One of the most common questions we get at Ocho is: Can I open and contribute to a solo 401k if I have a full-time job with an employer?
Yes, you can have a solo 401k even if you have a full-time job. While a solo 401k is a retirement plan for business owners and self-employed individuals, having a day job outside of your business doesn’t affect your eligibility. All that matters is that your business meets the eligibility requirements of a solo 401k plan.
Solo 401k eligibility rules
Let’s go through the eligibility rules of a solo 401k. There are only two requirements that you must meet.
- You must have a business or be self-employed.
- You must not have any employees, including part-time employees who are at least 21 years of age, and have worked over 500 hours per year for 3 consecutive 12-month periods (excluding your spouse).
The size of your business, type of business, and your business structure do not matter. All that matters is that you have business income (or self-employment income), and that you have no employees.
The following types of employees are still permitted:
- Employees under 21 years old
- Part-time employees (if they work less than the restricted number of hours listed above)
- 1099 contractors
- Union employees
- Nonresident alien employees
How does having a job affect a solo 401k?
Having a job does not affect your solo 401k eligibility at all. However, some parts of your solo 401k contribution limits could be affected if you also receive a 401k plan at work.
Contributions to your solo 401k can only be made from your business or self-employment income. Your solo 401k contributions limits are determined by what you make in your business. You can’t take your paycheck from your day job and use it to make contributions to your solo 401k.
Can I get a solo 401k even if I have a 401k from my day job?
Yes, you can contribute to both a solo 401k and a 401k at the same time. Your solo 401k is funded with income received from your business and your 401k is funded with W-2 wages you receive from your employer.
How solo 401k contributions work
The total 401k contribution limit for 2023 is $66,000 if you’re under 50 years of age, and $73,500 if you’re 50 years of age or older.
However, with a 401k at your day job, you’re not able to maximize that entire amount because you’re limited to only making contributions to your plan as the employee. Your employer also has the option to make employer contributions through 401k matching. However, this is optional and is only offered by some companies as an added incentive to attract more talent to work for them.
With a solo 401k, it’s different. Since you own your own business, you get to make contributions as both the employee and the employer. This opens up the full 401k contribution limit.
With a regular 401k, you can contribute up to 100% of your compensation up to $22,500 for 2023. If you’re at least 50 years of age, you can contribute up to $30,000.
With a solo 401k, you get the same amount in contribution room for employee contributions. But you also get to contribute a total of up to $66,000 into your plan for the year ($73,500 if age 50+) through employer contributions. As an employer, you could contribute up to 25% of your compensation if your business is incorporated. If you are an unincorporated business, you can contribute approximately 20% of your net income.
Employee contributions are aggregated for both 401k plans
As we saw above, the employee contribution limit to a solo 401k or a regular 401k is $22,500 ($30,000 if age 50+) for 2023.
This limit is per individual, not per plan. In other words, the total employee contributions to both your regular 401k at work and your solo 401k must not exceed this limit.
For example, if you’re under 50 years old and contribute $15,000 to your 401k plan at work, the maximum you can contribute as an employee to your solo 401k is $7,500.
$15,000 + $7,500 = $22,500 (the solo 401k employee contribution limit for 2023).
Therefore, if you have both a solo 401k and 401k plan at work, then additional calculations are required so that you don’t mistakenly overcontribute to either plan. Use our solo 401k calculator to crunch the numbers yourself.
How to open a solo 401k (even if you have a job)
Unlike a 401k plan, your plan isn’t sponsored by your employer that you could just opt into as the employee. You have to set it up yourself. Your solo 401k must be established by you, under your business entity. Your income from your 401k doesn’t affect your solo 401k application or eligibility status.
If you’re ready to start your solo 401k, here are the steps to follow:
Step 1: Choose a solo 401k plan provider.
Every solo 401k plan provider offers different features, levels of service, and user experience. For example, some plan providers do not offer a Roth account or access to alternative investments. Others may offer a full range of features, but require you to take your plan documents and establish your account with a 3rd party brokerage.
Compare the best solo 401k plan providers here, and then choose a provider that offers the full range of features you’re looking for, with a strong reputation for customer support. Because you’ll have to actively manage your solo 401k plan yourself, customer support is especially important for a solo 401k.
For a plan provider that offers world class customer support, and an intuitive all-in-one experience, try the Ocho Solo 401k.
Step 2: Get an EIN
An Employer Identification Number is like a Social Security number for your business entity. It’s how the IRS can identify and tax your business as its own entity. If you’re already in business, you may already have an EIN. If you don’t, register one through the IRS website. It’s free, and you can usually get it instantly.
Step 3: Fill out an application
After you have an EIN ready, you can start the registration process with the plan provider that you chose to go with. The application process, and how long it takes, varies with each provider. Some will require you to hand sign paper forms. With Ocho, everything is done online and takes under 10 minutes.
Step 4: Get an EIN for your solo 401k trust
Your solo 401k trust is its own entity. When you invest through your solo 401k, the investments belong to your solo 401k trust, not you. The same way you registered an EIN for your business, you’ll need to go through the application again and register one for your new solo 401k trust.
Note: You can skip this step with an Ocho Solo 401k. Everything is automated for you on the backend.
Step 5: Open bank and brokerage accounts for your solo 401k trust
Because your solo 401k is its own entity, it needs its own bank and brokerage accounts. For example, if you contribute $5,000 to your solo 401k, it gets put into your solo 401k bank account, which you can then pull money from to make investments through a brokerage account.
This part of the process complicates a lot of solo 401k owners if they’re required to open accounts with a 3rd party brokerage or bank. If you’re an Ocho Solo 401k user, you can also skip this part as well. Everything is taken for you automatically.
Once you’ve opened your solo 401k, all that’s left is to fund your account through a contribution. You could also choose to rollover assets from another retirement plan you have. Once your account is funded, you can start investing your solo 401k funds.