Tag Archives: Solo401(k)

Three Problems with Roth Solo 401(k) Employer Contributions

Late 2022 ushered in a new type of contribution to Solo 401(k)s: Roth employer contributions. Traditional employee and employer contributions have been available for all of the Solo 401(k)’s post-EGTRRA history. Roth employee contributions have been available since 2006, even if plan providers were slow to adopt them.

Should the availability of Roth employer contributions change planning for most solopreneurs? Not to my mind.

I have three concerns with making Roth employer contributions to Solo 401(k)s.

First Concern: Validity

Roth employer contributions were part of SECURE 2.0, which was part of the Omnibus bill passed in December 2022. That Omnibus bill has been subject to litigation. In Texas v. Garland (accessible here and here), Judge James W. Hendrix ruled for the State of Texas that the House of Representatives impermissibly used proxies to establish a quorum in order to pass the Omnibus, in violation of the Constitution’s Quorum Clause.

I encourage you to read the Texas v. Garland opinion. It is very convincing in my opinion.

While Texas v. Garland does not technically apply to SECURE 2.0, its reasoning does. Any taxpayer in the country facing harm under SECURE 2.0 (perhaps because they were denied the deduction for catch-up contributions under SECURE 2.0 Section 603) can pick it up and ask another federal judge to invalidate SECURE 2.0. That leaves SECURE 2.0 on shaky footing.

Short of litigation, there’s the question of what the new Administration will do with the Omnibus and SECURE 2.0. Texas v. Garland is litigation between the old Department of Justice and Ken Paxton, the Attorney General of Texas. Ken Paxton is much closer aligned politically with the Trump Administration. Will the Trump DoJ continue to litigate against Ken Paxton? The Trump Administration may simply refuse to uphold the Omnibus, including SECURE 2.0.

My hope is that if that happens taxpayers who have relied on SECURE 2.0 will be held harmless. For example, amounts in Roth 401(k)s (including Solo 401(k)s) attributable to employer contributions should be deemed to be amounts validly within the Roth 401(k) plan, so past reliance does not cause future harms (such as failed plan qualification). That said, my hope, a reasonable hope, is just a hope.

Regardless of one’s views on the Quorum Clause litigation, there’s at least some doubt as to SECURE 2.0’s validity, including the validity of Roth employer contributions to Solo 401(k)s. That makes planning into them difficult, in my opinion.

Second Concern: Section 199A Problem

Ben Henry-Moreland of Kitces.com wrote a thoughtful article on Roth employer contributions to Solo 401(k)s potentially reducing a solopreneur’s Section 199A qualified business income deduction.

I both agree and disagree with Mr. Henry-Moreland. I agree in a general sense that recent IRS guidance has muddied the waters when it comes to tax return reporting of Roth employer contributions to Solo 401(k)s. I disagree with his conclusion that this guidance results in non-deductible Roth employer contributions to Solo 401(k)s reducing the Section 199A qualified business income deduction.

The concern is Roth employer contributions might reduce the amount of qualified business income that then determines the Section 199A QBI deduction. Mr. Henry-Moreland is concerned about this because of Notice 2024-2 Q&A L9 (page 76 of this file). It tells plans how to report Roth 401(k) employer contributions in general. The question is “what reporting obligations apply to [Roth employer] contributions?”

Before I state the concerning answer, one must remember the context. This particular Q&A is about reporting, not about taxation. In theory, Roth employer contributions (taxable to the employee) should be simply added to W-2 income for most employees. But that creates a huge headache from a large employer systems perspective. That’s W-2 income that is income tax taxable but not payroll tax taxable. Ugh!

To avoid the payroll systems issue (which is mostly a large employer issue rather than a Solo 401(k) issue), the Notice provides that Roth employer contributions are reported “as if: (1) the contribution had been the only contribution made to an individual’s account under the plan, and (2) the contribution, upon allocation to that account, had been directly rolled over to a designated Roth account in the plan as an in-plan Roth rollover.” (emphases added). The Notice goes on to state that because of this treatment the Roth employer contribution is reported to the employee as taxable on a Form 1099-R.

Mr. Henry-Moreland is concerned that as applied to a Schedule C solopreneur, this is reported by deducting the contribution from net self-employment income (presumably on Schedule 1, Line 16) and then taxing the amount on Form 1040 Lines 5a and 5b. This reduction of net self-employment income would result in a reduction in the Section 199A QBI deduction.

While I hear Mr. Henry-Moreland’s concern, I disagree with it for several reasons. First, the Q&A in question applies to reporting by plans. It does not appear to apply to (1) determining taxable income or other tax relevant amounts and (2) tax return reporting by individuals. It is telling that the answer is silent as to any forms filed by individuals while it goes into depth as to how the Form 1099-R is to be filed.

