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Tax Time IRA & Solo 401(k) Contribution Tips

taxes paperwork

When building your retirement savings with self-directed IRA or Solo 401(k), it is not just about how you invest. Making new contributions to your retirement plan is a crucial aspect of creating long-term wealth with these tax-sheltered vehicles.

As the April tax filing deadline approaches, it is crucial to consider the concept of plan contributions. In addition to some basics on standard contributions, there are a few special tips that we would like to point out that may be suitable for some investors.

Contribution Deadlines

For Traditional IRA and Roth IRA plans, the contribution deadline is April 15th, or the first Monday following if the 15th falls on a weekend. Therefore, it is essential to plan ahead to get the funds and appropriate deposit form to your self-directed IRA custodian on time.

For SEP and SIMPLE IRA plans, you have until the tax filing date of the business that sponsors the plan to make contributions, which would be September 15th for pass-through entities and October 15th for corporations.

Solo 401(k) plans can accept employer profit-sharing contributions until the tax filing date of the sponsoring employer, including extensions (same Sept/Oct dates as above).

Employee contributions in a pass-through entity can also be made until the tax filing date. If you operate a S-Corporation or C-Corporation and receive your compensation as W-2 wages, then employee deferrals would have needed to be completed by the last payroll of the year – so December 31st or a few days into January.

Making IRA Contributions

When making IRA contributions, it is important to note that all IRA contributions must be sent to the IRA custodian. You may not simply place new funds in the IRA-owned LLC or trust entity, as that would break the reporting chain.

Once funds have been deposited into the IRA account, you can have the IRA custodian invest that new capital into the LLC or Trust entity.

Making Solo 401(k) Contributions

Making Solo 401(k) contributions is as simple as sending funds from the bank account of your sponsoring business to the Solo 401(k) participant account. You will report the contributions on your business and/or personal tax return.

Doubling-Up on IRA Contributions

Between January 1st and April 15th, you are eligible to make contributions to an IRA-based plan for both the prior and current tax year. Some IRA account holders choose to double-up on their contributions and then go through the process of actually making contributions every other year.

This strategy is a good way to get as much capital into your plan as early as possible and therefore maximize your ability to compound earnings over time. This approach also means you only need to go through the process of actually making the contribution every other year, and it will reduce your processing fees with the IRA custodian.

Additional Resources

IRA contribution limits & deadlines by plan type

Solo 401(k) contribution limits

IRS Information on IRA Contributions Limits

Feed the Pig

Ultimately, the more you set aside into your tax-sheltered retirement plan, the greater the benefits over the long term.  By compounding the tax-deferred or tax-free Roth earnings of your plan over a period of years, you can mushroom your savings, and the more you have on the input side of the equation, the more you can expect to see on the output side in retirement.

This page updated 04-2023.

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