The Solo 401k is one the most powerful and versatile retirement accounts for small business owners and freelancers. We know how challenging it can be to both run a business and then also juggle all of the rules and regulations concerning retirement planning. There is some good news though. Contrary to what you might think, the Solo 401k rules are quite simple. We will cover some of the basic Solo 401k rules here, so you can keep the main thing the main thing. Running your small business.
Who Is Eligible For A Solo 401k?
The Solo 401k is open to anyone who can say yes to these 2 key requirements:
- The presence of self-employment income (1099, side hustle, freelance, Schedule C, small business earned income)
- The absences of any full-time W2 employees outside of the owner and spouse
As long as you meet these 2 criteria, your small business qualifies to have a Solo 401k. Many times, people who have a full-time W2 job, don’t think about their side hustle or side gig as a business. What’s interesting is that according to the IRS, it is a small business.
Taking the definitions a little further, how much self employment income is enough to qualify? This is a grey area. The IRS does not say exactly how much income is needed to qualify to have the Solo 401k. Probably a few thousand dollars per year will be sufficient.
Where is the line between a full-time W2 employee and a part-time W2 employee? The IRS says that anyone working more than 1,000 hours per year is considered to be full time. If you have any employees that pass the 1,000 hour threshold, you would no longer qualify for the Solo 401k.
Solo 401K Rules & Contribution Limits
Contribution Limits for the Solo 401k are very high! So you definitely want to follow the rules to get the most out of your contributions. For 2021 the max contribution is $58,000 and $64,500 if you are 50 years old or older. For Solo 401k, the contributions have to come from your sponsoring business. They can’t come from your W2 job, pensions, rental income, or other sources not considered to be self employment income
What’s great is that you can contribute pre-tax/traditional and lower your taxable income. Or you can contribute after-tax to Roth, so your distributions later in retirement are tax-free. You can also do a combination of both traditional and Roth
There are many ways to contribute to a Solo 401k because you play multiple roles in the plan. You are the employee. So you can do employee salary deferrals up to $19,500 and $26,000 if you are 50 years old or older. This can be up to 100% of your net compensation or W2 depending on your business structure. This employee salary deferral can be pre-tax or Roth or a combination of both. You are also the employer. So you can do 20-25% as a employer profit sharing contribution depending on your business structure. 20% is for sole proprietors and single member LLCs. 25% is for S Corp, C Corp and partnerships. These contributions are always tax deductible.
Solo 401k Rules for Sole Proprietor
Being a sole proprietor is the simplest and easiest way to start out in business. You typically do business under your personal name or you could have a DBA (Doing Business As) name. Most of the rules for a sole proprietorship are similar to any other business structure, except for a few main areas
When calculating contributions from your sole proprietorship you get to use net business income. Your salary deferral can be up to $19,500 or $26,000 if you are 50 years of age or older. This can be up to 100% of your net business income. Your employer profit sharing contribution is a little bit more complex to calculate. You can look at IRS publication 560 which has a deduction worksheet for self employed in chapter 6. This worksheet helps you calculate your employer profit sharing contribution. It’s generally about 20% of your net business income minus half of your self employment income tax. You should work with a qualified tax professional to finalize your numbers. To get an estimate you can also use this Solo 401k calculator.
Your sole proprietorship contributions need to be made before your tax filing deadline. April 15 is the deadline for normal filing. If you file an extension you can make contributions all the way until October 15th. Put your tax deductible contributions on IRS Form 1040, Schedule 1, Line 15. You can write the check to make your contributions from your business checking account and deposit it into your Solo 401k Trust bank or brokerage account.
Solo 401k Rules for Spouse
Does your spouse get compensation from your sponsoring business for the Solo 401k? If so, they qualify to be a participant and/or a trustee on your Solo 401k plan. They do not have to be an owner to do this. Compensation is sufficient. How to define compensation depends on the business structure. If your business is incorporated, you need to have W2 wages. As a sole proprietorship or single member LLC, net income attributable to your spouse is sufficient. If you are a partnership, then the self-employment income for your spouse would show in their K1, line 14. There are many ways to structure your business to include your spouse. It’s recommended that you engage the help of a qualified tax professional to figure out what option is best for you and your business.