Second, the words “as if” in the Notice’s answer are illuminating. The reporting is done “as if” X and Y happened for tax purposes. That means X and Y did not happen for tax purposes, which is good news from a Section 199A perspective. Third, the Notice does not purport to affect Section 199A in any way. Fourth, qualified business income is determined under Section 199A and Treas. Reg. Section 1.199A-3. Neither SECURE 2.0 Section 604 nor Notice 2024-2 mention Section 199A and qualified business income. Thus, I believe that Notice 2024-2 and Roth employer contributions to Solo 401(k)s do not reduce the qualified business income deduction.

The above views voiced, there may be some small risk that Roth employer contributions to Solo 401(k)s are not only nondeductible, they also reduce the qualified business income deduction. That’s a negative when assessing their desirability from a planning perspective.

How to Report Solo 401(k) Roth Employer Contributions on 2024 Tax Returns

What follows is my academic opinion, not advice for you or anyone else. To properly report Roth employer contributions to a Solo 401(k) made in 2024 for 2024 and arrive at the correct Section 199A QBI deduction, I believe the following is the best way to proceed:

(1) Report Schedule C income and deductions as normal. This should help generate the appropriate Section 199A QBI deduction.

(2) Report the amount of the Roth employer contribution to the Solo 401(k) in full in Box 5a of Form 1040.

(3) Assuming no other pension, annuity, 401(k), or other qualified plan distributions, report $0 for the taxable amount of pension and annuity distributions in Box 5b of Form 1040.

My view is that the above will properly report that which must be reported to the IRS while also (i) avoiding any double counting and (ii) properly computing the Section 199A QBI deduction that the taxpayer is entitled to.

If anyone at the IRS or the Treasury Office of Tax Policy is reading this, it would very helpful for the government issuing guidance (1) clarifying that no, Roth employer contributions to Solo 401(k)s do not reduce the Section 199A qualified business income deduction and (2) illustrating the proper tax return reporting for Roth employer contributions to Solo 401(k)s.

Third Concern: Planning Desirability

For this section, let’s assume that I am wrong when it comes to the first concern and I am correct regarding the second concern. Making those two assumptions, Roth employer contributions to Solo 401(k)s are valid and do not reduce the Section 199A QBI deduction.

Great!

Does that mean we should plan into such contributions? I believe the answer is generally “No” for most solopreneurs.

Even with the “deduction-reduction problem” issue with traditional Solo 401(k) contributions, traditional Solo 401(k) contributions are often going to be better than Roth Solo 401(k) contributions.

Picture a solopreneur in the 24% marginal tax bracket. He or she can make employer contributions to a traditional Solo 401(k) and save 19.2 cents on the dollar (24% times 80% to account for the reduction to the Section 199A QBI deduction).

Okay, well, how is that money taxed in retirement? I’ve done blog posts and YouTube videos about this subject. Some of that money could be taxed at 0% because of the standard deduction (the Hidden Roth IRA), then against the 10% bracket and then against the 12% bracket. We can hardly say traditional contributions are always the “right answer,” but we can acknowledge that (1) retirees tend to be lightly taxed in retirement and (2) retirees greatly benefit from today’s tax environment, including large standard deductions and progressive tax brackets.

I question the planning value of Roth employer contributions. Say you disagree with me. You still have Roth employee contributions. Why not hedge your bets by making Roth employee contributions and deductible traditional employer contributions? Both of these types of contributions are well established under the law.

Conclusion

Roth employer contributions to Solo 401(k)s are on shaky legal ground and are not that desirable from a planning perspective. There’s even a chance they reduce the Section 199A QBI deduction. Based on those concerns, I believe Roth employer contributions to Solo 401(k)s are undesirable for most solopreneurs.

FI Tax Guy can be your financial planner! Find out more by visiting mullaneyfinancial.com

Follow me on X: @SeanMoneyandTax

This post is for entertainment and educational purposes only. It does not constitute accounting, financial, investment, legal, or tax advice. Please consult with your advisor(s) regarding your personal accounting, financial, investment, legal, and tax matters. Please also refer to the Disclaimer & Warning section found here.

2025 Solo 401(k) Update

Before we explore new developments for 2025, 2024 was so chock full of Solo 401(k) developments that it deserves its own rundown. Then we will move onto 2025 Solo 401(k) changes.

Vanguard Out!

Vanguard transferred all of their Solo 401(k) accounts to Ascensus in 2024. Vanguard is now entirely out of the Solo 401(k) business.

The good news for those fond of Vanguard is that the Ascensus Solo 401(k) offers Vanguard mutual funds.

