The Confusion Around the Type of Business That Can Open a Solo 401k Account

Also called one-participant 401k or individual 401k, a solo 401k retirement plan is still a mystery to some people. They wonder if their business is eligible for this because they believe it stands for sole proprietors. If you have the same doubt, it will help to know that this account is relevant for all business entities, such as C corporation, sole proprietorship, S corporation, single-member LLC, etc. For clarity, the term individual or solo isn’t about business structure but business activity.

Going by the guidelines, a company must not have W-2 or full-time employees spending more than 1,000 hours annually. If you don’t have an employee, you can set up your solo 401k. Interestingly, your spouse can be a part of your business, working over 1k hours a year and earning. They can have a solo 401k account. Due to this, there can be two contributions from one family every year. You can check a platform like solo401k for more insights and to open your account. Let’s explore a few business types to understand what they can do in this case.

Sole proprietorship business

As a single business owner, you have the sole proprietorship regardless of whether you register your business or not. But you still need to prove your eligibility for a solo 401k. Your spouse can join your business. You can contribute up to USD $22,500 for 2023 on the higher side as an employee. It can be USD $30,000 for people aged 50 and more. An employer can add 20% of their income into the account.

LLC business

Again, the same rule applies that there cannot be any workers, with the only exception being your spouse. LLC can be a single or multi-member entity. If it’s a multi-member LLC, the plan provider can remove their functions from your solo 401k plan. Furthermore, your contribution limit to this account can be subject to your tax liability as a corporation or a sole proprietorship. If you pay tax as a sole proprietorship, you can contribute as much as USD $22,500 for 2023. It is USD $30,000 for people in their 50+. While the upper limit remains the same for the corporation, based on tax liability, an employer can contribute up to 25% of their earning in the account against 20% in the case of a sole proprietorship. Other factors can also influence your contribution limit.

Partnership

As hinted earlier, people assume this retirement plan is out of reach if they run a business with partners or several owners. Partners are not employees. You cannot mention their names. However, to apply for this account, you may need to customize your plan by excluding your partners. The contribution limit for a partnership business can be the same as a Sole proprietorship with little variations. Learn about all the terms and conditions to make sure everything is clear.

Retirement planning is a critical step toward a safe future. And plans like individual 401k can be the catalyst. Take your steps carefully to avoid any disappointment.