How Late Can You Contribute to a Solo 401(k)? Here’s the Answer
One of the most appealing aspects of a solo 401(k) retirement plan is its flexibility. A participant can contribute as both an employee and an employer, allowing for the rapid growth of the plan’s assets. Under the right circumstances, a spouse can participate too, potentially doubling up on a couple’s nest egg. But what about timing? How late can you contribute to a solo 401(k)?
Author
Eddy Martinez
Jul 23, 2023
One of the most appealing aspects of a solo 401(k) retirement plan is its flexibility. A participant can contribute as both an employee and an employer, allowing for the rapid growth of the plan’s assets. Under the right circumstances, a spouse can participate too, potentially doubling up on a couple’s nest egg. But what about timing? How late can you contribute to a solo 401(k)?
Solo 401(k) contribution deadlines can vary, depending on the entity type of the business. Generally speaking, for a sole proprietorship, employee and employer contributions must be made no later than April 15th. For incorporated businesses, the deadline for contributions is March 15th.
As an investment vehicle, a solo 401(k) offers benefits as robust as retirement plans provided by big companies to their prized employees. But to maximize these features, contributions must be made regularly and on time. A solo 401(k) is different from other types of plans, so keep reading to learn how late you can contribute to one without jeopardizing your retirement plan.
How Late Can You Contribute to a Solo 401k?
A solo 401(k), also known as a one-participant or self-employed 401(k), is the retirement plan of choice for many owners of micro-businesses and self-employed workers. It affords an opportunity to methodically build a sizable nest egg through dual employee and employer contributions, and for couples who work together, both spouses can contribute to the same plan.
But as the old saying goes, timing is everything, and this is especially true for contributing to a solo 401(k). There are several reasons why timely contributions are important for maximizing the benefits of this unique investment vehicle:
A solo 401(k) allows a participant to wear two contributor hats - one as an employee and another as an employer - so failing to make a contribution on time is a lost opportunity to meaningfully add to the plan assets (and ultimately, the size of your nest egg)
There are also significant tax benefits, i.e. getting write-offs, from making contributions that may not be realized if deadlines are missed (or worse, can land you in hot water with the IRS if a deduction is inappropriately claimed for a contribution that was made too late for the tax year in question)
The spouse of a solo 401(k) participant who works for the same operation or holds an ownership interest, can contribute to the plan in the same manner as the business owner, so it is doubly important for contribution deadlines to be met
As far as contributions to a solo 401(k) are concerned, two sets of circumstances determine how late you can make contributions: (1) whether you are making employee or employer contributions, and (2) the entity type of your business (e.g., sole proprietorship, S corporation, C corporation, limited liability company, or partnership).
Employee Contribution Deadline for a Solo 401(k)
The first hat worn by a participant in a solo 401(k) with respect to contributions is that of an employee. These earnings can come in the form of wages or salary that the business pays to the owner, and in many cases, the spouse as well (provided that he or she works for the operation at least part-time, or holds an ownership interest).
These are the deadlines for contributing to a solo 401(k) as an employee:
For sole proprietors, the latest you can make an employee contribution is the personal tax filing deadline, which is April 15th for most people
This deadline can be extended to October 15th by filing an extension request with the IRS
For businesses that are incorporated, such as an S corporation or an LLC, an employee contribution must be made by March 15th, which is traditionally the tax filing deadline for these types of entities (with an IRS extension, this date can be delayed to September 15th)
For 2023, the maximum employee contribution you can make to a solo 401(k) is the lesser of $22,500 or your full year’s wages. If you are over the age of 50, you are allowed an additional $7,500 as a catch-up contribution. These same figures apply to a spouse who works for the same business (or has an ownership interest) as the plan participant.
Employer Contribution Deadline for a Solo 401(k)
The other hat worn by an enrollee in a solo 401(k) is that of an employer. Contributions from the employer side must comply with the following deadlines:
Employer profit-sharing contributions must be made no later than April 15th (or October 16th with an IRS extension) for sole proprietorships
For businesses that are incorporated, the employer profit-sharing contribution deadline is March 15th (September 15th with an extension)
The total contribution (the sum of employee and employer contributions) that is allowed for a solo 401(k) is capped at $66,000 for 2023. This amount is boosted to $73,500 for plan participants over the age of 50.
Again, the qualifying spouse of a business owner can contribute to a solo 401(k) in the same amount as the proprietor, essentially doubling up on the plan’s asset growth.
Employee Written Salary Deferral Election Deadline
A few other deadlines to keep in mind, particularly if you are participating in a solo 401(k) for the first time, relate to the formal start-up and written election for salary deferrals.
Regardless of the entity type, a written election to make salary deferrals into a solo 401(k) must be made by December 31st.
In addition, a solo 401(k) should be established before the tax deadline (including extensions) for an incorporated business if you want to make employee contributions for the same tax year. Otherwise, only profit-sharing (i.e. employer) contributions will be allowed for that initial year.
Final Thoughts
A solo 401(k) empowers small business owners and self-employed individuals to plan for their retirement and put hard-earned money away while reaping similar tax-saving benefits as rank-and-file employees with retirement plans from large employers.
But to reap the full benefits offered by a solo 401(k), it is necessary to abide by rules and regulations governing its setup and ongoing operations. This includes making timely contributions on both the employee and employer sides of the ledger.
SOURCES:
https://investor.vanguard.com/accounts-plans/small-business-retirement-plans/individual-solo-401k
https://www.fidelity.com/retirement-ira/small-business/self-employed-401k/overview