Small-Business Owners: Last Chance to Set Up Solo 401(k)

Personal Finance
Small-Business Owners: Last Chance to Set Up a Solo 401k and Cut Your Tax Bill

By Dmitriy Fomichenko

Learn more about Dmitriy on NerdWallet’s Ask an Advisor

Financial matters naturally come into focus as the end of the year approaches. If you’re a small-business owner or are self-employed, year-end is the time to plan for taxes. It’s also a good time to think about your retirement savings plan. You can achieve both of these goals by setting up a Solo 401(k) retirement plan before the end of the year.

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 2015, 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 it’s already too late to open a Solo 401(k) account for 2015. Others believe that even if they set up the plan, there wouldn’t be enough time to make contributions. Because of this, eligible entrepreneurs are missing out on tax and retirement savings this year. There are different deadlines for setting up a Solo 401(k) and for making contributions — and there’s still plenty of time to do both.

You must set up your Solo 401(k) by Dec. 31. Small-business owners have until the last day of the year to set up a Solo 401(k) plan that qualifies for 2015 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 2016. Fortunately, 2015 contributions do not need to be made by Dec. 31 to be counted for the 2015 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, 2016. For corporations, it’s March 15, 2016. 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 will 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.

With two months left of 2015, now is the final chance to take action and start planning for your retirement future.


Image via iStock.