The transition was not entirely smooth. Notably, beneficiary designation forms did not transfer from Vanguard to Ascensus. The Ascensus Solo 401(k) contribution portal is quite different from Vanguard’s and is not intuitive, in my opinion. I did a YouTube video about making contributions to a Solo 401(k) at Ascensus.

I’m not in the business of making generic recommendations about which Solo 401(k) plan provider to use. In my book, I advocate strongly for considering a pre-approved plan (sometimes referred to as a prototype plan). Schwab, Fidelity, and Ascensus are now among the larger providers of pre-approved plans. While I will not provide any plan provider recommendation, I believe Ascensus, Fidelity, and Schwab are all reasonable options to consider.

Solo 401(k)s at Retirement

During 2024 I did a deep-dive on some Solo 401(k) history. The results of that research is a 27 page self-published article concluding that for Schedule C solopreneurs, a Solo 401(k) should survive the solopreneur’s retirement.

One of the implications of that finding is that Solo 401(k)s should qualify for the Rule of 55. However, one must always consult with their own individual plan, as the plan itself must have rules facilitating Rule of 55 distributions.

Doubts About SECURE 2.0

SECURE 2.0 made dozens of changes to retirement account rules. It made what I believe to be rather inconsequential changes to Solo 401(k) planning. Nevertheless, it did change some Solo 401(k) rules.

Based on a court case in federal district court in Texas, the legal foundation of SECURE 2.0 is now shaky. I discussed the situation on YouTube. It will be very interesting to see what the new Administration does with SECURE 2.0 considering that a federal district court judge made a very convincing argument that the passage of the Omnibus bill (which included SECURE 2.0) in December 2022 was not valid.

New Solo 401(k) Employee Contributions Limit for 2025

The IRS announced that for 2025, the employee deferral limit for all 401(k)s, including Solo 401(k)s, will be $23,500.

Solo 401(k) Catch-Up Contributions Limit for 2025

The IRS also announced that for 2025, the normal employee deferrals catch-up contribution limit remains $7,500. As a result, those aged 50 or older can contribute, in employee contributions, a maximum of the lesser of $31,000 ($23,500 plus $7,500) or earned income.

New Solo 401(k) All Additions Limit for 2025

The new all-additions limit for Solo 401(k)s is $70,000 (or earned income, whichever is less). For those aged 50 or older during 2025, the $70,000 number is $77,500 ($70,000 plus $7,500).

New Additional Catch-Up Contributions for Those Aged 60 Through 63

SECURE 2.0 increased the catch-up contribution for those aged 60 through 63 (see page 2087 of this file). In 2025, the catch-up contribution for these people is $11,250, not $7,500. As this is a SECURE 2.0 rule, I believe that Solo 401(k) users should (1) proceed with caution and (2) stay tuned.

Traditional Solo 401(k) Contributions More Attractive Than Ever

I believe traditional Solo 401(k) contributions are now more attractive than ever. Why? The change in tax policy coming with the 2024 Election results.

There’s been plenty of debate: traditional versus Roth. The way to resolve that is to compare today’s marginal tax rate with the tax rate on the income in retirement. Today’s rate is pretty knowable, but tomorrow’s rate isn’t.

That said, we do know that America has a history of standard deductions and graduated progressive tax rates. That, combined with Congress’s political incentives (retirees tend to vote), suggests that retirees will be relatively low taxed in retirement.

Social Security has been a fly in the ointment to that view. Up to 85 percent of Social Security income fills up the standard deduction and lower tax brackets with income. Doesn’t that mean that traditional retirement account withdrawals will be taxed against higher tax brackets?

Starting in 2025, that issue may go away. Eliminating income tax on Social Security was a major promise of the Trump campaign. Considering the GOP majorities in both houses of Congress, the tax on Social Security should be repealed. Stay tuned!

Removing Social Security from taxable income means significant amounts of traditional retirement account withdrawals should be tax free (offset by the standard deduction) or subject to the lower 10 percent and 12 income tax brackets. The possibility of even lighter taxation on traditional retirement account withdrawals makes traditional Solo 401(k) contributions more attractive than ever.

2025 Update to Solo 401(k): The Solopreneur’s Retirement Account

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 2025 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 $23,500 to his Solo 401(k) as an employee deferral (2025 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 2025 is $42,087! That is a $23,500 employee contribution and a $18,587 employer contribution. Note there’s no change in the computation of the employer contribution for 2025 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 2025:

If Lionel turned 50 during the year, his limits are as follows:

Employee contribution: lesser of self-employment income ($92,935) or $31,000: $31,000
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 $77,500: $77,500

Amazon Reviews

If you have read Solo 401(k): The Solopreneur’s Retirement Account, you can help more solopreneurs find the book! How? By writing an honest, objective review of the book on Amazon.com. Reviews help other readers find the book!

