Does a Solo 401(k) Have To Be Set Up Before Year-End?

A solo 401(k) is a popular retirement plan offered specifically with self-employed workers and micro-business owners in mind. It affords great flexibility in terms of investment options and allows participants to maximize contributions in ways that other plans do not offer. But like any financial planning product, a solo 401 has clear-cut timing rules which must be closely followed.

Author

Josh Cruz

Jun 8, 2023

A solo 401(k) is a popular retirement plan offered specifically with self-employed workers and micro-business owners in mind. It affords great flexibility in terms of investment options and allows participants to maximize contributions in ways that other plans do not offer. But like any financial planning product, a solo 401 has clear-cut timing rules which must be closely followed.

There are two important deadlines that a solo 401(k) enrollee needs to remember. First, a written election to contribute to a solo 401(k) must be made by December 31st. Second, the contributions (both employee and employer) must be made by the participant’s business tax filing deadline with extensions.

Participating in a solo 401(k) is a smart decision for an independent proprietor as far as personal finances are concerned. Setting up a solo 401(k) need not be a stressful or difficult process as long as you keep a few key things in mind, starting with some important dates. Does a solo 401(k) need to be set up before year-end? Get out your calendar, because the answer to this question and a few others are below.

Does a Solo 401(k) Have To Be Set Up Before Year-End?

As with other retirement plan vehicles, a solo 401(k) must be properly set up before it can start reaping financial benefits for you. Failure to comply with certain deadlines can have serious consequences for you and your nest egg. When it comes to setting up a solo 401(k), there are two important dates to keep in mind.

  • The employee elective-deferral contribution (a written declaration of intent to set up a solo 401(k) and make contributions to it) must be made by December 31st of the year which will serve as the formal starting point of a solo 401(k)

  • The other key date to keep in mind for a solo 401(k) is the deadline for making contributions

  • As a general rule, contributions (i.e., deposits) must be made by the tax filing deadline for the enrolled business, including any extensions filed with the IRS

To sum up, the deadline for setting up a solo 401(k) is December 31st, and the contributions can be made on a date further out, but no later than the tax filing deadline for the enrolled business (including extensions). In other words, contributions can be made during the year following the election.

Because contributions can be made at a later date than the initial election, it is important to properly allocate the funding amounts to the correct tax year. 

For instance, if the election for an employee deferral contribution is made by December 31, 2022, and contributions will be made by the tax filing deadline for the business in 2023, you need to be clear with your plan’s administrator which tax filing year (i.e., 2022 or 2023) is being allocated the funds. This could have huge ramifications on your tax filings with the IRS when solo 401(k) contributions are written off.

How Do You Set Up a Solo 401(k)?

Although a solo 401(k) is fairly straightforward to set up and maintain, there are certain requirements (in addition to the deadlines we have just covered) that must be met to ensure that it operates as intended and complies with applicable IRS regulations. These can be summarized as follows:

  • Adopt a plan – whether you utilize the services of a brokerage firm or plan to administer a solo 401(k) yourself, adopt a written plan that lays out all the particulars of your investment vehicle

  • Establish a trust – a key step of setting up a solo 401(k) is establishing a trust to hold the plan’s assets, handle contributions, manage investments, oversee the flow of funds, and provide oversight to maintain the integrity of the plan and protect the interests of the participant

  • Implement a recordkeeping system – one of the most important (and overlooked) aspects of managing a solo 401(k) properly is implementing a solid recordkeeping system to document contributions, monitor investments, track expenses, and record distributions

With financial security for your retirement years at stake, it pays to know what is needed for setting up and maintaining a solo 401(k). By following these steps, you can ensure that your nest egg is protected.

Conclusion

With the dual employee and employer contributions it affords to participants and an unparalleled range of investment options, a solo 401(k) is a great retirement plan vehicle for self-employed individuals and small business owners. But to take full advantage of its many benefits, it is imperative to set up a solo 401(k) properly.

If a solo 401(k) seems like the right fit for your retirement plans, be sure to make your election by year-end and your contributions by the tax filing deadline (with extensions) for the business. Once it is set up, prioritize the implementation of a solid recordkeeping plan to ensure your solo 401(k) runs smoothly and worry-free.