SECURE 2.0 RELAXS RETROACTIVE SOLO 401(k) RULES

Monday, December 18, 2023

By Ian Berger, JD
IRA Analyst
Follow Us on X: @theslottreport

Thinking of opening up a new solo 401(k) plan for 2023? Thanks to SECURE 2.0, you don’t have to rush to get it done by year end.

A solo 401(k) is an excellent retirement savings vehicle for self-employed business owners with no employees (other than their spouse). That’s because the IRS says that a business owner with a solo (k) actually wears two hats – one as an employee and one as an employer. As an employee, he can make elective deferrals up to $22,500 for 2023, or $30,000 if age 50 or older. (Those limits will jump to $23,000/$30,500 for 2024.)  As an employer, he can also make additional contributions up to 20% of adjusted net earnings. Keep in mind that there’s an overall limit on combined elective deferrals and employer contributions. For 2023, that maximum is $66,000, or $73,500 if the additional $7,500 is deferred. (For 2024, those limits increase to $69,000/$76,500.) For many business owners, a solo 401(k) allows for much higher contributions than are possible under a SEP or SIMPLE IRA.

For sole proprietors (and single-member LLCs) looking to open up retroactive solo 401(k)s, SECURE 2.0 closed a loophole from the original SECURE Act. The SECURE Act gave businesses extra time (until the due date for the corporate tax return, including extensions) to establish retroactive retirement plans. So, for example, a business could open up a new plan for 2022 as late as September 15 or October 15, 2023, depending on the type of business. (Before this SECURE Act change, new plans had be in place by the end of the year.) The problem with this extended deadline was that it was available only for employer contributions – not for elective deferrals. This meant a sole proprietor could open up a solo 401(k) in 2023 retroactively effective for 2022, but only if the plan had just employer contributions – not elective deferrals.

SECURE 2.0 corrects this by allowing sole proprietors to establish retroactive solo plans with both employer contributions and elective deferrals. But be careful: The deadline for adopting a new solo plan after its first year with both kinds of contributions is the due date of the individual’s tax return without extensions for the prior year.

Example: Rick is a sole proprietor with a lawn-mowing business. In February 2024, Rick hears about solo 401(k) plans from a financial advisor and wants to set up a new plan retroactively for 2023. As long as the plan is opened by April 15, 2024 (the business’s 2023 tax filing, without extensions), Rick could fund the plan with both 2023 employer contributions and elective deferrals.

 

 

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