Your spouse has a unique individual contribution limit. So as long as their compensation is sufficiently high, they can also contribute up to the max of $58,000 or $64,500 if they are 50 years of age or older. All of the same contribution types and abilities apply to them that also apply to you. This is a huge advantage of the Solo 401k. This can effectively double your contribution abilities as long as you stay within the rules.
Solo 401k Rules for Multi-Owner LLC
A multi owner LLC or partnership is a very common business structure. If you have one, you may be wondering, can I still have a Solo 401k even though my business has multiple owners who are not me or my spouse? The answer is yes! As usual, you just need to stay within the rules. With a multi-member LLC we can simply exclude the other partners from your Solo 401k plan by role title. We just need the other partners’ role titles, such as president or secretary. These should be listed in your LLC operating agreement
When we exclude the other role titles from your plan, this keeps your Solo 401k truly solo and separate from your other partners. Just the same, each partner can have their very own Solo 401k plan with the other partners excluded. Each plan can include the partner’s spouse who’s plan it is.
Can I Have a Solo 401K and a Regular 401K?
Another frequently asked question that comes up a lot is whether it’s possible to have a Solo 401k and also have a group 401k plan with your employer. It is possible to have both. Let me tell you how. As long as your employer is offering a 401k plan, you can participate by making employee salary deferrals. This is generally limited to $19,500 or $26,000 if you are age 50 or older.
Now, let’s imagine a scenario where you also have a side business or side hustle. You are earning 1099 income driving for Uber on the weekends. You set up a Solo 401k to make additional contributions from your 1099 income to save more for retirement. Keep in mind, the salary deferrals you made at your W2 job follow you. They are aggregated across all 401k plans where you are a participant. So if you maxed out your salary deferral at your job, you cannot put anymore salary deferrals into the Solo 401k.
You can, however, contribute as the employer in the form of a profit sharing contribution which is 20% of your net income from those 1099s. You can also make after-tax contributions, which can be converted into Roth
Solo 401K Contribution Deadline 2021
You need to establish your plan and formally elect your contributions before December 31. Do this by filling out the contribution form in the Solo 401k dashboard. You do not have to actually make the contribution until you file your taxes. This depends on what your business structure is. For S Corp, C Corp and Partnership this is March 15, or September 15 if you file an extension. For Sole Proprietorship and Single Member LLC this is April 15 or October 15 if you file an extension. There are many important dates to remember for the Solo 401k. Rather than memorize them, here is a handy article which goes over some of the most important Solo 401k dates to remember.
Open Your Solo 401K
There really are so many advantages to the Solo 401k. Knowing the rules can majorly benefit you in getting more out of your retirement saving efforts. Now that you have learned a little bit about the rules for the Solo 401k and how you can take advantage of them, it’s time to take action. Get started by signing up for your very own Solo 401k. Our team is standing by. After you sign up, we will have your documents ready in 2-4 hours. You can set up a bank and/or brokerage account. Make your rollovers and new contributions. And be trading and investing before you know it! Click here to get started setting up you Solo 401k plan.
21 Responses
What are the rules regarding contributing to a traditional IRA when you also have a solo 401k account? Thanks
Hey Mattew, you can contribute to both as long as you have earned income to support the contribution to the IRA. For the Solo 401k, the contribution has to come from self employment earned income from the business that sponsors the Solo 401k, but the IRA contribution can come from any earned income, including a W2 job apart from your self employed income. Hope that helps!
Thanks Eric. Thank helps. Do you know if there is any different limit in how much you can contribute to the IRA if you are also contributing to your solo k? I won’t be able to max out my solo k for this year (not enough months left to max out the employee contribution) so that is why I am trying to see how much my wife and I can put in a conventional IRA.
There is not any different limit. The IRA has a separate limit from the 401k.
What if a spouse in the LLC turns 72 (RMDs) prior to the Solo401k being open for 5 years? Do you take the distribution as taxable or transfer assets to an existing ROTH instead.
After age 59 1/2 you can do a distribution from our Roth 401k to a Roth Ira if you would like. There are no RMDs that need to happen from a Roth IRA. Work with a tax professional on calculating your RMDs. Hope that helps!
What if you have more than one business, each within its own LLC, all producing income? Or you have SE income from multiple K-1’s? Do you set up multiple solo 401k’s? Or is there a “control group” rule that allows a single solo 401k?
