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Who is Eligible for the Solo 401k?
Who is Eligible for the Solo 401k?
Updated over a week ago

In order to qualify for a Solo 401k you must:

-Have self-employment activity

-Have zero full-time employees in any company you and/or your spouse run

Self-employment activity can be as simple as putting some photos online for sale, baby/pet sitting or selling baked goods. Your business can take the form of a Sole proprietorship, an LLC, an S-corp, etc. There is no IRS-required minimum amount of revenue you must generate in order to keep your Solo 401k active. The IRS wants to see that your business has an intent to profit.

Here’s an example of the same business, one with intent to profit, and one without.

Mary has always grown beautiful roses. Friends comment on them, and one even recommended she sell them at local farmer’s markets. Mary loves to garden, it brings her joy. Some of her friends buy her roses every once in a while, but she isn’t trying to really make money.

As you can see in the example above, Mary’s roses are more of a hobby and not a business. Let’s see what happens when Mary’s garden can become a business.

Mary has always grown beautiful roses. Friends comment on them, and one even recommended she sell them at local farmer’s markets. So, Mary purchased space at a local farmer’s market, packaged up her most beautiful roses into bouquets and brought loose roses to sell to passersby. Mary works the farmer’s market every single weekend and even drives to a neighboring town twice per month to setup her stall and sell her roses there. She’s not making a huge profit (yet!), but she’s bringing in enough revenue to buy more supplies, and plant more roses in her garden. If she keeps doing what she’s doing, in a few months her rose sales will outpace her expenses and she’ll start making profit!

In the second example, Mary is taking something she loves and turning it into a legitimate business with an intent to profit. It might still be something that only occupies her time on the weekends, and Mary might still have a full-time 9-5 job. Because her side business of growing and selling roses has an intent to profit, she can use that business to adopt the Solo 401k. Then, any revenue generated from her rose-selling business can be used to contribute new funds into her Solo 401k and grow Mary’s wealth.

You can be employed by another company, receive W-2 wages and have a 401k at work. You can still contribute to your 401k plan with your 9-5 full-time job.

And, you can still have a Solo 401k if your self-employment activity/business has an intent to profit.

Keep in mind 2 things:

  1. All contributions to your Solo 401k plan must come from income generated by your self-employment activity

  2. The total contributions for all your 401k plans (from full-time job and the Solo 401k) cannot exceed $53,000 per year total (or $59,000 if you’re age 50 or older)

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