What’s New Regarding Solo 401k contributions for Tax Year 2023?

With the passage of SECURE 2.0 Act on December 29, 2022, the employer/profit sharing contribution can now also be applied as a Roth solo 401k contribution or can continue to be made as pretax contribution.

The Roth solo 401k contributions can now be applied as employee and/or or employer contributions.  However, the catch-up contribution for those aged 50 or older can only be made from the employee contribution source and can be applied as pretax or Roth solo 401k contribution. Therefore, if age 50 or older in 2022 the employee Roth solo 401k contribution is $27,000 ($20, 500 + $6,500). For 2023, if you are aged 50 or older, the employee Roth solo 401k contribution increased to $30,000 ($22,500 + $7,500)

General Information regarding Making Year 2023 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.

2023 Contribution Limit: The total contribution limit for tax year 2023 increased to $66,000. The additional catchup amount  for those age 50 or older also increased to $7,500. Thus, if you are age 50 or older, the 2023 total solo 401k contribution amount is $73,500

For 2022, the total contribution limit was $61,000 or $67,500 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.

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

Video Slides: 2022 & 2023 Self-Directed Solo 401k Contribution Limits and Types

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.).

2023: $22,500 plus an additional $7,500 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 $66,000 for 2023, plus an additional catch-up amount of $7,500 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-2income 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-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 contribution deadline is March 15, or September 16 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 16 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 16 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 16 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 16 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 ($66,000 for 2023 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.

Convert Voluntary After-Tax Contributions in 2023 made for 202 and 2023 QUESTION

Solely Make Voluntary After-Tax Contributions QUESTION