There are some new developments in the world of the Solo 401(k). Here are the highlights:
SECURE 2.0 First Year Establishment Deadline for Schedule C Solopreneurs
Section 317 of SECURE 2.0 provides that for the 2023 year and later, a solopreneur reporting their business income and deductions on Schedule C can open a Solo 401(k) after year-end and make employee contributions as long as the Solo 401(k) is established and funded before the tax return filing deadline for the year. See page 2262 of the Omnibus bill.
SECURE 317’s deadline extension does not factor in any extensions.
Thus, for 2023, the deadline to establish and make employee contributions for the first year of a Solo 401(k) is April 15, 2024. However, the deadline to establish and make employer contributions for the first year of a Solo 401(k) is October 15, 2024.
UPDATE December 14, 2023: I Tweeted a thread about the provision that allows Schedule C solopreneurs to establish and fund a new Solo 401(k) with an employee deferral contribution after year-end. There is at least some concern that if one is diligent enough to establish a new Solo 401(k) prior to year-end they might not get the benefit of Section 401(b)(2)‘s funding deadline extension. If that is true (and to my mind this is an ambiguous issue), then the solopreneur establishing the new Solo 401(k) prior to year-end would need to either fund the employee contribution prior to year-end or elect to make an employee deferral contribution prior to year-end.
Note that Section 317 of SECURE 2.0 does not apply for 2022 and does not apply to years beyond the first year of a Solo 401(k).
Based on the wording of SECURE 2.0 Section 317, it is not initially clear if spouses who work in the Schedule C business qualify for the new deadline. I believe the IRS and Treasury may issue regulations clarifying this point.
New Solo 401(k) Employee Contributions Limit for 2023
The IRS announced that for 2023, the employee deferral limit for all 401(k)s, including Solo 401(k)s, will be $22,500.
New Solo 401(k) Catch-Up Contributions Limit for 2023
The IRS also announced that for 2023, the employee deferrals catch-up contribution limit increased from $6,500 (2022) to $7,500. As a result, those age 50 or older can contribute, in employee contributions, a maximum of the lesser of $30,000 ($22,500 plus $7,500) or earned income.
New Solo 401(k) All Additions Limit
The new all-additions limit for Solo 401(k)s is $66,000 (or earned income, whichever is less). For those aged 50 or older during 2023, the $66,000 number is $73,500 ($66,000 plus $7,500).
2023 Update to Solo 401(k): The Solopreneur’s Retirement Account
On sale now, Solo 401(k): The Solopreneur’s Retirement Account explores the nooks and crannies of Solo 401(k)s. On page 16 of the paperback edition, I provide an example of the Solo 401(k) limits for 2022 if a solopreneur makes $100,000 of Schedule C income. Here is a revised version (in italics) of the example (with the footnote omitted) applying the new 2023 employee contribution limit:
Lionel, age 35, is self-employed. His self-employment income (as reported on the Schedule C he files with his tax return) is $100,000. Lionel works with a financial institution to establish his own Solo 401(k) plan and choose investments for the plan. Lionel can contribute $22,500 to his Solo 401(k) as an employee deferral (2023 limit) and can choose to contribute, as an employer contribution, anywhere from 0-20% of his self-employment income.
Lionel’s maximum potential tax-advantaged Solo 401(k) contribution for 2023 is $41,087! That is a $22,500 employee contribution and a $18,587 employer contribution. Note there’s no change in the computation of the employer contribution for 2023 in this example.
On page 18 I provide an example of the Solo 401(k) contribution limits factoring in catch-up contributions. Here’s the example revised for 2023:
If Lionel turned 50 during the year, his limits are as follows:
- Employee contribution: lesser of self-employment income ($92,935) or $30,000: $30,000
- Employer contribution: 20% of net self-employment income (20% X $92,935): $18,587
- Overall contribution limit: lesser of net self-employment income ($92,935) or $73,500: $73,500
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Great article. I’m confused on the impact of QBD on the employee and employer contributions to a Solo 401k as an S Corp.
Please correct me if I’m wrong but if you’re below the QBD threshold, wouldn’t it make sense to contribute pre-tax to the employee contribution of the Solo-401k, since contributing $20,500 as an employee will defer on dollars that won’t receive the QBD.
Then with the distribution portion of income you take in your S Corp (which qualifies for QBD), not contribute the usual 25% of allowable employer contribution. And instead do a mega backdoor Roth for the remaining difference up to the $61k limit.
If income is projected to be above the QBD threshold then making the employer and employee contributions might make sense and could possibly help you get low enough to qualify for the QBD.
Obviously everyone’s situation is unique but if you’re simply talking about overall tax optimization are there errors in my thinking?
Justin, many thanks for reading and commenting. I appreciate it.
You touch on several great topics. I discuss S corporations, the QBI deduction, and Solo 401(k)s in Chapter 9 of my book. To my mind, this area is both complicated and subjective, and can even invoke things such as reasonable compensation.
One area I discussed with Brad Barrett on the ChooseFI podcast is the Mega Backdoor Roth as applied to Solo 401(k)s. I tend to believe in most cases the Mega Backdoor Roth makes much less sense in a Solo 401(k) than in a large employer 401(k). You can listen to that conversation here: https://www.choosefi.com/401k-mega-backdoor-roth-and-the-premium-tax-credit-sean-mullaney-ep-409/