FI Tax Guy can be your financial planner! Find out more by visiting mullaneyfinancial.com

Follow me on X at @SeanMoneyandTax

This post is for entertainment and educational purposes only. It does not constitute accounting, financial, legal, investment, or tax advice. Please consult with your advisor(s) regarding your personal accounting, financial, legal, investment, and tax matters. Please also refer to the Disclaimer & Warning section found here.

2024 Year-End Tax Planning

It’s that time of year again. The air is cool and the Election is in the rear-view mirror. That can only mean one thing when it comes to personal finance: time to start thinking about year-end tax planning.

I’ll provide some commentary about year-end tax planning to consider, with headings corresponding to the timeframe required to execute.

As always, none of this is advice for your particular situation but rather it is educational information.

Urgent

By urgent, I mean those items that (i) need to happen before year-end and (ii) may not happen if taxpayers delay and try to accomplish them late in the year.

Donor Advised Fund Contributions

The donor advised fund is a great way to contribute to charity and accelerate a tax deduction. My favorite way to use the donor advised fund is to contribute appreciated stock directly to the donor advised fund. This gets the donor three tax benefits: 1) a potential upfront itemized tax deduction, 2) removing the unrealized capital gain from future income tax, and 3) removing the income produced by the assets inside the donor advised fund from the donor’s tax return.

In order to get the first benefit in 2024, the appreciated stock must be received by the donor advised fund prior to January 1, 2025. This deadline is no different than the normal charitable contribution deadline.

However, due to much year end interest in donor advised fund contributions and processing time, different financial institutions will have different deadlines on when transfers must be initiated in order to count for 2024. Donor advised fund planning should be attended to sooner rather than later.

Taxable Roth Conversions

For a Roth conversion to count as being for 2024, it must be done before January 1, 2025. That means New Year’s Eve is the deadline. However, taxable Roth conversions should be done well before New Year’s Eve because

It requires analysis to determine if a taxable Roth conversion is advantageous,
If advantageous, the proper amount to convert must be estimated, and
The financial institution needs time to execute the Roth conversion so it counts as having occurred in 2024.

Remember, generally speaking it is not good to have federal and/or state income taxes withheld when doing Roth conversions!

Gotta Happen Before 2026!!!

Before the Election, many commentators said “you’ve gotta get your Roth conversions done before tax rates go up in 2026!” If this were X (the artist formerly known as Twitter), the assertion would likely be accompanied by a hair-on-fire GIF. 😉

I have disagreed with the assertion. As I have stated before, there’s nothing more permanent than a temporary tax cut! Now with a second Trump presidency and a Republican Congress, it is likely that the higher standard deduction and rate cuts of the Tax Cuts and Jobs Act will be extended.

Regardless of the particulars of 2025 tax changes, I recommend that you make your own personal taxable Roth conversion decisions based on your own personal situation and analysis of the landscape and not a fear of future tax hikes.

Adjust Withholding

This varies, but it is a good idea to look at how much tax you owed last year. If you are on pace to get 100% (110% if 2023 AGI is $150K or greater) or slightly more of that amount paid into Uncle Sam by the end of the year (take a look at your most recent pay stub), there’s likely no need for action. But what if you are likely to have much more or much less than 100%/110%? It may be that you want to reduce or increase your workplace withholdings for the rest of 2024. If you do, don’t forget to reassess your workplace withholdings for 2024 early in the year.

One great way to make up for underwithholding is through an IRA withdrawal mostly directed to the IRS and/or a state taxing agency. Just note that for those under age 59 ½, this tactic may require special planning.

Backdoor Roth IRA Diligence

The deadline for the Backdoor Roth IRA for 2024 is not December 31st, as I will discuss below. But if you have already completed a Backdoor Roth IRA for 2023, the deadline to get to a zero balance in all traditional IRAs, SEP IRAs, and SIMPLE IRAs is December 31, 2024.

Solo 401(k) Planning

There’s plenty of planning that needs to be done for solopreneurs in terms of retirement account contributions.

The Solo 401(k) can get complicated. That’s why I wrote a book about them and post an annual update on Solo 401(k)s here on the blog.

Year-End Deadline

These items can wait till close to year-end, though you don’t want to find yourself doing them on New Year’s Eve.

Tax Gain Harvesting

For those finding themselves in the 12% or lower federal marginal income tax bracket and with an asset in a taxable account with a built-in gain, tax gain harvesting prior to December 31, 2024 may be a good tax tactic to increase basis without incurring additional federal income tax. Remember, though, the gain itself increases one’s taxable income, making it harder to stay within the 12% or lower marginal income tax bracket.

