A Look at Tax Deductions Concerning Solo 401k Contributions


When saving for retirement, you want to learn about tax filing requirements. That’s the reason you may be curious to know what it means for a solo 401k account holder. As per IRS, you can be subject to pay tax when the value of your assets is more than USD $250k. In that case, you need to file Form 5500-EZ annually. Also, pre-tax money paid to the account can be tax deductible. You can claim the money during your annual filings. On the other hand, post-tax dollar contributions to Roth solo 401k may not be tax deductible.

Solo 401k contributions

A solo 401k plan allows you to contribute to your retirement account as an employee and employer with individual contribution limits. Check solo401k.com for precise information. In 2023, you can pay up to USD $66k in total. Employees can invest 100% of their earnings with the maximum amount capped at USD $22,500. If you are age 50 or more, it can be USD $30,000. You can fund your account with 25% of your earnings as an employer. When you pay your plan using pre-tax dollars, you can deduct up to USD $66,000 of the contribution limit for 2023. But higher tax deductions may not allow you to contribute anything to your Roth account.

Employers can use pre-tax dollars to fund their traditional solo 401k. On the other hand, employees can decide on a deductible amount based on their taxable income. If you pay your taxes now, you may not have to worry about them during withdrawal time in retirement. It allows you to increase your Roth contributions. Another thing is how to claim your solo 401k payments. If you must pay taxes as a sole proprietorship business, you can include your contributions as employer and employer on Form 1040. However, in other cases, you don’t mention these two contributions in the same form.

What is it about Form 5500-EZ?

If you hold more than USD $250,000 of assets in your account, you need to submit Form 5500-EZ every year as per IRS. It requires details, including total asset value, contributions, and rollovers, if any. Although it doesn’t do anything with the tax deduction claim process, you must take care of this form. You can file this form seven months after the financial year ends. Those who follow the calendar year for their business need to submit this form by July 31. Late submissions can lead to a penalty of USD $250 per day (up to USD $150,000). The finance experts say you may not need to care about this if your asset value is under USD $250,000; filling it up can only benefit you in the long run.

Since it’s a lot of work, you can talk to your plan provider and get insights into the critical areas to reduce your investment and tax-related stress. They can suggest some best options to follow through the process and reap the benefits of your retirement account. Make sure you know what works in your interest. The solo 401k plan offers you excellent flexibility but demands closer analysis for being relatively new in the system.