Posted over 3 years ago

Make Profit Sharing and Voluntary After-Tax Contributions to Solo 401k

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I have a job with an unrelated employer (a Fortune 500 company) and contributed the maximum employee contribution of 18,500 to that 401k plan. 

QUESTION:

I am also self-employed and My business made ~$286,000 in profit in 2018..

I believe I can contribute up to $55,000 to my plan (36,500 as pretax profit sharing and the remainder as after-tax contributions) Can you confirm?

ANSWER: 

Your are understanding is correct. The profit sharing contributions limits apply separately to each 401k plan since you are not an on owner of the business sponsoring the full-time employer 401k. Therefore, the profit sharing contribution to your self-employed solo 401k would be calculated based on your net self-employment income. 

Also, correct that you could contribute the difference (after your make the profit sharing contribution to the solo 401k) to the voluntary after-tax bucket of the solo 401k plan. Therefore, if you contribute $36,0000 in profit sharing contributions to the solo 401k plan, you could contribute the remaining amount of $19,000 to the voluntary after-tax bucket of the solo 401k, and subsequently convert the $19,000 to a Roth IRA or to the designated Roth solo 401k account. 

QUESTION:

What I’d actually like to do is contribute all $55,000 as an after-tax contribution (for future Roth conversions and because any pretax contribution reduces QBI). Is there any requirement that any portion of the 55,000 has to go to the pre-tax pool? I believe profit-sharing has to go to the pre-tax pool, but I don’t believe I’m obligated to make profit sharing contributions… can you confirm?

ANSWER: 

You are correct that you can choose to contribute the entire $55,000 to the voluntary after-tax solo 401k bucket and not thus not make any profit sharing contributions to the solo 401k. The IRS rules do not require that you make profit sharing contributions to the solo 401k plan in order to make voluntary after-tax employee contributions. 

QUESTION:

Also, I believe the deadline is my tax filing deadline plus extensions is still Oct 2019, even if I only contribute after-tax funds. Can you confirm?

ANSWER:

Exactly if your solo 401k plan was adopted by 12/31/2018 and it also depends on your self-employed business tax election as described below. 

  • If the entity type is a Sole Proprietorship, the annual solo 401k contribution deadline is April 15, or October 15 if tax return extension is timely filed.
  • If the entity type is an LLC taxed as an S-Corporation (calendar year), the annual solo 401k contribution deadline is March 15, or September 15 if tax return extension is timely filed.
  • If the entity type is an LLC taxed as a Partnership (calendar year), the annual solo 401k contribution deadline is March 15, or September 15 if tax return extension is timely filed.
  • If the entity type is a Partnership (calendar year), the annual solo 401k contribution deadline is March 15, or September 15 if tax return extension is timely filed.
  • If the entity type is an S-Corporation (calendar year), the annual solo 401k contribution deadline is March 15, or September 15 if tax return extension is timely filed.
  • If the entity type is an C-Corporation (calendar year), the annual solo 401k contribution deadline is April 15, or October 15 if tax return extension is timely filed.

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To learn more about he solo 401k contribution rules, VISIT HERE



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