Brady H., a member of my Dominate Your Dollars Facebook group, recently posted some great questions. He says:
“I had an LLC, in which I was the sole owner, and I opened a solo 401(k) and a solo Roth 401(k). But I changed the business to an S corporation, and I hired my girlfriend as a non-paid employee. Can I still have the solo 401(k)s even though I have an employee? Also, do my contributions for the current year need to be in the account by April 16 or just requested by then?”
Brady, thanks for your posts in the DYD group! A solo 401(k) is a fantastic retirement plan for a solopreneur, but it comes with some unique rules. In this post, I’ll answer Brady’s questions and explain 10 facts about using a solo 401(k), so you can save more for retirement.
10 facts about solo 401(k) retirement accounts
Before using a solo 401(k), make sure that you understand the following facts.
1. Eligibility is generally limited to solopreneurs
A solo 401(k) is a type of retirement plan for the self-employed. It’s also known as an individual 401(k), a one-participant 401(k), and a uni-401(k). It comes with a unique requirement in the world of retirement plans: You can only use it if your business has no full-time employees other than the owner(s) and their spouse(s).
You qualify for a solo 401(k) no matter your profession or business entity, such as a sole proprietor, partnership, limited liability company (LLC), or corporation. You can be self-employed part-time, full-time, or even while you simultaneously work for other employers.
If your spouse works in your business, even as a paid employee, you can still have a solo 401(k), and you and your spouse can both make contributions as owner-employees.
There’s no threshold for how much revenue your solo business must make. As long as you intend to make a profit and don’t have excluded employees on the payroll, you’re eligible for a solo 401(k).
However, be aware of two exceptions to the no-employee rule. One is if your spouse works in your business, even as a paid employee. You can still have a solo 401(k), and you and your spouse can both make contributions as owner-employees.
Another exception is the ability to have part-time employees who work less than 1,000 hours per year. Note that you can have an unlimited number of businesses or other self-employed folks working with you, such as 1099 contractors and freelancers. But once you hire a W-2 employee who works full-time hours, you can no longer contribute to a solo 401(k).
It’s important to keep in mind that self-employment…