I’m also quite fond of tax gain harvesting that reallocates one’s portfolio in a tax efficient manner.

Tax Loss Harvesting

The deadline for tax loss harvesting for 2024 is December 31, 2024. Just remember to navigate the wash sale rule.

RMDs from Your Own Retirement Account

The deadline to take any required minimum distributions from one’s own retirement account is December 31, 2024. Remember, the rules can get a bit confusing. Generally, IRAs can be aggregated for RMD purposes, but 401(k)s cannot.

RMDs from Inherited Accounts

The deadline to take any RMDs from inherited retirement accounts is December 31st. For some beneficiaries of retirement accounts inherited during 2020, 2021, 2022, and 2023, the IRS has waived 2024 RMDs. That said, all beneficiaries of inherited retirement accounts may want to consider affirmatively taking distributions (in addition to RMDs, if any) before the end of 2024 to put the income into a lower tax year, if 2024 happens to be a lower taxable income year vis-a-vis future tax years.

Can Wait Till Next Year

Traditional IRA and Roth IRA Contribution Deadline

The deadline for funding either or both a traditional IRA and a Roth IRA for 2024 is April 15, 2025.

Backdoor Roth IRA Deadline

There’s no law saying “the deadline for the Backdoor Roth IRA is DATE X.” However, the deadline to make a nondeductible traditional IRA contribution for the 2024 tax year is April 15, 2025. Those doing the Backdoor Roth IRA for 2024 and doing the Roth conversion step in 2025 may want to consider the unique tax filing when that happens (what I refer to as a “Split-Year Backdoor Roth IRA”).

HSA Funding Deadline

The deadline to fund an HSA for 2024 is April 15, 2025. Those who have not maximized their HSA through payroll deductions during the year may want to look into establishing payroll withholding for their HSA so as to take advantage of the payroll tax break available when HSAs are funded through payroll.

The deadline for those age 55 and older to fund a Baby HSA for 2024 is April 15, 2025.

2025 Tax Planning at the End of 2024

HDHP and HSA Open Enrollment

It’s open enrollment season. Now is a great time to assess whether a high deductible health plan (a HDHP) is a good medical insurance plan for you. One of the benefits of the HDHP is the health savings account (an HSA).

For those who already have a HDHP, now is a good time to review payroll withholding into the HSA. Many HSA owners will want to max this out through payroll deductions so as to qualify to reduce both income taxes and payroll taxes.

Self-Employment Tax Planning

FI Tax Guy can be your financial planner! Find out more by visiting mullaneyfinancial.com

Follow me on Twitter at @SeanMoneyandTax

SECURE 2.0 and Section 72(t) Comment Letter

Recently, the IRS and Treasury issued Notice 2024-55. This notice provided initial rules for SECURE 2.0 emergency personal expense distributions (“EPEDs”), domestic abuse victim distributions, and repayments into retirement accounts. The Notice also asked for comments on the above and on Section 72(t) in general.

I wrote a comment letter (which you can read here) to the IRS and Treasury obliging that request. The letter addresses EPEDs, repayments into retirement accounts, and the impact of Texas v. Garland on SECURE 2.0. Further, the comment letter requests clarification that Solo 401(k)s of retired solopreneurs qualify for the Rule of 55 exception to the Section 72(t) ten percent early withdrawal penalty.

Follow me on X: @SeanMoneyandTax

This post (and the linked-to comment letter) is for entertainment and educational purposes only. They do not constitute accounting, financial, investment, legal, or tax advice for you or any other individual. Please consult with your advisor(s) regarding your personal accounting, financial, investment, legal, and tax matters. Please also refer to the Disclaimer & Warning section found here.

Revisiting Solo 401(k)s and the Rule of 55

On a recent episode of ChooseFI, I stated my then-held view that it is unlikely a distribution from a Solo 401(k) qualifies for the Rule of 55. My concern was this: once the Schedule C solopreneur retires, there does not appear to be an “employer” remaining in the picture to sponsor the Solo 401(k).

If that is the case, the Solo 401(k) should be rolled over to an IRA and there’s no ability to use the Rule of 55.

Until now, I’m not aware that anyone has done a deep dive to validate or disprove that concern. So I decided to do it myself. My research took me as close to the year 1962 as one can get without a flux capacitor, a DeLorean, and 1.21 gigawatts of electricity.

I’ve now changed my view on the Solo 401(k) Rule of 55 issue. The analysis is too complicated to write adequately in a blog post. Thus, I’m self-publishing an article, Solo 401(k)s and the Rule of 55: Does the Answer Lie in 1962? (accessible here), on the topic.

Of course, the article is not legal or tax advice for you, any other individual, and any plan.

