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Solo 401(k) Plans: Reminder of New 2019 IRS Tax Deadlines and How to Lower Your Taxes

By Stuart Robertson and Mike Morrison

As a result of the COVID-19 pandemic, the IRS made some big changes that affect this year’s taxes. Most notably, they pushed back the filing and payment due date for most people and businesses to July 15, 2020.

What Does This Mean For Solo 401(k) Owners?
It means you now have more time to lower your 2019 taxes by contributing up to $56,000 to your Solo 401(k) plan. Of course, you have options of how much you may want to contribute, if any, as you manage through what are uncertain times for many of us. If your business has solid cash savings and you’re going to owe taxes and/or have a need to build your nest egg, now is a good time to determine how much you want to contribute before the extended tax deadlines. As long as your plan was installed prior to January 1st of 2020, you now have up until July 15 to make 2019 contributions (October if you have a filing extension).

What Are the Solo 401(k) Employer Contribution Rules?
Since you’re both an employer and employee when it comes to your Solo 401(k) plan, a smart move is to determine your tax situation and then make a one-time, employer contribution that best balances your tax saving needs with your retirement savings goals before the filing deadline.

If your business is structured as a corporation, you can make employer contributions up to 25% of net earnings into the 401(k) plan. If you’re a sole proprietor or own an LLC (or partnership), this percentage changes to 20% of your net schedule C. Just keep in mind that total contributions as an employer and employee cannot exceed a combined total of $56,000 for the 2019 tax year ($62,000 if you’re over 50 years of age and you made an employee “catch-up” contribution). Note that employee contributions must be elected prior to the calendar year end, unlike your employer contributions. For the 2020 tax year, 401(k) contribution limits have increased.

Here's an Example of How to Lower Your 2019 Taxes by $6,000 or More
The amount you can tax defer will vary by your earnings and your tax rate. Here’s a hypothetical example of how an owner who makes an employer contributions of $30,000 will lower taxes by $6,000, assuming an effective tax rate of 20%, versus a person that doesn’t contribute:

Example Calculation and Comparison
With a 401(k) Contribution Without a 401(k) Contribution
Earnings $150,000 $150,000
20% of Net Self-Employment Contribution $30,000 $0
Taxable Income $120,000 $150,000
Taxes Owed (20% Effective Tax Rate) $24,000 $30,000

Again, the owner that contributed paid $6,000 less in taxes. In actuality, the tax savings could be even greater as the 401(k) contribution may also drop the owner a tax bracket and/or lower the effective tax rate. Remember, this is an example and not meant as tax advice. Be sure to consult a tax advisor to discuss your specific situation and verify your tax deadline. Be well.


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