Solo 401k Excess Contribution: What to Do
If you contribute more than your Solo 401k limit for the year, what to do with the Solo 401k excess contribution?
While the Solo 401k plan gives the plan participant a lot of control and flexibility, certain rules and regulations must be followed. One of the rules is the contribution limit, which is set at a maximum of $59,000 annually as of 2015. The actual limit varies from plan to plan, depending on the plan owner’s age, income level, and the type of sponsoring business.
In this Solo 401k Quick Tip video, Sense Financial explains how to remedy the excess contribution to a Solo 401k small business account:
Solo 401k Excess Contribution
If you contribute more money than the allowed limit to your Solo 401k small business account, you will have to either carry over the excess amount to the next year, or pay an excise tax for the excess amount. If you decide to carry over the excess contribution, it will be combined with your contribution next year. If you decide to keep the contribution for the year instead, it will be considered a nondeductible contribution, and trigger an excise tax. This tax is usually 10% and you will also need to report these contributions on Form 5330. Solo 401k excess contributions can also be removed.
We strongly encourage you to consult your tax advisor if you’ve made excess contributions.
March 20, 2018 @ 7:03 am
It is now March 2018. I made a number of cash (from savings, not deferred) contributions early in FY 2017 to my solo Roth 401(k) but did not earn enough K-1, Schedule C, Schedule F etc. income by the end of the year to justify the total amount of contributions made. I invested the contributions in pre-IPO stock so it is not liquid. I now have excess cash contributions for 2017. (These contributions do not exceed the max allowable amounts, they just exceed the amount that would be covered by my business earned income.) I have not filed my 2017 1040 and have an extension.
I would like to carry my excess contribution over to 2018. How do I formalize this decision? (I have read the instructions for Form 5330 and believe that taxes might be due under section 4979 no later than “the last day of the 15th month after the close of the plan year to which the excess contributions or excess aggregate contributions relate.”)
June 1, 2018 @ 9:44 am
Bryan, I strongly encourage you to contact your tax advisor and plan provider so you can receive proper guidance on how to rectify the mistake you’ve made. In the future I recommend that you make your contributions at the end of the year when you know your net self-employment earnings. Contributions have to come from self-employment income, you can not contribute from savings.
April 14, 2020 @ 8:51 am
It seems the excess contribution would be locked in the 401K and essentially double-taxed, from other sources that I’ve read. The excise tax would apply only for IRA’s. I am hoping for some clarification.
October 20, 2020 @ 3:44 pm
We strongly recommend you contact qualified tax professional to review your situation and provide you with appropriate guidance.