Hey Jerry, yes. This depends on if the IRS would consider your different businesses as a Controlled Group or an Affiliated Service Group. If the businesses are not one of these, then yes you can have multiple Solo 401ks. One for each qualifying business.
If I do hard money lending from my disregarded entity LLC can i use the interest from long term loans to pay myself and put it into the c corp holding company to start a solo 401K
My mom has a Solo 401(k) plan. She passed away in February 2022, and I am the Executor of her estate. My 2 brothers and I are each 33 1/3% beneficiaries, and we are trying to have the Solo 401(k) funds transferred into 3 separate Beneficiary IRA accounts. What is the best way to accomplish this?
I have recently opened up a Solo 401k account. I contributed the allowed percentages as a sin gle employee and employer contribution. I made the contributions with company checks at year end of 2022. I am now hearing that these contributions must be made each pay on each payroll date. Is this factual?
Assuming you are a S Corp or LLC treated as an S Corp: You likely will need to adjust your last paycheck or last quarter paychecks (if you haven’t done your quarterly tax deposits), but of course your paycheck needs to be large enough to deduct off the amount you are putting into you 401k for the employee deferral. If you think that will be tough, and you deposited the employee deferral amount after the new year, most soloK plans allow you (since they don’t report to the IRS anyway) to shift it to the new year and take it off your January paycheck or even recategorize it as employer deferral for the new year….but yes, it needs to be deducted from paychecks or a paycheck and needs to be accordingly reflected on your W2. The employer contribution can be made up until your tax filing deadlines for your company with extensions.
Check with your tax accountant, but many CPAs are also confused so here you go……If you are an S Corp or an LLC treated as an S Corp, the SoloK employee contribution needs to be deducted from your paycheck during the calendar year it applies and reflected on your W2. You should actually keep an “Enrollment Salary Deferral Form” in your files indicating the percentage you will deduct, even if it is a one- time end of the year bonus you use to reflect the deferral. The employer (owner) then must actually deposit into the investment account the funds within the allowed time which I believe is 7 days after the pay was deducted (see the DOL/IRS for contribution timing). So the last employee deferral can actually be put into the investment account in the first week of the new year, but not as late as your tax filing deadlines. This also is the case with a spouse who might be an employee of an S Corp along with LLC or Sole Proprietor and making a SoloK contribution. This might not have been clear in the above Q&A. The employer contribution for an S Corp can be made up until the tax filing deadline for the company, and deducted on the S corporate tax return For LLC owners (not electing to be tread as an S Corp) and Sole Proprietors, both the employee deferral and the employer contribution can be made up until tax filing deadlines with extensions.
In the net profit of my sole proprietorship calculated AFTER my salary deferral?
Can I open a solo 401K if I have 1099 income but do not have EIN?
Yes, do check out https://www.solo401k.com/qualify
For clarity, an EIN is not required if the sponsoring business is you as a sole proprietor, or a single-member LLC!
Hello. regarding the C corp EMPLOYER contribution.. Is this 100% tax deductible? Meaning myself as the owner and employee, if I take 25% of my gross salary this year and contribute to my Solo K, “the business” pays no taxes on it? and as the employee i pay no payroll taxes on it?
Great question Kelly! All contributions are net of self-employment (payroll taxes). Click here for our contribution calculator: https://solo401k.com/calculator
Let’s say I am a shareholder of a professional association business and am compensated with W2 income but also receive a K-1 statement and occasional distributions. I max out my employee contributions to the company 401k and the rest is maxed out by the company.
If I have a 1099 side hustle, can I still open a solo 401k as a sole proprietor to make employer contributions to up to the allowed limit (20% of the 1099 income)?
Great question, Zach and yes you can open a Solo 401k for your side hustle (1099 income) and make employer contributions up to the allowed limit!
My business didn’t make any money last year so I’m unable to make a deductible contribution to my solo 401k. Meanwhile, I picked up a part-time job that offers no retirement plan. I’d like to contribute $7,500 from that to an IRA, but my tax software is telling me that it’s not deductible because I am covered by a retirement plan through my business. (My spouse earned $100k+). I can’t tell what MAGI limit applies here.