Yes, you can have a Solo 401k with your spouse. There are so many different ways to describe a spouse. We often hear a spouse described as a partner, friend, lover, companion. But a spouse can be so much more: an adventure buddy, motivator, protector, provider, business partner, co-pilot…. The list goes on. A spouse is half of your marriage and life.
Therefore, it makes sense to want to include your spouse in your retirement plan. With a Solo 401k, both spouses can participate in the same plan. To qualify, you both must work in the business adopting the plan. Together you and your spouse can make the most of your retirement by both being able to contribute.
What’s Your Business Structure?
First, determine your type of business structure. Then, determine how your spouse can participate in the business. When your spouse participates in your business, they can also participate in your Solo 401k plan.
A knowledgable CPA is a vital part of the process. A good CPA can help you determine what structure you’ll need to ensure your spouse is compliantly working for your business. They can also help if you plan to compensate your spouse from business earnings.
Let’s cover the different types of business structures and how your spouse can participate:
Sole Proprietorship Solo 401k and Your Spouse
There are 3 ways you can structure your sole proprietorship if your spouse works with you:
- One spouse is the sole business owner of the Solo 401k; the other spouse will receive a W-2 as an employee in the first spouse’s business. This is often the simplest solution. This may be best if the second spouse has only minimal duties and activities in the business.
- The couple acts and files as a partnership, where each partner will receive a K-1(Form 1065). The partnership will not pay income taxes itself, passing the profits and losses on to each partner. If both spouses contribute materially to the business, a partnership will be the default structure in the eyes of the IRS.
- The couple files as a Qualified Joint Venture. This solution is possible when both spouses work and contribute materially to the business and file a joint tax return. This allows you couple to avoid forming a partnership. Also, both spouses will receive credit for social security and Medicare coverage purposes. Each spouse will separately report income gains and losses, as well as business deductions and credits on Form 1040 Schedule C.
Limited Liability Company or Partnership
There are 3 ways an LLC may be treated, depending on your structure:
- Partnership – If an LLC has 2 members (in this example, each spouse), it is classified as a partnership for federal tax purposes. Each spouse in the Solo 401k is responsible for their income, profit and loss, as shown on a K-1 (Form 1065)
- Corporation – If an LLC is classified as a Corporation, it will file Form 8832. The Corporation files tax form 1120. There are no flow through items to a 1040. Each spouse/member receives a K-1 to document income, profits, loss, etc.
- Disregarded entity – If an LLC only has one member, it is a disregarded entity. You’ll report business activity on your tax form1040, typically on Schedule C. For a participating spouse, the member of the LLC would pay the spouse a W-2 so the spouse is eligible to participate in the Solo 401k.
- C-Corp – C-Corps are corporation that file its own tax return (usually forms 1120 and 941) and pays taxes on earned income. The corp then pays dividends to its shareholders (each spouse). Those shareholders pay taxes on their earnings, effectively being taxed twice.
- S-Corp – S-Corps are corporations that pass corporate income, losses, deductions, and credits down to the shareholders. This formation is sometimes preferable to the C Corp, as the C Corp is taxed twice, (through the corporation and again through the shareholders). An S Corp is only taxed once (through the shareholders).
Including Your Spouse in the Solo 401k
Even though full-time W2 employees disqualify a business owner from a Solo 401k, the spouse is an exception! The IRS allows your spouse to be a full-time W2 employee in your business and you can still have the Solo 401k plan.
Therefore, your spouse can be a co-owner or simply an employee in your business. As long as your spouse is actively involved in the business as an employee (full-time or part-time is OK) or is an owner of the business, they can also be in your Solo 401k.
The IRS website has a couple of good resources as well as an overview on Choosing a business structure based on your preferences. As with any business decision, always check with your CPA to ensure everything remains compliant and structured in the best way for you and your spouse to both participate.
Have questions on including your spouse in the Solo 401k? Reach out to the Solo 401k Experts at Nabers Group and we’ll be here to help.