solo 401k
I have a question on funding sources for a solo 401k/ps. Ill use an extreme example:
Client age 52 owns a successful travel business set up as an S corp. Company income for 2011 is 200,000. Client sets up solo K in July. Company keeps a bank account where all cash flows through. Company spends cash on improvements as fast as they make it. On 12/31/2011 owner realizes she never funded deferrals . There is no cash in company account and she has no cash in her name but spouce has plenty.
Q1 Can spouse journal the 22,000 to wife’s solo 401k account without issues? On one hand I think why not but on the other hand I think that the IRS may have a problem with this since SOURCE of the funding was not S corp account or her own private account. The essence of the question is does source matter as long as company has the income?
Q2 Same question but for the 32,000 PS contribtuobn made on Aopril 15 2012.
Permalink Submitted by mk foss on Wed, 2011-08-03 03:19
Solo 401k contributions from an S corporation are based on salaries paid by the corporation. Your fact pattern does not indicate how much salary was paid.
Normally the deferral occurs as the salary is paid – which would be before the year end. The company can add a profit sharing portion – which is also based on salary.
For example, if the spouse had a salary of $40,000 – during the year she could defer $16,500 through payroll deductions ($5,500 more if over age 50). The profit sharing could be as much as 25% of the salary, or $10,000. The contribution is due by the due date of the S corporation tax return – 3/15 if no extension or 9/15 if an extension request was filed. The corporation would deduct salary of $23,500 and retirement plan contributions of $26,500 ($16,500+ $10,000).
S corporation earnings cannot be used as earned income for retirement plan contributions.