Self-employed individuals planning to save on taxes for the 2025 tax year, a self-directed solo 401k is a good option. However, time may be running out in order to preserve the right to make both employee and employer contributions. Reason being, unlike a SEP IRA which only accepts employer contributions (aka profit sharing contributions), a solo 401k allows for both employee and employer contributions. However, in order to allow for more time to make employee contributions to the solo 401k the solo 401k must be established/adopted by December 31, 2024. A solo 401k will meet the establishment deadline for 2024 for making employee (pretax and Roth) contributions as long as the solo 401k plan documents are executed/signed by 12/31/2024.
Various Self-Employed Business Entities Solo 401k Setup Deadlines
S-Corporation, LLC taxed as S-corporation
C-Corporation, LLC taxed as C-corporation
Partnership, LLC taxed as Partnership
Sole Proprietor/1099-NEC, Schedule C, Independent Contractor
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Unlike SEP IRAS, Solo 401k Plans Have 2 (Two) Setup/Establishment Deadlines
The SECURE Act changed the solo 401k setup deadline but it caused confusion because the new rules pertaining to the deadline to establish a solo 401k plan only changed for making profit sharing (aka employer contributions) not employee pretax or Roth contributions (aka salary deferral contributions). As a result, if a solo 401k is adopted by December 31, 2024, the self-employed business owner will be able to make both employee and employer contributions for 2024 in 2025 by his or her business tax return due date including business tax return extensions.
If the solo 401k is not adopted until January 1, 2025 or after but by the self-employed business tax return including the business tax return extension deadline, the business owner can at minimum make employer profit sharing contributions as well as voluntary after-tax solo 401k contributions.
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FAQs – The December 31, 2024 Self-Directed Solo 401k Establishment Deadline
What do I have to do by December 31, 2024?
Do I have to open the bank or brokerage account by December 31, 2024?
- No.
- All you need to do is sign the 401(k) plan establishment documents before the end of 2024.
- This will preserve the right for you to both open the bank/brokerage account and make contributions on or before your tax return deadline including any timely-filed business tax return extension in 2025.
- You can open up the bank/brokerage account next year and we will help you do so. For example, if you want to open a brokerage account such as at Fidelity or Schwab, we will prepare all the paperwork that is needed to open a brokerage account.
Do have to obtain an employer identification number by December 31, 2024?
- No.
- All you need to do is sign the 401(k) establishment documents before the end of 2024.
- This will preserve the right for you to make contributions on or before your business tax return deadline including any timely-filed extension in 2025.
- You can open up the bank/brokerage account next year in 2025 and we will help you do so. For example, if you want to open a brokerage account such as at Fidelity or Schwab, we will prepare all the paperwork that is needed to open a brokerage account.
Is the tax return deadline my personal tax return deadline (e.g. April 15) or my self-employed business tax return deadline in 2025?
- The applicable tax return deadline is your business tax return deadline since your business is the sponsor of the plan.
- Of course, if you operate your business as a sole proprietorship or a single member LLC, you will report your self-employment activity on your personal taxes which means your business tax return deadline is the same as your personal tax return deadline.
If I adopt the plan in December 2024, how can I make contributions based on income that I earned in January 2025?
- As is the industry best practice, the solo 401(k) plan is effective as of January 1, 2024 even if you adopt the plan in December 2024.
- As such, you are able to make contributions for any self-employment income earned and reported for 2024.
My CPA/tax advisor is informing me that the employee contribution must be made by December 31, 20234. Are you sure that I can make this contribution in 2025?
- This is a common point of confusion as employee contributions for a full-time employer plan such as one that you might have through a day job must be made by the end of the year.
- The rules are different for solo 401(k) plans and this is clear per IRS Publication 560 which clearly states that both employee and employer contributions can be made any time up until the tax return deadline including any timely filed extension. For example, please see the table on page 3 of IRS Publication 560.
Can I make a Roth conversion for 2024 any time up until my tax return deadline in 2025?
- No – since converting pretax to Roth funds will result in a taxable event, the deadline to make the conversion effective for 2024 is December 31, 2024.
- As such you will want to make sure that you set up the plan and accounts as soon as possible to give you as much time as possible to complete the conversion
