Looking for a Last Minute Tax Deferral Opportunity? Timing is Everything!
Self-Directed Solo 401(k)s are a great way for eligible nonemployer business owners to save on taxes by deferring till retirement. They can also help save for retirement in a self-directed and asset class-diversified way. The timing for adopting this kind of plan matters, however, so that the contribution methods can be fully maximized.
Depending on how the business is taxed, time is running out for 2021. Read on for details...
Contribution types – the difference matters for timing
The Self-Directed Solo 401(k) allows for pretax contributions to be made two different ways: Salary Deferral and Profit-Sharing. Here is the 2021 contribution limit breakdown for each and how they are calculated.
Salary Deferral - With salary deferral, the account holder can contribute:
- 100% of net earnings from self-employment up to a maximum of $19,500.
- Those who are 50 years old or older qualify for the additional catch-up contribution of $6,500, bringing the salary deferral limit to $26,000.
Profit-Sharing - In addition to salary deferral, the account holder can also make a profit-sharing contribution:
- For those set up as an LLC, Partnership, or Sole Proprietor, they can contribute up to 20 percent of their net earnings from self-employment.
- Those set up as C Corporations and S Corporations can contribute up to 25 percent of their salary from self-employment.
The combined limit for 2021 has been increased to $58,000 and $64,500.
Combined Limit - The contribution limit for the salary deferral and profit sharing, combined, cannot exceed $58,000 for those under 50 years old or $64,500 for those 50 years old and over. Again, this is the maximum amount allowed; the account holder doesn’t have to contribute the full amount.
Plan set-up and contribution deadlines
For 2019 and prior years, the Self-Directed Solo 401k plan had to be established by the end of the tax year. The SECURE Act changed this deadline. Starting with the 2020 tax year, business owners can establish a Self-Directed Solo 401(k) plan up until the tax filing deadline (plus extension) for the preceding year.
Contribution deadlines depend on how the business entity is taxed and the type of contribution being made. For Sole Proprietor, Partnerships, and LLCs, salary deferral and profit-sharing contributions can be made up until the personal tax filing deadline, plus extension. For C Corporations and S Corporations, the salary deferral portion must be contributed as the salary to be contributed is earned, within at least seven days, and generally through payroll deductions. Profit-sharing contributions can be made up until the corporate tax filing deadline, plus extension.
Plan adoption process and time-frame
Adopting a Self-Directed Solo 401(k) is a simple process that can be completed in as little as five business days, depending on the response time from the business owner.
Step 1 – Consult with our plan expert to ensure that this kind of plan is a good fit for you and your needs.
Step 2 – Go to our Get Started tab and process your payment for the plan.
Step 3 – You will get an email with the next steps and a link to our Intake form so that we may obtain all of the information needed to create your plan.
Step 4 – Once the Intake form is returned, we send you Form SS-4 to sign so that we may obtain an EIN for your plan from the IRS on your behalf.
Step 5 – Upon receipt of the signed form, we obtain the EIN.
Step 6 – We create your plan documents and send the signature pages to you to sign.
Step 7 – After receiving your signed pages, we deliver the complete plan documents to you.
Step 8 – If requested, we will initiate the trust checking account opening process with Titan Bank, or we can help walk you through the process with a bank of your choosing. We can also recommend an investment advisor for traditional/stock market investments, if needed.
Step 9 – Fund the trust checking and/or trust investment accounts with your earnings from self-employment and/or account rollovers.
NOW is the time to establish your Self-Directed Solo 401(k)
Since C and S Corporations require the salary deferral contribution to be made as the salary is earned, business owners will want to establish the plan NOW so that there is enough time remaining over the next couple weeks to make this contribution type for 2021 without negatively affecting the salary amount that is needed for everyday living needs.
It’s important to point out that while the IRS extended the deadline for the plan to be established, they have not yet updated their prior guidelines stating that employee (salary deferral) contributions must be elected before the end of the tax year. That said, until the IRS issues final guidance on this, it is recommended that all entity types establish the plan (and elect the salary deferral contribution) before 12/31/2021, just to be on the safe side, so that the salary deferral and profit-sharing contributions can both be maximized.
Why wait? The sooner that the plan is adopted, and the account is funded, the sooner the money can be invested and have increased diversification and higher earnings potential - no matter how your business is taxed!
Want to learn more about Self-Directed Solo 401(k)s? Take our Self-Directed Solo 401(k) - EXPLAINED course on Udemy.
