You’re just in time to make contributions for the 2023 tax year. In this article, one important thing that you will take away is how to stretch out your ability to make 2023 contributions all the way into the fall of 2024. You will also want to know the contribution limits for 2023 so that you don’t leave any extra money on the tax table that should be growing for your golden retirement.
2023 Solo 401k Contribution Deadlines Applying to 2022 Tax Returns
Yes, December 31, 2022, has come and gone. The end of 2022 was the last day that you could set up a new Solo 401k (we know because December is always our busiest month). However, the last day of the year is not the last day that you can make tax-deferred and tax-free contributions that lower your tax bill for 2022!
There are four important dates that you want to mark on your calendar that involve the Solo 401k contribution deadlines if you still want to make a 2022 contribution:
- March 15, 2023, is the Solo 401k contribution deadline for S-Corporations and partnership LLCs.
- April 18, 2023, is the federal tax filing deadline for sole proprietors, single member LLCs, and C-corporations. It is also the Solo 401k contribution deadline for those business types.
- Both of those dates (March 15th and April 18th) are also the deadlines for filing for a six-month extension that also allows for extensions to the Solo 401k contribution deadlines. The respective extensions are until September 15, 2023, and October 17, 2023.
Something to be aware of is that the W-2 deadline can complicate the employee contribution to the Solo 401k. W-2 forms must be filed by January 31, 2023, and include the employee contributions. As a result, you should make your employee contributions (up to $20,500 for 2022) by January 31st, 2023, or you should decide the amount you plan to contribute so that you can file an accurate W-2 by January 31st, 2023. If you have not yet made the employee contribution, you will have until the federal tax filing dates (including extensions) to make both the employee and employer contributions.
Sole proprietors and single member LLCs (almost all Solo 401k LLCs are single member) use IRS Form 4868 to file for an extension. Most S corporations, partnerships, and multi-member LLCs use IRS Form 7004 to file for an extension. There is some flexibility on the extension form type depending on your business structure.
The instructions for Form 4868 state: “You’ll receive an electronic acknowledgment once you complete the transaction.”
You will not receive confirmation that your extension has been approved for Form 7004:
“Properly filing Form 7004 will automatically give you the maximum extension allowed from the due date of your return to file the return. The IRS will no longer send a notification that your extension has been approved. We will notify you only if your request for an extension is disallowed.”
~ from IRS Instructions for Form 7004:
Contribution deadlines are also explained in IRS Publication 560.
Pretax and/or after-tax (Roth) funds both make up employee deferral contributions.
What Are The 2023 Solo 401k Contribution Limits?
Simply put, your Solo 401k offers all the same benefits as a traditional 401k but with several distinct differences that include the highest contribution limits allowed. Your full 2023 contributions are allowed right up until the Solo 401k contribution deadlines.
For 2023, the maximums are $66,000 or $73,500 if you are 50 years old or older. This is up from $61,000 and $67,500 in 2022. This limit is per participant. So, if your spouse is earning money from your small business, that means your spouse can also contribute the same amount to a Solo 401k. If you are both 50 years old or older, this means that joint contributions could be up to $147,000 per year!
Solo 401k business owners make contributions both as an employee and as an employer. The double benefit is to maximize both retirement contributions and business deductions. Importantly, as the business owner, you decide the maximum employer contribution up to the IRS limit. The employer profit-sharing portion can be between 20-25% of your net business self-employment income or W2, depending on your business structure.
The employee portion can be up to 100% of your net compensation or W2 depending on your business structure (up to $22,500 in 2023). If you are 50 years old or older, you can also make a catch-up contribution of $6,500. This adds up to a total possible employee salary deferral of $29,000 for 50 years or older.
Total contributions to a participant’s account, not counting catch-up contributions, cannot exceed $66,000 for 2023. With catch up contributions, the allowed total cannot exceed $73,500.
The more you earn, the more you can contribute. If your spouse works in your business and receives compensation – you can double your contribution amount. Imagine being able to tax-shelter up to $147,000 in 2023!
Again, 2023 contributions can still be made right up until the Solo 401k contribution deadlines in 2024.
What Are The Benefits of Contributing To A Solo 401k in 2023 and Beyond?
The tax advantages are a huge motivator for contributing before the Solo 401k contribution deadlines but there are many more benefits that a Solo 401k entitles you to. In the spirit of tax advantages, it does empower you with the flexibility to choose when and how you want to deal with your tax obligation. Of course, all earnings grow tax-deferred until withdrawn or tax-free with a Roth Solo 401k.
Any business with no full time employees can open a Solo 401k plan. The business can be a sole proprietorship, LLC, corporation, or partnership. It is specifically designed for a small, owner-only business.
Beyond the generous tax advantages, your solo 401k opens the entire world of investment opportunities. You can invest in almost any type of investment that you discover. Your investment freedom is only limited by your imagination. The income and gains from these investments will flow back into your Solo 401k completely tax-free. Making investments with your plan is fast and simple. You have complete control over your retirement assets.
Participant loans. Your Solo 401k allows participants to borrow up to $50,000 or 50% of the account value – whichever is less. You can use this for any purpose at a low-interest rate. This gives you the quick ability to access up to $50,000 for any purpose, such as paying personal debt or funding a business. It is repaid over an amortization schedule of 5 years or less. You get money when you need and want it. You also repay the loan to yourself, plus interest to yourself – all without withdrawing funds from your retirement account!
