing:: Smaller of $53,000 or 100% of participant’s compensation.||By end of the tax year.|
|Qualified Plan: Defined Benefit Plan||Contributions generally must be paid in quarterly installments, due 15 days after the end of each quarter. See Minimum Funding Requirement in chapter 4.||Amount needed to provide an annual benefit no larger than the smaller of $210,000 or 100% of the participant’s average compensation for his or her highest 3 consecutive calendar years.||By end of the tax year.|