Solo 401(k) Eligibility: 5 Things You Need To Know

Everything falls back on you when you’re running your own business. This can be great in some instances such as not needing to worry about an overcontrolling boss, but also means that there’s no one but you to supply a retirement plan. Thankfully, there are Solo 401(k) plans for sole proprietors.

Author

Eddy Martinez

Jul 11, 2023

Everything falls back on you when you’re running your own business. This can be great in some instances such as not needing to worry about an overcontrolling boss, but also means that there’s no one but you to supply a retirement plan. Thankfully, there are Solo 401(k) plans for sole proprietors.

Here are five things that you need to know about Solo 401(k) Eligibility:

  • Must be Self-Employed

  • No Full-Time Employees

  • Must be a US Resident

  • Side Salary Jobs are Acceptable

  • Contributions Need to be Recurring and Substantial

Speaking with a 401(k) provider such as SEPira(k) can help make sure you find the right plan for you and your needs. However, going in knowing if you’re eligible for a Solo 401(k) plan can make the process much easier, so keep reading for an in-depth look at everything you need to know about Solo 401(k) eligibility.

How Do I Qualify for a Solo 401(k)?

The requirements for a Solo 401(k) are straightforward and simple for the most part. There are just a few criteria that must be followed in order for the IRS to count it as viable. Disqualification means anything earned from the investments is taxable after all, so it’s important to make sure that it’s done correctly.

You Must be Self-Employed

The point of a Solo 401(k) is to allow self-employed individuals the opportunity to have a 401(k) retirement plan. So, it makes sense that one of the requirements for eligibility is to be self-employed.

The IRS defines legitimate self-employment businesses as those run with the intent of generating profits. That means that people who offer products or services themselves are eligible. They will require an Employer Identification Number (EIN) which will be assigned when the business is properly set up.

This also means that freelancers and independent contractors count in this as being self-employed and can also start up a Solo 401(k) plan. They don’t necessarily have to have their own business empire, just to be doing work that generates a profit. They will still likely be assigned an EIN, but sometimes that ends up just being their social security number if they don’t have an actual business name and presence. 

Talking with a professional can help make sure this is done appropriately, especially if you’re unsure about Employer Identification Numbers, how to find them, and how to get them.

You Cannot Have Any Full-Time Employees

The wording for this requirement can come across as a little confusing depending on what resources are looked at where. Basically, however, a person is only eligible for a Solo 401(k) if they have no full-time employees.

This doesn’t mean that having absolutely no employees is a requirement. There can be workers paid, there are just some limitations. There are also some exceptions.

These are those limitations and exceptions:

  • No worker can work more than 1,000 hours per year

  • 1099 contract workers are not considered workers

  • Employees under the age of 21 are excluded

  • Spouse does not count against the no full-time worker rule

  • Multiple business owners/partners who are not a spouse also does not count

Be sure to note that this applies to all self-employment work. No businesses owned can gain a full-time employee (other than a spouse) without revoking Solo 401(k) eligibility.

It’s also important to know that anyone working at least 500 hours in three consecutive years will have an impact on the plan, which could change eligibility.

You Must be a Legal US Resident of at Least 21 Years of Age

As with most anything involving the government, only legal US residents qualify for a Solo 401(k) plan. If you were born, raised, and never lived outside of the country, then this one is probably going to be the easiest of the eligibility requirements to meet. 

The second half of that is that you also need to be at least 21 years old, which really is just a waiting game. Honestly, you’re probably not thinking about setting up a retirement plan that early anyway, but it is good to start as soon as possible.

The good news is that this also doesn’t mean only those born in the US, but also includes those who have gotten legal authorization to reside in the country. It might need some extra pushing without complete naturalization paperwork, so definitely check with a specialist if this is applicable to you.

You Can Have a Solo 401(k) and a Salaried Job

One of the nicest perks about a Solo 401(k) plan is that you do not have to be only a self-employed individual. If this self-employment is just a side hustle, that’s fine. If there’s a regular salaried job in the picture, even one that offers 401(k) benefits, a Solo 401(k) plan is still on the table.

Additionally, having a 401(k) plan from an employer does not revoke eligibility for an additional Solo 401(k) plan. In fact, profit-sharing employer contributions can still be made up to the plan maximum. 

This also allows for configuration with multiple participating employers, combined income, and even multiple personal and/or spousal businesses to make investments into the same Solo 401(k) plan.

Another bonus point is that whatever business the Solo 401(k) plan is attached to can put up to 100% of the net income into the plan. Therefore, it’s totally viable to have a side business/freelance gig/etc. that uses the entirety of its profits to fund the plan and continue to work a normal salaried job to pay for the rest of life’s necessities.

Your Contributions Need to be Recurring and Substantial

One of the most appealing parts of a Solo 401(k) plan is that they have extremely high contribution limits. They’re self-driven and are there to give a self-employed person the ability to save for retirement. Unlike more traditional plans, these use the net business income to calculate the limits.

