While the 2019 SECURE Act extended the deadline to adopt a Solo 401k plan from the end of the year to the business tax return deadline including any timely filed extension, the IRS has not yet updated its prior guidelines stating that employee contributions must be elected by the end of the year.
Therefore until the IRS issues final guidance, the conservative approach is to adopt the plan by 12/31/2020 to ensure that both employee and employer contributions can be made for 2020 in 2021 by your business tax return plus extension.
What do I have to do by December 31, 2020?
- In order to preserve the right to make contributions from your self-employment income for 2020, all you have to do is adopt the 401(k) plan (sign the plan establishment documents) prior to the end of 2020.
- We make it very easy to do so! All you have to do is sign the solo 401k plan documents before the end of the year.
- You can set up the bank or brokerage account and make the contribution any time before your tax business tax return deadline including any timely-filed extension in 2021.
Do I have to open the bank or brokerage account by December 31, 2020?
- All you need to do is sign the 401(k) plan establishment documents before the end of 2020.
- 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 2021.
- 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 I have to obtain an employer identification number by December 31, 2020?
- All you need to do is sign the 401(k) establishment documents before the end of 2020.
- This will preserve the right for you to make contributions on or before your business tax return deadline including any timely-filed extension in 2021.
- You can open up the bank/brokerage account next year in 2021 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 2021?
- 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 2020, how can I make contributions based on income that I earned in January 2021?
- As is the industry best practice, the solo 401(k) plan is effective as of January 1, 20209 even if you adopt the plan in December 2020.
- As such, you are able to make contributions for any self-employment income earned and reported for 2020.
My CPA/tax advisor is informing me that the employee contribution must be made by December 31, 2020. Are you sure that I can make this contribution in 2021?
- 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 2020 any time up until my tax return deadline in 2021?
- No – since converting pretax to Roth funds will result in a taxable event, the deadline to make the conversion effective for 2020 is December 31, 2020.
- 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.
Open the Solo 401k Plan by December 31, 2020 and Wait to Make Both the Employer Profit Sharing Contribution and Employee Contribution in 2021
If you are self-employed and open a solo 401k plan by December 31, 2020, you will be able to wait until next year (2021) to contribute $57,000 plus an additional $6,500 if you turn 50 in 2020 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 employer profit sharing and employee contributions for tax year 2020.
A Solo 401k Plan is NOT Subject to DOL Rules so Contribution Deadline is More Favorable
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, 2020 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 $19,500, $26,000 if age 50 or over. Employer contribution: ProfitSharing:: Smaller of $57,000 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 $225,000 or 100% of the participant’s average compensation for his or her highest 3 consecutive calendar years.||By end of the tax year.|
Solo 401k Plan Establishment Deadline QUESTION:
With a December 31st year end, when does the plan need to be established?
As long as you sign up for our Solo 401k by December 31, 2020, you will preserve the right to make Solo 401k contributions up until your business tax return deadline (including any timely filed extension) in 2021.
Solo 401k Deadline for Existing Solo 401k Plan QUESTION:
I already have a solo 401(k) through another provider – does the December 31, 2020 deadline apply to me?
- Since we will restate the plan, you do not have to restate by December 31, 2020.
- Of course, if you want to make Roth conversions or Roth or after-tax contributions & your plan does not allow that you should set up the plan with us prior to the end of 2020.
Payroll Provider QUESTION:
I am self-employed. I operate the business as an S-corporation with no w-2 employees. I received w-2 wages and my payroll provider is telling me that I need to make salary deferrals (employee contributions) by the end of the year. Is that correct?
- No it’s not correct. It’s clear under IRS Publication 560 that you have until the tax return deadline to make both employee and employer contributions. For example see the table on page 3.
- That being said, what some of our customers do is inform the payroll company of what they will contribute as a salary deferral so that the payroll company can report it on the w-2 (in that case pre-tax contributions are not included in Box 1 of the w-2 & included in Box 12 of the w-2). They will park the money until they open the solo 401k account and deposit the funds by the tax return deadline including any timely filed extension.
- Alternatively, if the contribution amount is included in box 1 of the w-2 (i.e. not pulled out on put on box 12), the amount is reported on line 28 of the 1040
Catch Up Contribution to Voluntary After -Tax Account for 2020 QUESTION:
With a December 31st year end, when does the plan need to be established? I am looking to set up a Solo 401k in order to make after-tax contributions. If I am age 50 or older, can I make an additional $6,500 as an after-tax contribution so that for 2020 I could contribute $63,000 in after-tax contributions?
- No – for 2020, the after-tax contribution limit is the lesser of the overall limit ($57,000 ) or your self-employment compensation.
- The limit does not increase if you are age 50 or older.
- While you can’t make the $6,500 catch-up contribution amount as an after-tax contribution, you could make it on a pre-tax basis or as a Roth contribution (assuming that you are not already making this contribution to another 401k plan & that you have the self-employment income to justify it).