For those of you who read my book, Solo 401(k): The Solopreneur’s Retirement Account (thank you!), please know the article is written differently. The book is a “101” and “201” level discussion of tax planning for the self-employed with some beginning and intermediate tax rule analysis. The article is much more akin to a “501” level discussion of a complex and somewhat uncertain tax issue emerging from ambiguities in the Internal Revenue Code

Enjoy the article and let me know what you think in the comments below.

FI Tax Guy can be your financial planner! Find out more by visiting mullaneyfinancial.com

Follow me on Twitter: @SeanMoneyandTax

This post and the linked-to article are for entertainment and educational purposes only. They do not constitute accounting, financial, investment, legal, or tax advice. Please consult with your advisor(s) regarding your personal accounting, financial, investment, legal, and tax matters. Please also refer to the Disclaimer & Warning section found here.

Vanguard Exits the Solo 401(k) Business

Big news in the Solo 401(k) world! Vanguard is closing their Solo 401(k) and will exit the Solo 401(k) business in July.

On April 19th I recorded a YouTube video with my initial reaction.

On April 20th I posted a lengthy X thread and a LinkedIn post with additional thoughts.

UPDATE July 22, 2024: The Vanguard to Ascensus transfer is now complete. For those with a new Ascensus account, it’s vitally important to file a new beneficiary designation form!

UPDATE October 12, 2024 The Ascensus Solo 401(k) contribution portal is not intuitive. I walk through tips for new Ascensus Solo 401(k) owners in this YouTube video.

My Solo 401(k) Book

If you’re interested in the Solo 401(k), I wrote a book about it.

FI Tax Guy can be your financial planner! Find out more by visiting mullaneyfinancial.com

Follow me on Twitter: @SeanMoneyandTax

SECURE 2.0 Comment Letter

SECURE 2.0, passed in December 2022, made dozens of changes to the rules governing tax-advantaged retirement accounts.

When Congress passes a major tax law change, the IRS and Treasury issue regulations and other guidance regarding the change. Practitioners and taxpayers often provide the IRS and Treasury comment letters bringing issues and concerns to the government’s attention.

I wrote a comment letter (which you can read here) to the IRS and Treasury addressing facets of the following provisions:

SECURE 2.0 Section 115

SECURE 2.0 Section 314

SECURE 2.0 Section 317

SECURE 2.0 Section 326

SECURE 2.0 Section 331

SECURE 2.0 Section 603

SECURE 1.0 Section 113

Follow me on Twitter: @SeanMoneyandTax

This post (and the linked-to comment letter) is for entertainment and educational purposes only. They do not constitute accounting, financial, investment, legal, or tax advice. Please consult with your advisor(s) regarding your personal accounting, financial, investment, legal, and tax matters. Please also refer to the Disclaimer & Warning section found here.

2024 Solo 401(k) Update

There are some new developments in the world of the Solo 401(k). Here are the highlights:

New Solo 401(k) Employee Contributions Limit for 2024

The IRS announced that for 2024, the employee deferral limit for all 401(k)s, including Solo 401(k)s, will be $23,000.

Solo 401(k) Catch-Up Contributions Limit for 2024

The IRS also announced that for 2024, the employee deferrals catch-up contribution limit remains $7,500. As a result, those aged 50 or older can contribute, in employee contributions, a maximum of the lesser of $30,500 ($23,000 plus $7,500) or earned income.

New Solo 401(k) All Additions Limit for 2024

The new all-additions limit for Solo 401(k)s is $69,000 (or earned income, whichever is less). For those aged 50 or older during 2024, the $66,000 number is $76,500 ($69,000 plus $7,500).

Wither Roth Employer Contributions?

One of the changes SECURE 2.0 ushered in was allowing Roth employer contributions to 401(k) plans, including Solo 401(k)s. Interestingly enough, three of the largest institutions offering Solo 401(k)s, Fidelity, Schwab, and Vanguard, have not added that feature to their Solo 401(k)s. Vanguard’s website goes so far as to affirmatively state it will not add the Roth employer contribution feature to their Solo 401(k) at this time.

I mention this development to inform the reader, not to criticize Solo 401(k) providers. If you’ve read some of my other work, you may know I don’t think a lack of Roth employer contributions in Solo 401(k)s is a problem.

UPDATE March 2, 2024: Today I learned that Schwab now offers Roth employee contributions (a change) and Roth employer contributions (also a change). Based on this January 21, 2024 post, I suspect this change occurred prior to the federal district court’s publishing of its decision in Texas v. Garland on February 27, 2024.

Ambiguity on New Schedule C Solo 401(k) Funding Deadline

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.