These limits increase after the plan owner is 50 years old and can be up to 100% of the net income for the business. This part of the Solo 401(k) plans can get really tricky and complicated really fast due to the high limits, so it’s highly recommended to find a professional to help manage the plan and all of its details, such as those at SEPira(k).

However. The IRS states that contributions to the plan must be both recurring and substantial to keep a plan active. So, it’s not just something that can be set up and forgotten about. It needs to be frequently added to, but exactly how frequently depends on the plan itself.

How much is considered substantial is based on income though, so there’s not really a set figure everyone abides by. It’s usually just a small percentage of the net income, but it’s always best to put in as much as feasible so that there’s more to build from.

Additionally, while it is possible to withdraw from the plan if it’s under $50,000 or 50% of the total — whichever happens to be lower — it is best to try and leave it there so it can grow. The exception is if the owner is over the age of 72, in which case it is required to take disbursements occasionally as well.

Who is Not Eligible for a Solo 401(k) Plan?

Basically, anyone who does not fall under the aforementioned criteria is not going to be eligible for a Solo 401(k) plan. Every one of those boxes need to be ticked and applicable, otherwise the plan isn’t going to work. In fact, it could even get completely disqualified by the IRS and listed as taxable income.

However, to break it down for ease of understanding, here are criteria that would make it so someone is ineligible for a Solo 401(k):

  • Anyone under the age of 21

  • Union employees

  • Non-US Residents

  • Employees working under 1,000 hours annually for three consecutive years.

If you’re ever unsure if something counts, be sure to ask a specialist. The expert guidance at SEPira(k) is one good place to check to get the best and most current information regarding Solo 401(k)s and your eligibility. The worst-case scenario is that a different type of retirement plan and provider will need to be selected.

What Can You Invest in With a Solo 401(k)?

Solo 401(k)s are self-driven plans. With these, there’s a lot more room to select what exactly to invest in so that the money grows. Most providers will have a set package of investments to select from, whereas others have fewer limitations.

SEPira(k), for example, offers this list for types of investments their clients can choose from:

  • Real Estate (both residential and commercial)

  • Tax Liens

  • Private Placements

  • Precious Metals

  • Energy 

  • Equipment Leasing

  • Foreign Currency

  • Stocks

  • Bonds

  • Mutual Funds

Investments can be riskier, safer, or even a combination of both. Typically, picking out a combination works out well, so there’s always a safe bet and the chance of getting a more solid return. Just be sure to keep an eye on trends and make informed decisions when selecting riskier options.

Another option is to utilize a service like SEPira(k) which can help make these decisions, manage them, and even tailor them to the individual. There’s no shame in asking for expert advice or help after all, especially when money is concerned.

Why Use SEPira(k) as Your Solo 401(k) Provider?

Recordkeeping for a Solo 401(k) plan is stressful and difficult. If there’s anything wrong with any step, the IRS is more than happy to disqualify the plan and issue out a whole slew of taxes on that now taxable income. 

Most providers use the current best practice of recordkeeping — Excel spreadsheets — and expect their clients to manage them primarily on their own. This can add a whole new layer of stress on top of the whole thing. Really, what’s the point of trying to pay all those provider’s fees when you’re still doing most of the legwork?

SEPira(k) has experts and a state-of-the-art platform to help do as much as possible for the client instead of the other way around. This simplifies the process and makes it so much easier for solo entrepreneurs and small business owners (who don’t have any w-2 employees of course) to get, manage, and maintain their retirement plan.

Their support is personalized to their client, helping as much or as little as needed so that they can focus on other parts of their lives, businesses, families, and anything else they need to. This also helps clients make the most informed and worthwhile decisions for their investments, something that not many other providers can claim. They also have a wide list of investment options which can also be tailored to the client’s individual portfolio.

To top it all off, their platform is extremely secure and reliable, It even has a robust backup system so their clients’ savings are always going to be safe even if the worst should happen.

Conclusion

Setting up a Solo 401(k) can be tricky, not to mention terrifying. One wrong step and the IRS is going to have a field day handing out a massive tax bill. There are a few points to note about eligibility for them in the first place, from the fact that you need to be over 21 and self-employed with no full-time employees, to being a legal US resident, all the way down to having recurring and substantial payments to the fund. 

The IRS counts a self-employment business as legitimate if it’s run with the intention of generating profits. That means that freelancers and independent contractors count, if they do not have full-time employees. There are some exceptions such as 1099 workers, spouses, and multiple owners to a business, though.

Thankfully there are providers such as SEPira(k) who have experts handling a state-of-the-art, secure, and easy to use recordkeeping platform to make the whole process as stress-free as possible. They can handle all of the confusing jargon, answer questions, and pretty much do everything for the client so they don’t have to worry.

Resources

401(k) Plan Qualification Requirements

What Is a Solo 401(k)? Self-Employed Retirement Plans

3 Things You Need to Know About Solo 401(k)s

SEPira(k)