All new contributions, including Roth contributions must come from your business earnings. The Solo 401k only allows you to contribute based on my self-employment income?You cannot contribute any additional funds from full-time employment elsewhere or any other funds not related to self-employment. Your Solo 401k’s biggest benefit is that you are able to roll over existing funds. If you have a lot of self-employment income, you get an additional benefit of being able to reduce your taxable income by making big contributions.
What if I have multiple businesses?
To do this, general opinion is that you can set up a holding company for the separate companies and make the holding company the adopting company for the Solo 401k. A holding company is usually a company that doesn’t do any business with anyone, it just owns other companies. The trick to making this work is of course to have the other companies which would be called, “Subsidiary companies” – the companies that go out there and do business and are owned by the holding company.
Those need to be passed through entities; meaning that they don’t pay taxation at their own level, they just pass through the earning up to the parent company. So LLCs are pass through entities, and if you use LLCs, then one other benefit you’ll get is that you’ll have the subsidiary company structured as an LLC and it only has one owner or one member which would be the parent company. It would be a single member LLC. If you have a single member LLC, it doesn’t even have to file a tax return in the first place. Single member LLCs the IRS instructs to be disregarded for tax purposes. For further clarification, please consult your CPA or tax advisor.
Why are matching contributions not applicable for the Solo 401k?
In the Solo 401K, you are the employee and you are also the employer. There are no matching contributions because the plan is designed to be as flexible and as capable as any retirement plan can possibly be allowed by law in the U.S. This might mean that some years you will make employer contributions and in other years you won’t. This is to allow the greatest flexibility within the plan.
Does my current employer’s 401k plan have any effect on my solo 401k plan such as contribution limit?
In your solo 401k plan, there are two types of contributions. The first contribution is for your role as employee in your business, for which the limit is $19,500 (or $26,000 if you’re age 50 or older). The second type of contribution is for your role as employer which can be 20% of your earnings from self-employment. Added together can total up to a maximum of $57,000 (or the $63,500 if over age 50).
When you look at your total contribution as employee, that limitation that’s either $19,500 or it’s $26,000 if you’re over age 50. Any contributions you have into your employer’s 401k plan at another company (outside of your Solo401k), need to be factored in within the $19,500 or $26,000 limit.
For example: If you contribute $10,000 at your employer’s 401k plan and if you’re over the age of 50, you can contribute $16,000 as an employee to your Solo 401k plan.
Can I open my 401k trust bank account with my personal money and consider it an annual contribution?
As long as you have earned income from the business that adopted the 401k plan, this is probably fine because the contributions are just a matter of putting the money in that account anyway and accounting for them at the end of the year. So if you’re going to be doing all of your accounting on your own, then sure, go for it, and just make sure that everything you’re doing is accounted for. If you have a CPA, which I highly recommend, then just let your CPA know what you’re doing and what’s going on and make sure that they account for it. But in general, if you’re going to make contributions into your 401k plan, it’s just a matter of depositing money directly into your 401k trust account.
What are the contribution deadlines?
Per IRS Publication 560, the employee elective deferral should be formally elected by December 31st of the calendar year. Formal election can consist of completing the Solo 401k contribution form (found here).
Then, you have until the employer's tax return is filed (including extensions) to complete the actual contributions.
Can my investment income be contributed to a Solo 401(k)?
Contributions to any retirement account must come from earned income. You may be able to designate all or a portion of your investment income as earned income, however. Your CPA may make this determination based on management or administrative work you perform for your investments. For more information on earned income, see this article on determining earned income.