You can activate your Solo 401k quickly and easily with just a couple steps. But these steps are critical to take in order for your Solo 401k plan to be qualified and to capture your tax-deductions. As a successful solopreneur, you may be feeling the pain of taxes and looking for ways to reduce your tax liability. One way to do this is by contributing to a Solo 401k plan. This type of 401k allows self-employed individuals and business owners with no employees to save for retirement on a tax-deferred basis.
If you want to take advantage of this opportunity, you need to activate your Solo 401k by the end of the year. In this blog post, we’ll explain how to do that.
If you’re self-employed, now is the time to set up your Solo 401k.
As the end of the year approaches, it’s important for self-employed individuals to think ahead to save money on taxes. Setting up a Solo 401k is an excellent and efficient way to save for retirement; contributions are tax-deductible, saving you money off your final taxable income.
Plus, with this type of retirement plan you can save more than traditional plans.
A Solo 401(k) is a retirement plan designed specifically for self-employed individuals or small business owners who don’t have any full-time employees other than a spouse. One of the main advantages of a Solo 401(k) is that it allows you to contribute significantly more money towards your retirement savings compared to other types of retirement plans.
The contribution limits for a Solo 401(k) are determined by the IRS and are based on the amount of income you earn from your business. For 2022, you can contribute up to $61,000. If you are over the age of 50, you may be eligible to make additional catch-up contributions of up to $6,500. In 2023 those numbers increase to $66,000 per participant or $73,500 if you are age 50 or older.
If your spouse participates in your Solo 401k plan with you, you can effectively double your contributions. Your spouse’s contributions are based on their compensation from your small business.
This means that if you are self-employed and earn a high income, you may be able to contribute significantly more money to your Solo 401(k) compared to other types of retirement plans, such as a Traditional or Roth IRA. In fact, Solo 401k contribution limits are 10x higher than an IRA. You can start making contributions as soon as you activate your Solo 401k plan.
Contribution Deadlines to Activate Your Solo 401k
According to IRS Publication 560, the last date of contribution for both employee and employer is “Due date of employer’s return (including extensions)”
It is generally recommended you formally elect contributions by December 31st, but the contributions may be made up through tax day. This means that even if you just set up your Solo 401k plan, you have plenty of time to activate your 401k and make contributions well before the tax deadline. You do not have to deposit contributions into your 401k bank account by December 31st.
Activate Your Solo 401k – Complete Your Docusign
Check your email to complete your docusign, which activates your Solo 401k and brings the plan into existence. The formal signing of the plan by the business owner (you) and trustee (you) is what “turns on” your Solo 401k. You do not have to fund your Solo 401k in order for it to be active.
Only business owners and trustees need to sign the 401k plan documents. If your spouse is a co-participant, but not a co-trustee they do not need to docusign the 401k plan documents.
Most 401k plans do not list participants by name. Rather, a trustee is listed to denote who has fiduciary responsibility over the plan funds. For a Solo 401k plan, when both spouses are co-participants, the spouse’s name isn’t typically listed in the document as a participant.
The regulations provide that Solo 401k plans cover the owner and spouse; therefore, there is no need to list the spouse in the document. The plan can be administered just like any other 401(k) plan, with the owner and spouse as participants.
Activate Your Solo 401k – Formally Elect Your Contributions
While rollovers can happen anytime during the year, the IRS has specific guidelines on when contributions must be made to your plan in order to activate your Solo 4 01k.
There are two types of contributions allowed:
- Elective deferrals (employee)
- Profit sharing contributions (employer)
Elective deferrals (employee contributions) must be formally elected by December 31st. The actual deposit may be made by the “due date of employer’s return (including extensions)” (IRS Source)
Formal election simply means you are documenting that you plan to make elective deferrals into your plan, and typically are documenting how much you plan to contribute.
The contribution form should be completed by December 31st to activate your Solo 401k. Complete the form every year after, even if you don’t make contributions by December 31st. You should keep a copy for your records, and share a copy with your CPA. Your contribution form does not need to be sent to Nabers.
If you complete the formal election by December 31st of each year, you have until you file your tax returns for the following year to make the deposit.
Get Started Now
Setting up your account is a quick process that can be done in 5 minutes or less. Simply sign up online and provide the required information. Once we receive your application, we’ll have your Solo 401k plan documents in just a few hours. This means you can activate your Solo 401k and be up and running in no time.