Correcting solo 401k over-contributions
I started working as a self-employed contractor in December and made a $1000 initial funding for 2024 as an employee. I realize that the client pays me in January for my December’s work, so my business income is $0 and I’m not eligible to make any contributions for 2024, and thus I over-contributed to my Solo 401k by $1000.
I read something about being able to remove my excess contributions before my tax deadline. I also heard that another option to fix this over-contribution is to simply change tax year for this contribution to 2025 (and keep my own records), since a brokage doesn’t report to IRS.
Could I just now contribute $1,000 toward my 2025 tax year, and simply note in my records that the $1,000 in question was actually for 2025 (not 2024) contribution?
If allowed, this would mean I haven’t actually made an over-contribution at all and owe no penalty. But is it allowed? In the brokerage in which I contributed to my Solo 401K, I filled out an initial funding form, entering ‘$1000’ as an employee contribution and ‘2024’ as a tax year. That said, my understanding is that since the brokerage is not the record-keeper, none of those designations mean anything — it’s my responsibility to keep records of how much I contributed for each year. Is that true?
Answers
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Hello
Generally, you would need to withdrawal an excess contribution as soon as possible (ideally before the filing deadline). Cash basis of accounting would require the contribution to be recognized in the year the money was actually contributed. There is no 10% penalty or required 20% withholding if the excess is withdrawn before the deadline.
Let us know if there are additional questions or concerns.