UPDATE March 2, 2024: There’s new uncertainty when it comes to the new Solo 401(k) establishment deadline for Schedule C solopreneurs looking to make a first-time employee contribution. A federal district court in Texas held on February 27, 2024, in Texas v. Garland, that the House of Representatives did not have a sufficient Quorum when it passed the Omnibus, which includes SECURE 2.0 and the Solo 401(k) deadline extension in SECURE 2.0 Section 317. Here’s my X/Twitter thread on the case and here’s my YouTube video on the case. Stay tuned to my YouTube channel for future updates!

2024 Update to Solo 401(k): The Solopreneur’s Retirement Account

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 $23,000 to his Solo 401(k) as an employee deferral (2024 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 2024 is $41,587! That is a $23,000 employee contribution and a $18,587 employer contribution. Note there’s no change in the computation of the employer contribution for 2024 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 2024:

If Lionel turned 50 during the year, his limits are as follows:

Employee contribution: lesser of self-employment income ($92,935) or $30,500: $30,500
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 $76,500: $76,500

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FI Tax Guy can be your financial planner! Find out more by visiting mullaneyfinancial.com

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2023 Year-End Tax Planning

It’s that time of year again. The air is crisp and my favorite football team is surging. That can only mean one thing when it comes to personal finance: time to start thinking about year-end tax planning.

I’ll break it down with three categories: Urgent, Year-End Deadline, and Can Wait Till Next Year. I will also provide some thoughts on 2024 tax planning that can/should be done before year-end in 2023.

As always, none of this is advice for your particular situation but rather it is educational information.

Urgent

By urgent, I mean those items that (i) need to happen before year-end and (ii) may not happen if taxpayers delay and try to accomplish them late in the year.

Donor Advised Fund Contributions

A tax deduction for the fair market value of the contributed appreciated stock,
Elimination of the built-in capital gain on the contributed appreciated stock, and
Tax-free treatment of the income earned inside the donor advised fund.

In order to get the first benefit in 2023, the appreciated stock must be received by the donor advised fund prior to January 1, 2024. This deadline is no different than the normal charitable contribution deadline.

However, due to much year end interest in donor advised fund contributions and processing time, different financial institutions will have different deadlines on when transfers must be initiated in order to count for 2023. Donor advised fund planning should be attended to sooner rather than later.

Taxable Roth Conversions

For a Roth conversion to count as being for 2023, it must be done before January 1, 2024. That means New Year’s Eve is the deadline. However, taxable Roth conversions should be done well before New Year’s Eve because

It requires analysis to determine if a taxable Roth conversion is advantageous,
If advantageous, the proper amount to convert must be estimated, and
The financial institution needs time to execute the Roth conversion so it counts as having occurred in 2023.

Remember, generally speaking it is not good to have federal and/or state income taxes withheld when doing Roth conversions!

Roth Conversion Example: See slides 8 through 10 of this slide deck for an example of a Roth conversion in retirement. You might be surprised by just how little federal income tax is owed on a $23,000 Roth conversion.

Example Where I Disfavor Roth Conversions: I present an example of a 73-year old married couple with $400K in deferred retirement accounts and $87K in 2023 gross income. I would not recommend they do end-of-year Roth conversions. This spreadsheet computes the taxable Social Security with and without a $10K Roth conversion.

Gotta Happen Before 2026!!!

You will hear many commentators say “do more Roth conversions before tax rates go up in 2026!” If this were X (the artist formerly known as Twitter), the assertion would likely be accompanied by a hair-on-fire GIF. 😉

I disagree with the assertion. As I have stated before, there’s nothing more permanent than a temporary tax cut. You do your own risk assessment, but mine is this: members of Congress like to win reelection, and they are not going to want to face voters without having acted to ensure popular tax cuts, such as the reduction of the 15% tax rate down to 12% and the increased standard deduction, are extended.

I recommend that you make your own personal taxable Roth conversion decisions based on your own personal situation and analysis of the landscape and not a fear of future tax hikes.

Learn all about the Pro-Rata Rule here.

Adjust Withholding

This varies, but it is a good idea to look at how much tax you owed last year (line 24 on the Form 1040). If you are on pace to get 100% (110% if 2022 AGI is $150K or greater) or slightly more of that amount paid into Uncle Sam by the end of the year (take a look at your most recent pay stub), there’s likely no need for action. But what if you are likely to have much more or much less than 100%/110%? It may be that you want to reduce or increase your workplace withholdings for the rest of 2023. If you do, don’t forget to reassess your workplace withholdings for 2024 early in the year.

Backdoor Roth IRA Diligence

The deadline for the Backdoor Roth IRA for 2023 is not December 31st, as I will discuss below. But if you have already completed a Backdoor Roth IRA for 2023, the deadline to get to a zero balance in all traditional IRAs, SEP IRAs, and SIMPLE IRAs is December 31, 2023.

