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Elective Deferral or Employer Contribution from a Solo 401(k) first?

I understand the amounts I can contribute to my one person business. I have a two part question. Assuming I have already opened the 401(k), when is the latest I can make a contribution for 2013 (year end or tax deadline?).

Second, are employer contributions treated differently than employee contributions (elective deferrals)? If so, which should I designate first?

Thanks

Sep 25, 2013 by Rebecca from Broomfield, CO in  |  Flag
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3 votes

Hello Rebecca,

The latest you can make contributions to your solo 401(k) for 2013 is your tax filing deadline, including extensions. The plan itself, however, must be established by December 31, 2013. It sounds like you have already taken care of that, so good for you!

There is no real difference between employee and employer contributions to a solo 401(k), other than how they are calculated. For 2013, the employee contribution limit is 100% of your business-related net earnings, up to $17,500 ($23,000 if you are age 50 or over). If your business is a sole proprietorship, you as the employer may also contribute up to about 20% of the business's net earnings to your 401(k). If your business is incorporated, you may contribute up to 25%.

Consider waiting until the end of the year to figure out how much your business made, and then calculate how much to contribute as the employer. It's a good way to avoid over-contributing to the plan. There are a number of resources available online to help you calculate your maximum employer contribution.

Good luck!

Kris d'Esterhazy http://www.wealthguards.com

Comment   |  Flag   |  Sep 25, 2013 from Jacksonville, FL

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Rebecca,

First off, the deadline to make a contribution is during your last pay period of this year and therefore it has to be made by 12/31/2013 at the very latest.

For your second question, this is a really good resource for you: http://www.irs.gov/Retirement-Plans/One-Participant-401(k)-Plans

1 Comment   |  Flag   |  Sep 25, 2013 from St. Louis, MO
Don Chamberlin III, CFP®, AWMA®

Let me just clarify something. You have to make the election of the deferral to your 401k by 12/31/2013, however, you have until April 15th, 2014 to actually make the contribution for it to be considered a contribution made in 2013.

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Flag |  Sep 25, 2013 near St. Louis, MO

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March 15 of 2014 if you're a corporation, otherwise, April 15 is the deadline for contributions.

If you're not a C-Corporation, you shouldn't need to worry about who makes the contributions, as you are the employer and employee, and probably are filing one return. Do, however, consult with your CPA prior to making that decision.

http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics---401(k)-and-Profit-Sharing-Plan-Contribution-Limits

Best Regards, Rod

Comment   |  Flag   |  Sep 25, 2013 from Springfield, MO

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Rebecca, your employee deferral should be from compensation from this calendar year, so if you pay yourself by paycheck, I would argue that your contribution should be deducted from your paycheck for the 2013 calendar year – assuming you are on a calendar year. But your accountant needs to deal with the numbers; you should do it the way your accountant wants you to do it. We can give you opinions here on what the rules are. But your CPA is going to tell what specifically is best for you.

That goes for the second part of the question as well. It really should not make a difference, but if your accountant has a strong opinion otherwise, he/she may have a reason.

Comment   |  Flag   |  Sep 30, 2013 from Delray Beach, FL

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