Are you self-employed? Do you do the work yourself without any employees in any of the companies you own? Then you may qualify for a Solo 401(k) account.
- You have higher contribution limits than most other retirement accounts
- Your Solok can have a “Roth” bucket allowing you to make Roth contributions regardless of income (no income cap)
- You can borrow from a Solok for personal use, whereas you cannot borrow from an IRA
The Old Way
There are new changes for the timing when setting up a Solo 401k. The old rule said the Solo(k) had to be established by the end of year for which wanted to contribute. For example, if you wanted to contribute for 2019, the plan had to be opened by December 31st, 2019. You could make the contribution up until April 15, 2020 (changed to July 15, 2020). The prior-year contribution date was set by either the tax filing deadline or the deadline if you filed an extension.
The New Way
Under the Secure Act, the new rules are much more user-friendly. Now, you have until the tax filing deadline (plus extensions) to get the account opened. The year-end deadline to establish an account is abolished.
With a SoloK you are both employer and employee. Regarding contributions, some CPAs take the position that both employer and employee contributions can be made up until the tax filing deadline plus extensions, especially if taxpayer is on a Schedule C since you often do not know what net profit is until you file taxes. Some CPAs take the position that employee contributions must be done by year-end even if it is SoloK and Schedule C.
The SECURE Act Section 1.0, Section 201 does not explicitly state anything about this the deferral component. Make sure you discuss this with your competent tax advisor.
In 2020 and thereafter the Solo(k) acts like other accounts in that there is no year-end deadline to establish your account to make a prior-year employer contribution. It is the employee deferral portion that has not been made clear by the IRS.
Find Out More
To learn more and to find out if a Solo(k) account is for you, please contact your competent tax professional. uDirect IRA Services can be reached at info@uDirectIRA.com or (866) 447-6598.