Solo 401(k) Planning

There’s plenty of planning that needs to be done for solopreneurs in terms of retirement account contributions. Even though Schedule C solopreneurs can now establish a Solo 401(k) after year-end (up to April 15th), it is absolutely the case that it is better to do the planning upfront. For those Schedule C solopreneurs with a Solo 401(k) established, December 31st is the deadline to make 2023 employee deferral contributions or make a 2023 deferral election as an alternative to making the payments in 2023. December 31st is also the 2023 employee deferral contribution for solopreneurs operating out of S corporations.

The Solo 401(k) can get complicated. That’s why I wrote a book about them and post an annual update on Solo 401(k)s here on the blog.

Year-End Deadline

These items can wait till close to year-end, though you don’t want to find yourself doing them on New Year’s Eve.

Tax Gain Harvesting

For those finding themselves in the 12% or lower federal marginal income tax bracket and with an asset in a taxable account with a built-in gain, tax gain harvesting prior to December 31, 2023 may be a good tax tactic to increase basis without incurring additional federal income tax. Remember, though, the gain itself increases one’s taxable income, making it harder to stay within the 12% or lower marginal income tax bracket.

I’m also quite fond of tax gain harvesting that reallocates one’s portfolio in a tax efficient manner.

Tax Gain Harvesting Example: See slide 15 of this slide deck for an example of tax gain harvesting in retirement.

Tax Loss Harvesting

The deadline for tax loss harvesting for 2023 is December 31, 2023. Just remember to navigate the wash sale rule.

RMDs from Your Own Retirement Account

The deadline to take any required minimum distributions from one’s own retirement account is December 31, 2023. Remember, the rules can get a bit confusing. Generally, IRAs can be aggregated for RMD purposes, but 401(k)s cannot.

RMDs from Inherited Accounts

The deadline to take any RMDs from inherited retirement accounts is December 31st. For some beneficiaries of retirement accounts inherited during 2020, 2021, and 2022, the IRS has waived 2023 RMDs. That said, all beneficiaries of inherited retirement accounts may want to consider affirmatively taking distributions (in addition to RMDs, if any) before the end of 2023 to put the income into a lower tax year, if 2023 happens to be a lower taxable income year vis-a-vis future tax years.

Can Wait Till Next Year

Traditional IRA and Roth IRA Contribution Deadline

The deadline for funding either or both a traditional IRA and a Roth IRA for 2023 is April 15, 2024.

Backdoor Roth IRA Deadline

There’s no law saying “the deadline for the Backdoor Roth IRA is DATE X.” However, the deadline to make a nondeductible traditional IRA contribution for the 2023 tax year is April 15, 2024. Those doing the Backdoor Roth IRA for 2023 and doing the Roth conversion step in 2024 may want to consider the unique tax filing when that happens (what I refer to as a “Split-Year Backdoor Roth IRA”).

HSA Funding Deadline

The deadline to fund an HSA for 2023 is April 15, 2024. Those who have not maximized their HSA through payroll deductions during the year may want to look into establishing payroll withholding for their HSA so as to take advantage of the payroll tax break available when HSAs are funded through payroll.

The deadline for those age 55 and older to fund a Baby HSA for 2023 is April 15, 2024.

2024 Tax Planning at the End of 2023

HDHP and HSA Open Enrollment

Self-Employment Tax Planning

Year-end is a great time for solopreneurs, particularly newer solopreneurs, to assess their business structure and retirement plans. Perhaps 2024 is the year to open a Solo 401(k). Perhaps their business is growing such that an S corporation election makes sense. The best time to be thinking about these sorts of things for 2024 is late in 2023. Often this analysis benefits from professional consultations.

Additional Resource

Please see my November 11, 2023 ChooseFI Orange County year-end tax planning presentation slide deck.

FI Tax Guy can be your financial planner! Find out more by visiting mullaneyfinancial.com

Follow me on Twitter at @SeanMoneyandTax

Sean on the Catching Up to FI Podcast

Listen as I talk tax with Becky Heptig and Bill Yount on the Catching Up to FI podcast.

You can access the podcast on Apple Podcasts.

We discuss tax planning for financial independence, particularly planning for those catching up later in their careers.

The show notes include references to the following FI Tax Guy blog posts.

The Advantages of Living on Taxable Assets First in Early Retirement

TikTok Tax Advice

Early Retirement and Social Security

HSAs and Las Vegas

This post, and the above mentioned podcast episode, are for entertainment and educational purposes only. They do not constitute accounting, financial, investment, legal, or tax advice. Please consult with your advisor(s) regarding your personal accounting, financial, investment, legal, and tax matters. Please also refer to the Disclaimer & Warning section found here.