In order to be eligible for the Self-Directed Solo 401(k) account, you must be self-employed and have no full time employees. Further eligibility requirements and exceptions below.
What do I need to make sure I qualify for the Solo 401(k)?
1. Income from the below qualifies...
- Sole Proprietorship
- C Corporation
- S Corporation (must contribute from income, not distributions)
- Limited Partnership
2. Who is your business owned by?
You and your spouse are the only people who can own the business. There can be no other outside ownership, or you will not qualify for the Solo 401(k).
3. Do you have any employees?
To qualify for a Self-Directed Solo 401(k), you cannot have any full-time common law employees other than your spouse. You can have part-time employees, but if you hire full-time employees in the future, you will have to stop contributing or come up with another retirement plan solution (maybe a SEP-IRA).
My other business has employees... but not the one I want to connect to the Solo 401(k). Does that still count?
Yes, unfortunately. The IRS can see this as hiding a retirement plan from your employees in another business. If you have employees, you can be subject to "discrimination testing" to make sure that if you are giving yourself retirement benefits or an employer match, that your other employees are also eligible for fair employer match and able to contribute to retirement accounts.
If you ignore this, you could be subject to retirement backpay or legal action from your employees as a violation of ERISA law by enforcement of the Department of Labor. (DOL)
I qualify! is the Self-Directed Solo 401(k) right for me?
Hold up there. Check if the Solo 401(k) is something you want to do. The Solo 401(k) can be a more complicated product to administer for our customers compared to a Self-Directed IRA, which is simple and straightforward.
- Are you trying to save over $6,000 per year in tax-advantaged retirement dollars?
- Are you trying to take out loans from your retirement account?
- Are you trying to save both Traditional and Roth Dollars, or do after-tax conversions? (Mega-Roth)
- Are you going to be doing matching or profit-sharing contributions? Can you handle these contributions yourself or with a trusted CPA?
- Is your self-employment income going to continue consistently year to year?
- If you answered no to all or most of these questions, it might be best to stick with the IRA. You can read more about the Self-Directed IRA vs. the Self-Directed Solo 401(k) comparison here.
Here is an example of box 1 in the K1 where your ordinary income would qualify for the Self-Directed Solo 401(k).