Solo 401k Eligibility & Plan Setup

Solo 401k eligibility

Solo 401(k) Eligibility

To be eligible to benefit for the Solo 401k Plan, investors must meet two eligibility requirements:

  • The presence of self employment activity.
  • The absence of full-time employees.

A Solo 401(k) is an IRS approved retirement plan that is well suited for businesses that either have no employees or no full-time employees, therefore are excluded from coverage. A Solo 401(k) plan is perfect for sole proprietors, consultants or independent contractors. Individuals who have a full-time job are also eligible to open a Solo 401(k).

The Presence of Self Employment Activity

Solo 401(k) eligibility includes the presence of “self employment activity”. This generally refers to the ownership and operation of:

  • A sole proprietorship
  • Limited Liability Company (LLC)
  • C Corporation, S Corporation
  • Limited Partnership where the business intends to generate revenue for profit and make significant contributions to the plan

Related: Solo 401(k) Rollover vs. Contribution

Generate Revenue for Profit

IRS will consider you eligible for the plan if the business is legitimate and is run with the intention of generating profits.

Self-employment activity can be part time, and it can be ancillary to full time employment elsewhere. A person can even participate in an employer’s 401(k) plan in tandem with their own Roth 401(k) retirement plan. In such a case, the employee elective deferrals from both plans are subject to the single contribution limit.

There are no established thresholds for:

  • Profit the business must generate
  • How much money must be contributed to the plan
  • When and how quickly the profits and contributions must occur

Related: How to Choose the Best Solo 401(k) Provider

The Absence of Full-Time Employees

Unlike a regular 401(k) plan, a Solo 401(k) retirement plan can be implemented only by self-employed individuals or small business owners with no other full-time employees. Additionally, they must not be employed by any business owned by them or their spouse. An exception applies if your full-time employee is your spouse.

The business owner and their spouse are technically considered “owner-employees” rather than “employees”.

*Did you know that individuals who participate in the Gig economy are eligible for a Solo 401(k)? Learn more about different side-jobs individuals can do to open a Solo 401(k).

Employees who are Excluded from Coverage

In order to maintain Solo 401(k) eligibility, the following types of employees may be generally excluded from coverage:

  • Employees under 21 years of age
  • Employees that work less than a 1,000 hours annually
  • Union employees
  • Nonresident alien employees

Do you have full-time employees aged 21 or older (other than your spouse)? Do your part-time employees work more than 1,000 hours a year? If yes, you must typically include them in any plan you set up. However, a business eligible for the plan can have part time employees and independent contractors.

Solo 401(k) Info Kit

Get the Info Kit

Why Open a Self-Directed Solo 401(k)?

Many individuals open a Solo 401(k) to save for retirement. Some individuals have traditional jobs and pay into a regular 401(k) or IRA and a Solo 401(k). One of the benefits of opening a Solo 401(k) is the ability to save more! Employer sponsored 401(k)’s are limited by lower annual contributions. Individuals can open a Solo 401(k) to put more money away and diversify their retirement portfolios. Furthermore, opening a Self-Directed Solo 401(k) will allow you to invest in traditional and alternative investments. With IRA Finacial’s Solo 401(k) plan, you can invest in stocks, bonds, and mutual funds. In addition, you can invest in alternative investments to help diversify your portfolio. Popular alternative assets include:

Real Estate

Bitcoin

Cryptocurrencies

Foreign Currencies

Gold

Precious Metals

Hard Money Loans

Privately-Owned Companies

Traditional Investments such as Stock and Bonds

There are countless opportunities to diversify your retirement account with a Solo 401(k). While some of the investments you can make are listed above, the options are endless. Instead, with a Solo 401(k) there are only three things you cannot invest in. Best of all, you can open a Self-Directed Solo 401(k) without every stepping foot in the bank.

Learn More: Solo 401(k) Prohibited Transaction Rules

*Did you know IRA Financial Solo 401(k) comes with a loan feature. While many 401(k) plans enable individuals to take loans, some providers exclude this feature from their Solo 401(k) plan. Many individuals have recently started a new business use a Solo 401(k) loan to invest in their new business venture.

Learn More:

Open a Solo 401k Online

Solo 401k Frequently Asked Questions

Why Choose a Solo 401(k) vs. a SEP IRA?

Get in Touch

Do you have questions regarding the Solo 401(k) eligibility requirements that we did not cover in this article? Contact IRA Financial Group directly at 800-472-0646. You can also fill out the form to speak with a 401(k) specialist to find out if you are eligible for the Solo 401(k) retirement plan.

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