Open a solo 401k plan online in under 10 minutes – The Carry Solo 401k Plan is a featured-packed self-directed account that lets you invest in both traditional and alternative assets, take out a loan, or do a mega backdoor Roth conversion with a few clicks.
With a Solo 401k, you can make contributions as either the employee or employer, since as a self-employed individual you are acting as both employer and employee.
It is important that you differentiate between contributions you make as an employee or employer.
- Employee contributions are technically “employee elective salary deferrals,” meaning they represent a portion of your pay going into your Solo 401k, instead of your personal bank account (even if, as a self-employed individual, you don’t have a regular salary)
- Employer contributions are technically “employer profit-sharing contributions,” and represent an amount separate from your “salary” that is paid directly into your plan
Employee and employer contributions are subject to different limits, and are treated differently in certain circumstances.
In a “normal” large employer 401(k) plan, like you might find at a day job, you only have control over your employee contributions. These are often set as either a dollar amount per paycheck, or a percentage of your pay. Your employer has control over the contributions they make, which can be nothing or a substantial amount.
As a self-employed individual with a Solo 401k, you have full control to set both your employee and employer contribution amounts.
What is a Solo 401k election?
A Solo 401k election is simply a written form or document for how much in employee contributions you want to make, and to which accounts it should go towards (pre-tax or Roth). In most cases, the election should be made prior to your salary being paid out.
Since you are the employer and employee, you’re essentially writing a signed, dated note to yourself on the amounts you are going to contribute as an employee, and keeping it on file yourself for your own records, in case the IRS ever asks for it.
If you’re a Carry Solo 401k user, you can find an electronic contribution election form in our web app.
What is the deadline for making an election?
Solo 401k plan elections generally must be made by the last day of the calendar year, on December 31.
If you do not have a Solo 401k plan yet, but wish to set one up for the current tax year and make employee contributions, you must establish your plan and make an election by December 31.
The only exception is for the first year only of an unincorporated sole proprietors Solo 401k plan, where the election can be made by the tax filing due date (excluding any extensions).
Once the election is made, you have until your tax filing deadline with any timely filed extensions to actually deposit the contributions into your solo 401k plan. You should deposit the funds as soon as it is practicable to do so.
Also read: Solo 401k Contribution Limits & Deadlines for 2023
What if I don’t make an election?
If you don’t make an election, you are not legally allowed to make employee contributions, but you can still make employer contributions.
If the IRS determines that no election was ever made for employee contributions, the contributions would have to be returned, your tax returns would need to be amended, and penalties would likely apply. In extreme cases, your Solo 401k plan could also become disqualified, resulting in even more negative tax consequences.
Can a deposit receipt act as evidence of the written election?
No, a deposit receipt is not evidence of a written election prior to making the contribution. If the IRS comes knocking, they’re going to want to see the actual written election. A deposit receipt would not be valid on its own.
If I make my Solo 401k contributions by December 31, should I still make an election?
Yes, you should still make an election prior to making your contributions. While there is not a lot of guidance on Solo 401k plans specifically, a written election can help you clearly establish that your plan is operating in full compliance.
How to make a Solo 401k election
A simple signed, dated note to yourself with the different amounts you want to contribute is usually sufficient. You can also download a free template here, which you can fill in, print and sign to keep in your records.
The Carry web application includes an electronic contribution election form, which you can download and print as well.