Small Business Owners: Understand Different Solo 401(K) Deadlines

Financial matters are always on the focus of business owners. For self employed individuals, tax-planning is an important process that can enhance earnings and help business owners accelerate wealth building. At the same time, business owners also need to think of retirement planning and saving for their future. Fortunately, you can achieve both of these goals by setting up a Solo 401(k) retirement plan.

Solo 401(k)s are self-directed retirement plans that offer flexible investment choices and one of the highest contribution limits among qualified retirement plans – $53,000 for 2016, or $59,000 if you’re 50 or older. This lets participants lower their taxable income by thousands of dollars each year.

Here are the deadlines:

Many people mistakenly assume that the Solo 401(k) account need to be set up and receive contributions before the end of each year. Because of this, eligible entrepreneurs tend to delay setting up a retirement and can miss out on tax benefits and retirement savings. There are different deadlines for setting up a Solo 401(k) and for making contributions – and self-employed professionals need to know these deadlines to plan ahead

You must set up your Solo 401(k) by the end of each year

Small-business owners have until the last day of the year to set up a Solo 401(k) that qualifies for that year’s contributions.

To be eligible for a Solo 401(k) plan, you must engage in a self-employed business activity with the intention of generating profit. That business can’t have any employees aside from yourself and your spouse.

But you can make contributions into the next year

Fortunately, Solo 401k contributions do not need to be made by Dec. 31 to be counted for the tax year.

According to the tax code, Solo 401(k) plans can receive contributions up to your business’ tax-filing deadline. For sole proprietorships, partnerships or LLCs, the contribution deadline is April 15 of the following tax year. For corporations, it’s March 15. You can even apply for an extension if needed.

What do you stand to gain?

By contributing to a Solo 401(k) plan, you can lower your taxable income by a substantial amount. The funds can grow on a tax-deferred basis, meaning you won’t pay taxes on the wealth you accumulate until you make withdrawals during retirement.

You can use a Solo 401(k) calculator to determine the exact amount you can contribute this year.

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