Can a Husband and Wife Open a Solo 401k?

And for millions of self-employed workers, financial vehicles like a solo 401k enable independent business operators to prepare for life after their working years are over. But how does this retirement plan work for married couples? Can a husband and wife open a solo 401k?

If the spouse of a self-employed individual also works for the same business, then he or she can contribute to the same solo 401k plan as the proprietor. Furthermore, a spouse can contribute the same amounts as an employee and employer, so a married couple can really benefit from a solo 401k.

One of the most desirable employment benefits that people seek from the companies they work for is a retirement plan. Just because you operate your own business does not mean that you cannot plan for your retirement years. With a solo 401k, not only can you build financial security, but if your spouse works for your company, he or she can contribute as well. Here’s how.

Can a Husband and Wife Open a Solo 401k?

Because it is intended to provide retirement benefits to individuals who are self-employed or operate their own business, one of the fundamental requirements of a solo 401k is that the business in question has no employees other than the owner.

There is, however, one critical exception to this rule. The spouse of the business operator can work for the business or hold an ownership interest, and in such a case, he or she can also contribute to a solo 401k in the same manner as the proprietor. This applies even if the spouse is a part-time employee.

Under the right circumstances, this can be an extremely beneficial arrangement for a married couple working for a family-owned business.

How Much Can a Spouse Contribute to a Solo 401k?

Like a traditional 401k, a solo 401k (also known as an individual or a self-employed 401k) enables a participant to set aside pre-tax earnings and contribute them to the plan, where they can be invested in a broad range of investment vehicles. As with any retirement plan, the hope is that these contributions will grow into a sizable tax-deferred nest egg for later withdrawal upon reaching retirement age.

But a solo 401k is uniquely adapted for people who are self-employed, operate their own business, or even have a side gig while working for someone else. The key difference between a traditional and solo 401k is that the latter views the plan participant as both an employee and an employer. 

As far as a solo 401k is concerned, the IRS aptly describes the participating business owner as wearing two hats. Here’s how the dual contributions work for a self-employed individual:

• As an employee, a proprietor can contribute the lesser of $22,500 (for 2023) or 100% earnings to a solo 401k

• For a business owner who is over the age of 50, this amount is boosted by $7,500 to $30,000 to allow for a catch-up contribution

• Changing hats from employee to employer, the same participant is permitted to further contribute up to 25% of the net self-employment income (i.e., the gross income for the business less expenses, less one-half of self-employment taxes, and less the solo 401k employee contribution amount)

• The cap on the total amount that can be contributed to a solo 401k by a business owner, as both an employee and employer, is $66,000 for 2023 (this amount is $73,500 for participants over 50)

As a retirement plan vehicle, a solo 401k is an attractive option for self-employed individuals, but married couples who work for the same family business stand to benefit even more.

Here’s How Much a Spouse Can Contribute to a Solo 401k

For a husband and wife working for the same family business, a solo 401k can be especially beneficial because both spouses can contribute to the plan. Here’s how it works:

• The one exception to the no-employees rule for a solo 401k is the spouse of the business owner

• Even if the husband or wife of the proprietor only works part-time (or is a part-owner), he or she can contribute to a solo 401k as both an employee and employer in the same manner as the proprietor

• Most importantly, the contribution amounts are the same for the spouse as they are for the business owner

Under the right circumstances, a married couple stands to double the amounts that can be contributed to a solo 401k, or up to $132,000 for 2023 ($147,000 if both spouses are over 50).

Final Thoughts

If properly set up and maintained, a solo 401k can be a game-changing financial vehicle for people who earn their living working for themselves. Particularly for a married couple working for the same family-owned business, a solo 401k can be a very attractive retirement plan option because of the duality of contributions that are allowed from both spouses.

But with the financial security that comes with a solo 401k, there are also undesirable consequences if accurate contribution records are not kept, especially on the employer side. Since a business owner is both the employee and employer (as is the spouse) in a solo 401k, the onus is on the proprietor to make sure that payroll and business income information is in good order.

SOURCES:

https://www.fool.com/retirement/plans/solo-401k/rules/ 

https://www.irs.gov/retirement-plans/one-participant-401k-plans

https://www.tdameritrade.com/retirement-planning/small-business/individual-401k.html