Solo 401k Eligibility: How Do I Know If I'm Eligible?
So, you’ve heard about the great benefits of a Solo 401k.
The more diverse investment options, higher contribution limits, loans and more.
It’s no surprise why many solo entrepreneurs and small business owners are choosing to fund Solo 401k’s as opposed a SEP, traditional IRA, or other investment.
But the question is– do you qualify?
While the requirements to qualify for a Solo 401k (also referred to as a One-Participant 401k) are few, there are still two main eligibility factors that need to be met.
You must meet these two main eligibility factors to qualify for a Solo 401k plan:
- Self-employed income
- No full-time employees
So, how do you know if you’re eligible for a Solo 401k? Let’s break down both factors to see if you’re eligible:
1. Self-employed income
The first of two qualifying factors for a Solo 401k plan is self-employed income. This means you must own a business and be generating revenue with that business on either a full-time or part-time basis.
First, let’s talk about what qualifies as self-employment…
Under IRS regulations, self-employment includes any business operating as a:
- Sole Proprietorship
- Limited Liability Corporation (LLC)
- Limited Partnership
If you’re self-employed and generate self-employed income under any one of the above types of businesses, you meet the first factor to qualify for a Solo 401k.
It’s also important to note that, according to the IRS, a sole proprietor is anyone “who owns an unincorporated business by himself or herself”. This doesn’t require an application or paperwork of any kind.
For that reason, if you have a side gig, such as selling an eBook from a blog you created, crafts from an Etsy store, or anything else similar, you are technically considered a sole proprietorship and can be eligible for a Solo 401k.
According to the IRS, you need to have self-employment activity to qualify for a Solo 401k. However, the term self-employed activity can be a bit confusing.
To put it simply, self-employment activity refers mostly to the fact that you need to be generating income from your business (the primary indicator of self-employment activity). If your business is generating income, even if it isn’t much, you can qualify for a Solo 401k.
It’s important to note that you don’t have to be full-time in your business to qualify. You can qualify for a Solo 401k as a:
- Full-time business owner
- Part-time business owner (with no other income)
- Even business owners who use their income as an accompaniment to full-time employment
How much time you spend on the business isn’t a qualifying factor, only that there is some form of self-employment activity.
And before you question whether you’ll qualify due to the fact that your business doesn’t generate much revenue– don’t worry. The Internal Revenue Service (IRS) doesn’t specify an amount or percentage of income a business must generate for you to qualify for a Solo 401k, simply that there needs to be some sort of income generated throughout the year.
Having said that, it’s important to note that you may also still qualify if your losses are greater than the revenue you generated for the year due to tax deductions with your business.
Summary: If you’re self-employed and generating self-employment income, you can be eligible for a Solo 401k (provided you have no full-time employees, which we’ll talk about in the next section).
Additional eligibility information:
- Have a 401k through your full-time employer? You can simultaneously participate in an employer’s 401k plan and your own Solo 401k through your part-time business. However, keep in mind that your contributions are subject to the same single contribution limit.
- Interested in the benefits of a Solo 401k, but not sure if you have self-employed income that qualifies? Many types of income qualify as self-employed income including consultation work and selling crafts on the side as a sole proprietor. If you’re not sure whether a side income you have in place will help you qualify, feel free to contact us below and we’ll be happy to help.
To learn more about your options and to see if you qualify for a Solo 401k, contact us here or call us at (844) 486-4015.
2. No full-time employees
To be eligible for a Solo 401k plan you as a self-employed individual can have no full-time employees.
However, there are several important exceptions and exclusions that need to be taken into account as well. Many which make it easier to qualify.
Solo 401k employee exceptions
An employee is excluded from this rule if they:
- Work less than 1000 years annually (if they do, they’re considered part-time)
- Are under 21-years of age
- Are part of a union
- Are a nonresident (alien) employee
This means any person you employee who meets one or more of the points above does not count against you towards qualifying for a Solo 401k. If you have one or more employees but all meet one or more of the above points, you may still be eligible for a Solo 401k.
It’s important to note that independent contractors are also not considered full-time employees and don’t affect your ability to qualify for a Solo 401k plan.
Spouses and partners
If you own a business and employ your spouse, your spouse is considered an “owner-employee” and does not count against you even if they’re a full-time employee. In addition, your spouse can actually contribute to the same Solo 401k plan.
Partnerships work in a similar fashion, with each partner in a partnership being able to contribute to their own separate Solo 401k plan.
Are you eligible for a Solo 401k plan?
So, do you qualify?
Are you ready to take advantage of all the great benefits a Solo 401k plan has to offer? Including:
- More diverse investment options from real estate and precious metals (including gold and silver) to private equity, stocks, and bonds.
- Higher contribution limits up to $54,000 annually ($60,000 if you’re over 50).
- Flexible loan options for you and your business with instant approval and no restriction on how you use the funds.
In addition, Maverick makes the setup process simple and easy. All it takes is a few short minutes with our online application and you’ll have taken the first step towards a brighter and more secure retirement future.
To learn more about your options and to see if you qualify for a Maverick Solo 401k, contact us here or call us at (844) 486-4015.