Do You Need W-2 Income for a Solo 401(k)? Is it Allowed?

Putting aside money for retirement is one of the best investments that can be made. It makes it so that later in life you can continue to live with the same, or sometimes even better, conditions as you have been. Starting up your own business is one great way to make money in the meantime, but sometimes that’s more of a side gig. Sometimes, it’s not. So, do you need to have W-2 income for a Solo 401(k)? Is it allowed?

You do not need your own W-2 income for a Solo 401(k), but you are allowed to have one and still qualify for a plan. However, you may not have any full-time rank-and-file employees (those who get W-2s) that are not your spouse. 

A Solo 401(k) plan is a retirement plan for sole proprietors like freelancers and independent contractors, so it makes sense that only those without full-time rank-and-file employees qualify. Keep reading for more information.

Can I Have a Salaried Job and Still Have a Solo 401(k)?

Oftentimes people have a self-employed job on the side of a job somewhere else. They use their own business as a side hustle to augment their regular pay. Sometimes those other jobs will offer 401(k) benefits, sometimes they don’t.

No matter what though, you still can have a Solo 401(k). It is even allowed to have a traditional 401(k) from an employer and a Solo 401(k) at the same time. Since a Solo 401(k) has higher contribution limits than a traditional and allows for contributions up to 100% of the net income of the business, it might even be more beneficial. 

Just be sure to chat with an expert such as those at SEPira(k) to make sure that your personal eligibility, contribution limits, and any applicable taxes are understood and appropriately managed.

Rolling Over Old 401(k) Plans into a Solo 401(k)

Not only can you have a Solo 401(k) and a traditional 401k at the same time, but you can also rollover old plans into it. Since a Solo 401(k) has those higher contribution limits, it can be pretty easy to take old benefits and roll them over into the new plan.

Here are the types of plans that are and are not allowed to be rolled over into a Solo 401(k):

Allowed Not Allowed Traditional Roth IRA Rollover Current Employer Plans SEP IRA   SIMPLE IRA   Former Employer Plans  

The easiest ones to rollover are Traditional, Rollover, and SEP IRA plans and will likely not have any hitches along the way. A SIMLE IRA can only be rolled over if it was participated in for at least two years. Rolling over former employer plans can get complicated quickly, needs the use of a 1099-R, and may have rules about how and when it can be rolled over. It is highly recommended to talk with an expert to make sure nothing goes wrong.

Additionally, you can indirectly rollover a plan by withdrawing money from an old plan and using that to contribute to a Solo 401(k) within 60 days. However, this may only be done once every 12 months.

Can I Have W-2 Employees and a Solo 401(k)?

A Solo 401(k) does not have many rules, but one very important one is that you may not have any full-time rank-and-file employees. That means that nobody should be getting a W-2 from you, otherwise you will not qualify for a plan.

The exception to this rule however is if that person is your spouse. They can be listed as an employee and given a W-2 if they have minimal contributions to the business. If they contribute materially, they can be listed as a co-owner instead.

Get Help from SEPira(k)

Not everyone has a story that’s perfectly clear cut, which means their recordkeeping can get a bit tangled. If those tangles become knotted messes with even one mistake, the IRS is going to disqualify the whole Solo 401(k) plan and issue a massive tax bill. That’s why it’s strongly recommended to get help with recordkeeping, rolling over plans, and everything else that goes into saving for retirement.

While Solo 401(k) plans are self-directed plans in general, SEPira(k) makes the whole process easy with their state-of-the-art, highly secure platform that goes beyond the standard Excel spreadsheets that everyone else makes their clients manage themselves. 

To top it off, they also allow for investing in both traditional and unconventional assets, such as:

• Mutual Funds

• Stocks and Bonds

• Real Estate

• Commodities

• Tax Liens

• Private Placements

• Precious Metals

• Energy

• Equipment Leasing

• Foreign Currency

• Cryptocurrency

With their robust platform and expert guidance, managing a Solo 401(k) will never be easier.

Conclusion

Solo 401(k) plans are a type of retirement plan available to the sole proprietor. These plans have high contribution limits and can be contributed to in tandem with a traditional 401(k) plan from a salaried position elsewhere. However, if there are any full-time rank-and-file employees in the business that are not the owner’s spouse, they are not eligible for one of these plans.

Additionally, old 401(k) plans can be rolled over into the new Solo 401(k), typically without much trouble. However, it is highly recommended to get help from experts such as those at SEPira(k) to help manage the plan from beginning to end to make sure that the IRS doesn’t find something wrong and issue a massive tax bill.

Resources

The Ultimate Guide to the Solo 401(k), Written by a CPA Who Has One

Understanding Rules for Solo 401(k)s

One-Participant 401(k) Plans

Understanding the self-employed 401(k)

Solo 401(k): Definition, Eligibility, Limits, Pros & Cons

The Pros and Cons to a “Solo” 401(k) plan | Money