A Solo 401k comes with checkbook control over your retirement funds. This creates multiple advantages including the ability to make timely investments without needing custodian approval. It also gives you sole authority over all assets in your Solo 401k. Additionally, it eliminates the costs associated with a custodian.
Setting up your Solo 401k. Ready to take control of your financial future? If you work for yourself, the Solo 401k from Nabers Group provides more investment options, the highest contribution limits, the most features, and the lowest fees of any fully self-directed retirement plan.
How Do You Contribute To A Solo 401k?
You do have to follow the IRS-established Solo 401k contribution deadlines, but otherwise you are free to contribute on your own schedule and there are no minimum contributions. There are generally two ways to fund your Solo 401k:
Most people begin by rolling over retirement funds from other sources. That is the quickest and easiest way to fund your Solo 401k. You can rollover funds from an existing SDIRA, Solo 401k, traditional IRA, 401k, 403b, TSP (Thrift Savings Plan), Defined Benefit Plan, or 457b (and more). This is a terrific way to consolidate all your retirement accounts into one self-managed account.
You can also fund your plan with new contributions. Your Solo 401k features three contribution choices: pretax, Roth, and voluntary after-tax). Pre-tax contributions are tax-deferred by reducing your taxes in the year taken. After-tax Roth contributions go into your free Solo 401k Roth sub-account and are tax-free when withdrawn. Voluntary after-tax contributions are not tax-deferred or Roth. These are after-tax contributions that grow tax-deferred until withdrawals begin – and you expect to be in a lower tax bracket.
Because you are both the business owner and the employee of your business, you will be making contributions as:
- Employee (salary deferral) Contributions
- Employer (profit sharing) Contributions
The total of these two is what determines the maximum annual contributions allowed ($66,000 or $73,500 if you are 50 years old or older in 2023). Your spouse may also make employee and employer contributions that can double the total allowed contributions.
For more about making contributions that specifically apply to you, see:
- Contribution FAQs
- Sole Proprietorships: Solo 401k Contributions
- Solo 401k Contributions for an LLC (single or multi-member)
- Solo 401k Contributions for a Corporation
How To Maximize Your Solo 401k Contribution
As Benjamin Franklin said, “In this world, nothing can be said to be certain, except death and taxes.” However, a Solo 401k could help you increase your retirement savings by 2X, 5X, 10X, or even more compared to other retirement accounts. It could make the difference between retiring early or working well into your senior years.
A Solo 401k provides many ways to reduce your taxes to save more for retirement.
Highest annual contributions.
These contributions are about ten-fold higher than for a regular IRA account. The upper limit for Solo 401k contributions also increases more often than for IRAs. Importantly, the contributions are beneficial to both your personal income taxes as well as business taxes.
Deferred taxes on earnings that compound.
The deferred taxes are certainly great but don’t overlook the power of compounding the earnings that you keep. For 2023 the capital gains tax can be as high as 20% – with it having been as high as 28% and even 35% in the past. A Solo 401k allows you to keep those earnings to reinvest year after year. For instance, a $50,000 investment at 12% interest becomes more than $90,000 when compounded for 5 years. If you paid 20% tax on that initial $50,000, it would only compound to $72,000. If you paid 28% tax, it would only compound to $65,000.
This is where your freedom to invest can pay off big time. Instead of watching the Dow Jones Average and Standard & Poor 100 fluctuate widely from one week to the next, you can invest in reliable assets that you understand. Real estate, and especially rental properties, have proven to be high-value investments for many Solo 401k investors. Every month, the rental income is deposited tax-free into your Solo 401k as earnings. Every year, you can expect the amount of rent collected to go up. The value of the property has been on a sky-rocket trajectory for several years. If you decide to sell a rental property, all the appreciated value becomes tax-deferred profits flowing into your solo 401k. Cryptocurrency is another alternative asset that can be held in your Solo 401k and has shown remarkable increases in value. Alternative investments can be whatever you think has the best potential to grow your wealth – other examples include tax liens, mortgage notes, private businesses, and gold.
Roth Solo 401k for tax-free earnings.
Roth accounts are especially attractive to high-income earners. A Roth Solo 401k plan allows after-tax contributions regardless of income level. The key benefit is tax-free earnings. No matter how much the earnings grow and compound over the years, when it comes time to withdraw these funds for your retirement, every cent is tax-free.
There are many strategies with a Solo 401k but the best-proven strategy with a retirement plan is targeting long-term gains over short-term growth.
Solo 401k Contribution Calculator
Now is the time to take a close look at what a Solo 401k can do for your future and your retirement. You start paying much less in taxes today while growing those savings into a wealthy retirement account for your golden years.
Use this Solo 401k Contribution Comparison calculator to estimate the potential contribution that can be made to your Solo 401k plan by comparing it to Profit Sharing, SIMPLE, or SEP plans.
Setup Your Solo 401k Today
Others imitate, but as the #1 Solo 401k provider we innovate. You can be a freelancer, independent contractor, or small business owner. Your business can be structured as a sole proprietorship or a formally structured LLC, C Corp, or S Corp. All of these meet the IRS qualifications for a Solo 401k as long as there are no outside full-time employees in any business owned by you and/or your spouse.