Let’s begin with a clear distinction. The extended tax filing deadline extends the date allowed for contributions to your Solo 401k. However, this is a different deadline then to start a new Solo 401k from scratch. The July 15, 2020 tax deadline extension does not change the Dec. 31, 2019 date for opening a new Solo 401k account. However, you can still open a new account now to start taking advantage of the tax benefits in 2020.
Solo 401k and IRA Contributions Allowed Until July 15, 2020
On March 18, 2020, the IRS released IRS Notice 2020-18 to extend the 2019 tax year filing deadline from April 15 to July 15, 2020. This is a result of the President issuing an Emergency Assistance Act on March 13.
“The Secretary of the Treasury has determined that any person with a Federal income tax payment or a Federal income tax return due April 15, 2020, is affected by the COVID-19 emergency for purposes of the relief described in this section III (Affected Taxpayer). The term “person” includes an individual, a trust, estate, partnership, association, company or corporation, as provided in section 7701(a)(1) of the Code.”
The extension is automatic. You do not need to file for an extension. You also don’t need to take any additional action other than to file on or before July 15. Additionally, “the period beginning on April 15, 2020, and ending on July 15, 2020, will be disregarded in the calculation of any interest, penalty, or addition to tax for failure to file the Federal income tax returns or to pay the Federal income taxes postponed by this notice.”
Solo 401k July Contribution Limit
Your ability to make Solo 401k contributions through July 15, 2020, is explained in IRS Publication 560 (Retirement Plans for Small Business). On page 14, it states: “Contributions deadline. You can make deductible contributions for a tax year up to the due date of your return (plus extensions) for that year.”
The extension includes self-employment income on IRS Form 1040. This includes sole proprietors and single-member LLCs taxed as sole proprietors. Interestingly, this is how most Solo 401k account holders file. Is your business a C-corporations? Typically April 15, 2020 is the due date for filing Form 1120. However, the extension for the employer [under IRS section 404(a)(6)] to make contributions to its solo 401k plan is extended through July 15, 2020.
Under IRS Notice 2020-23, the July 15 deadline also applies when filing IRS Form 990-T.
You do not have to be sick, or quarantined, or have any other impact from COVID-19 for the July 15, 2020 extension. For additional information about emergency taxpayer relief, you may also want to read IRS Notice 2020-23 in full.
Very Good News for Retirement Savers
The July 15 extension is good news for many reasons. As a result of the economic shutdown, many taxpayers have significantly less income in 2020. Being able to maximize your Solo 401k or self directed IRA contribution for 2019 reduces your taxes for 2019 when you likely need the deduction more than you will in 2020. And of course, it enables you to begin compounding your tax-deferred retirement earnings sooner than if you contributed the same money later in the tax year 2020.
However, don’t confuse the 2020 contribution limits with the 2019 contribution limits. When you increase your contribution between now and July 15, 2020, the maximum pre-tax contribution remains $62,000 (if you are age 50 or older). Or $56,000 if under age 50. You can double those amounts if you have a participating spouse (up to $124,000).
Don’t forget that increasing or maximizing your 2019 Solo 401k contribution is also likely to lower your state taxes.
Did you file your 2019 taxes but didn’t make a full contribution to their Solo 401k or self directed IRA? The July 15 extension is another chance to make a full or increased tax-deferred contribution. If you filed your taxes before April 15 but did not make the maximum contribution, there is no IRS guidance preventing you from now increasing your contribution before July 15 and filing an amended 2019 tax return.
2019 Amended Return Tips
If you file an amended 2019 tax return, include a letter with your tax amendment. The letter explains why you are amending your return. It should help the IRS agent to better understand your changes or amendment.
Something else to keep in mind is that although the July 15 extension is automatic (no extra paperwork required), if you need a further extension until October 15, you do need to file for that extension. Additionally, the automatic July 15 extension did not apply to corporate returns due March 15, 2020, because the automatic extension was granted after that tax deadline.
Other Solo 401k Considerations Related to COVID-19
Your Solo 401k or self directed IRA doesn’t only enhance your financial security for your retirement. During these turbulent financial times of COIVID-19, you may find additional financial security and advantages through your Solo 401k via:
- Coronavirus-Related Distributions
- PPP Loans and the Solo 401k
- PPP Round 2 Approved
- COVID-19 and Real Estate
The biggest highlight remains that self-employed individuals may now make or increase their Solo 401k contribution. You have until July 15, 2020 or later by filing a timely extension. That’s at least an extra three months to lower both your 2019 and 2020 tax bills.
Now is a very good time to have full control of your retirement account. Stay tuned because there is almost certainly more to come…
Have questions about growing your retirement account? The 401k experts at Nabers Group will help you get your retirement funds into your control, where they belong.