How To Include Your Wife or Husband In A Solo 401(k)

There are almost always exceptions to rules, but when it comes to something with the IRS, those can be hard to qualify for. Thankfully, a Solo 401(k)’s exception to their no full-time employee rule being a spouse is a pretty simple one. It’s not even too difficult to include them in it either.

Here are the ways a spouse can be included in a Solo 401(k) plan:

• List them as an employee

• File as a Partnership

• File as a Qualified Joint Venture

• Set up an LLC, S, or C corporation

Some of these options may require a tax expert of some kind to make sure things are getting filled out and filed properly. If the business is already properly established, getting an expert provider such as SEPira(k) can help make sure that all the correct forms are given to the IRS in pristine condition so that the Solo 401(k) doesn’t get disqualified. Keep reading to learn more about how to include your spouse in your Solo 401(k) plan.

How to Include You Spouse in Your Solo 401(k) Plan

It’s simple to include a spouse in a Solo 401(k) plan. There are a few options as to how to go about including them depending on their responsibilities in the business.

List Them as an Employee

A common way that spouses are included in a Solo 401(k) plan is that one spouse is considered the sole business owner on the plan and the other spouse is listed as an employee. Spouses are the exception to the rule regarding no full-time, W-2 employees. Therefore, if they are working for the business and/or have minimal duties related to it, this can be the best solution. In fact, it’s often the easiest way to include them.

File as a Partnership

Another exception to the no full-time rank-and-file employees rule are co-owners. Spouse or otherwise, co-owners in a partnership can both have Solo 401(k) plans. If they are spouses that contribute to the business and file a joint tax return, they can open a Solo 401(k) plan as a partnership. 

Each partner will receive a K-1 (Form 1065). Profits and losses for the business will be passed onto each other and bypass income taxes. However, do note that the IRS only considers this option if both partners are contributing materially. In fact, if both spouses are contributing materially, this is how they’re going to consider the plan anyway.

File as a Qualified Joint Venture

A Qualified Joint Venture is another type of partnership that spouses can take on and set up a Solo 401(k) with. With this, everything is listed and filed separately on Form 1040 Schedule C instead. Just like with a partnership, both spouses need to contribute materially to the business and file a joint tax return.

Something that sets this apart from a basic partnership is that spouses will receive social security and Medicare credit. Be sure to check with an expert such as those at SEPira(k) to determine which filing is going to be the best option.

Set up an LLC or a C or S Corporation

Spouses can be considered co-owners of an LLC, C, or S Corporation and can thus set up a Solo 401(k) plan together. Depending on how the business is set up will determine how to include a spouse and what forms will need to be filed for the plan to be valid.

Limited Liability Company (LLC)

An LLC can be considered a partnership, corporation, or a disregarded entity. Depending on which depends on which form the spouses need to file.

• Partnership: Each spouse has to file their own K-1 (Form 1065)

• Corporation: The business itself will file Form 8832 and each spouse will file their own K-1 form

• Disregarded Entity: Report business activity on form 1040 on a Schedule C and pay the spouse a W-2

This will allow the spouse of the business owner the ability to participate in their Solo 401(k) plan.

Corporation

C corporations file taxes as its own entity, usually using forms 1120 and 941. This option effectively double taxes, as it has to tax the overall business income and then turn around and have the shareholders—in this case both spouses—pay taxes on their income. An S corporation passes everything down to the shareholders—again both spouses—and only taxes their income. 

Both C and S corporations are eligible for spouses to open a 401(k) plan. While an S corporation is often preferred, sometimes a C corporation is necessary. Talking with a tax expert can help to determine which is going to be the best route.

Conclusion

A spouse is one of the exceptions to one of the few rules surrounding a Solo 401(k). They can be listed as an employee, full-time or otherwise, or even as a co-owner in the business the plan is attached to. Depending on what they do and if they contribute materially or not will determine how taxes should be filed.

Just be careful, because one wrong step and the IRS will disqualify the whole plan. However, providers such as SEPira(k) can ensure that never happens with their simple to use, state-of-the-art secure platform and expert guidance. The best part? They can also help with a wide range of assets to help you build a great investment portfolio within that Solo 401(k) plan.

Resources

How to Invest Your 401(k) and Best 401(k) Investments

One-Participant 401(k) Plans

Understanding the self-employed 401(k)