The Individual 401k or Solo 401k

Understanding Individual 401k Contributions

The individual 401k offers a unique and unprecedented amount of flexibility when it comes to making contributions. To help you understand these contributions, we have put together a page dedicated to explaining them.

First, there are 2 main contribution components:

1. Employee Contributions: You are an employee of your corporation and can contribute as such. This type of contribution is referred to as a Salary Deferral
2. Employer Contributions: As the employer of your business you are also entitled to contribute to the plan. These types of contributions are referred to as Profit Sharing Contributions

Note: The individual 401k is partially set up like a corporation, which is why the contributions are referred to as “Employee” and “Employer.”

Catch up Contributions

Now, if you are over the age of 50 then, as an employee, you are able to make an additional contribution to the individual 401k plan. This is referred to as a “Catch-up Contribution”

2013 Individual 401k Contribution Limits

Tax Deductible Contributions VS Roth Contributions

  • Tax Deductible Contributions
    • Substantial tax savings when making contributions.
    • Employee contributions (salary deferral) can be tax deductible.
    • Employer contributions (profit sharing) are always tax deductible. Unincorporated businesses (i.e. sole proprietors) can generally deduct salary deferral and profit sharing contributions from personal income.
  • Roth Contributions
    • Your individual 401k can be set up as an Individual Roth 401k, and that can provide you the opportunity to designate your employee contributions (salary deferral) as Roth aka after tax.
    • Making contributions in an individual Roth 401k means that you pay the taxes on the contributions now, not on the distributions later one.
    • Since there are no income limits with an individual 401k, that means that high income earners now have the ability to make direct contributions to a Roth account.

Contribution Deadlines

For a sole Proprietorship, partnership, or an LLC taxed as a sole proprietorship:

  • Employee salary deferral contributions can be deposited up to your personal tax filing deadline plus extensions
  • Employer profit sharing contributions can be deposited up to your personal tax filing deadline plus extensions

For S or C Corps or an LLC taxed as a corporations:

  • Employee Salary deferral contributions must be deposited as soon as reasonably possible after each w-2 pay periods.
  • Employer profit sharing contributions can be made up to the corporate tax filing deadline plus extensions. (For entities with a calendar year, that means March 15th plus available extensions.)

How Can We Help You?

Our team of experienced Self Directed Investment professionals are here to help answer your questions. We have years of experience and have seen nearly every type of account, investment, tax issue, funding method, and question imaginable. Give us a call and let us offer our expertise.