Solo 401k and payroll. The two pieces must go together. Your Solo 401k has to be established by the end of the year. That means you want to make sure your payroll company is onboard and up to speed. You don’t necessarily have to make the contributions just yet but you do need to have a plan in place before year-end.
Solo 401k and W-2 Payroll
If you haven’t already established your Solo 401k plan, you need to begin in time to complete the setup on or before December 31, 2019. Otherwise, you won’t be allowed to make your 2019 contributions. Setting up your account can be done without finalizing the contributions. Both employer and employee contributions can be made up until your company’s tax deadline (Wednesday, April 15, 2020 for most business). However, you may be able to file extensions if needed (up to six months). Also, be aware that partnership LLCs, S-Corporations, and C-Corporations may have different tax deadlines.
Your business or other businesses you work for need to file W-2 and 1099 MISC forms by January 31, 2020. The W-2 needs to include any deductions for employee retirement plans. Even if the contribution hasn’t been made, the amount that will be made needs to be entered on the W-2. You will have to make the contribution by the tax deadline (or extended deadline). You must let your payroll company know how much you plan to contribute as an employee so that they correctly report the contributions on your payroll and W-2.
When you go with a Solo 401k, you can make the highest tax deferred contribution allowed by any retirement plan. Not only is your contribution tax deferred, but also the business contribution is tax deductible as an expense. It’s a win-win for you as an employee and taxes owed as the business owner.
Basics that You and Your Payroll Company Must Know
The Solo 401k is a perfect tool for small business owners looking to maximize their retirement contributions. Any business type qualifies. This includes corporations, LLCs, partnerships, and sole proprietors. The only requirement is that you are the only employee (spouses also qualify). Any other employees must work less than 1,000 hours per year.
You can contribute up to $62,000 for retirement into a Solo 401k for 2019. All of it is tax deferred or a tax write off. If your spouse is on payroll, this can mean up to $124,000 in savings. The $62,000 per person includes an extra $6,000 per year in “catch-up” contributions for people over age 50. If you’re not over age 50, the allowable contributions are only slightly lower at $56,000 per person. Either way, the Solo 401k allows small-business owners to salt away much more for retirement than if you have a traditional IRA or even a SEP IRA.
Contributions come from two sources. The first is from the employee, which in a Solo 401k is you as the business owner (you have full control of both contributions). That amount is $19,000 for 2019 as an employee (or $25,000 if you’re 50 or older). And get this – it can be 100% of your self-employed earnings for the year. The other contribution source is the employer contribution. If your business is a sole proprietor or partnership, the maximum profit sharing contribution is 20% of your net income. If your business is structured as a corporation, the maximum profit sharing contribution is 25% of gross income. The combination of the two contributions cannot exceed $56,000 per person ($62,000 for those over age 50).
Solo 401k Specific Information
You have many options for opening and funding your Solo 401k for 2019. Opening the account does need to be completed before the end of 2019 and the funding can come from many sources. You can fund it directly from your business earnings or from an existing retirement account. Retirement accounts that you can rollover include:
- SEP IRA
- Traditional IRA
- SIMPLE IRA
- Accounts from a previous employer’s traditional 401k, 403b, or 457b
- Profit Sharing
- Money Purchase
- Pension Plan
- Thrift Savings Plan
- …and more
Funding Your Plan
The Solo 401k experts at Nabers Group will gladly help you get started with a direct or indirect rollover or new funding. We can also help you rollover real estate (or other assets) from a self directed IRA into a Solo 401k.
Another significant benefit only available through a 401k is the ability to take out a loan from your account. This feature lets you act as your own bank. You do have to pay interest on the loan but you pay the interest directly to your own retirement account. However, you can borrow up to $50,000 or 50% of the account balance. Your Solo 401k by Nabers Group automatically includes a participant loan.
Keep in mind that annual Solo 401k funding is flexible. You can fund it to the max each year or anywhere between zero and the max. There is no minimum contribution requirement – this year or in any future year. You can fund it any time up to the tax deadline (including extensions).
Roth 401k Contributions
You want to be sure your payroll company is aware of and prepared to work with a Roth 401k. You may not currently be contributing to this after tax retirement account but there could well be reasons why you will want to in the future. Every Solo 401k by Nabers Group automatically includes a Roth 401k sub-account at no extra charge. This gives you the freedom to decide if and how you want to fund, use, and invest with your Roth money.
There are many reasons you may prefer a Roth 401k. You do pay taxes on the contributions but you don’t pay taxes when you withdraw money from a Roth account. Very importantly, you don’t pay taxes on the earnings from a Roth account. In five years or less, you might double (or more) the value of a Roth account. All of it is available tax-free (penalty free after age 59 ½). With a tax deferred 401k the funds are taxable at your tax rate at the time of withdrawal. There are several implications here. When you are diligent about managing your retirement account, you very easily could have a much higher income during retirement than during your income earning years. With a Roth 401k, all of those funds are tax-free.
Grow Money Tax-Free
We automatically include a Roth 401k sub-account is because your tax deferred Solo 401k may one day reach a value when you realize you’re approaching a financial point when you could be paying more in taxes after retirement than while working. This may be the point in time when you choose a Roth account because the earnings are tax-free. Real estate and cryptocurrencies are investing examples having the potential to create this pleasant scenario for you. You can even convert a portion or all of your Solo 401k funds to Roth now or at a later date.
There are many personal circumstances that can make the Roth 401k preferable. Maybe you are relatively young and earning a lower income today than you expect to in the future. The Solo Roth 401K lets you pay a lower tax today and substantially grow your retirement fund into a large nest egg that you can withdraw from tax-free at a later time. Or you want to avoid or reduce taxes on social security benefits. Please contact Nabers Group to discuss the many other benefits available with a Roth 401k.
Whatever your specific retirement needs and goals are, you need to start coordinating now with your payroll company or accountant about your yearly wage information including your W-2. While traditional IRAs might not need to be setup until April 15th, your Solo 401k must be setup by December 31st.
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.
Great article! I have one question. It states “Your business or other businesses you work for need to file W-2 and 1099 MISC forms by January 31, 2020.” My wife and I have a LLC taxed as a partnership. No other employers. Is a W-2 required to make the employee contributions or can we simply make a contribution from our personal checking accounts?