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Individual 401K Plans: SDIRA Contributions Explained

The Horizon Trust Individual (k) offers unprecedented flexibility when making contributions to your account. Here is some helpful information to understand how contributions work.

Two Contribution Components

  1. Employee Contribution. You are an employee of your business and can contribute as such. This type of contribution is referred to as a salary deferral.
  2. Employer Contribution. As the employer of your business you also are entitled to contribute to the plan. This type of contribution is referred to as profit sharing contribution.

Catch-up Contributions

As an employee if you are age 50 or over, you are able to make an additional contribution to the plan referred to as a catch-up contribution.

Overall limit on contributions:

Total annual contributions (annual additions) to all of your accounts in plans maintained by one employer (and any related employer) are limited. The limit applies to the total of:

  • elective deferrals (but not catch-up contributions)
  • employer matching contributions
  • employer non-elective contributions
  • allocations of forfeitures

The annual additions paid to a participant’s account cannot exceed the lesser of:
100% of the participant’s compensation, or

$56,000 ($62,000 including catch-up contributions) for 2019: $55,000 ($61,000 including catch-up contributions) for 2018.

However, an employer’s deduction for contributions to a defined contribution plan (profit-sharing plan or money purchase pension plan) cannot be more than 25% of the compensation paid (or accrued) during the year to eligible employees participating in the plan.

* You can contribute up to 100% of your income not to exceed the total dollar amount.
**If you are taxed as a corporation you can contribute up to 25% of your W-2 earnings not to exceed the total dollar amount.
If you are taxed as a sole proprietor or partnership you can contribute up to 20% of adjusted net business profits not to exceed the total dollar limit.

Tax Deductible Contributions

  • Contributions to your Indi (k) can provide substantial tax savings when making tax deductible contributions.
  • Employee contributions can be tax deductible. Simply indicate on the contribution form Traditional (tax deductible) for contribution type.
  • Employer Profit Sharing contributions are always made as tax deductible (traditional) type contributions.
  • Unincorporated businesses such as sole proprietors can generally deduct salary deferral and profit sharing contributions from personal income.

Roth Contributions

  • Sometimes referred to as a Roth 401(k), contributions to your Indi (k) can provide you the opportunity to designate your employee contributions as Roth (after tax).
  • By making contributions after tax (Roth) all future earnings are distributed tax free(Qualified Distributions).
  • Unlike the Roth IRA, there are no income limits on contributions to an Indi(k). This feature allows high income earners not eligible to make direct contributions to a Roth IRA to make Roth contributions to an Indi (k).

In Service Conversions

  • Profit Sharing contributions made by you, as an employer, must be made as a tax deductible (traditional) contribution.
  • In 2013 the rules were amended that allow the employer profit sharing contributions to be converted to your Roth (tax free) bucket.

Contribution Deadlines

For a sole proprietorship, partnership, or an LLC taxed as a sole proprietorship…

  • Employee salary deferral contributions can be deposited up to your personal tax filing deadline plus extensions.
  • Employer profit sharing contributions can be deposited into your personal tax filing deadline plus extensions.

For a S or C Corp or an LLC taxed as a corporation…

  • Employee salary deferral contributions must be deposited as soon as reasonably possible after each W-2 pay period.
  • Employer profit sharing contributions can be made up to the corporate tax filing deadline plus extensions. For entities with a calendar year, that means April 15th plus available extensions.