- While a solo 401k requires that you do not have any full-time W-2 employees in your business, there’s one exception: your spouse.
- Your spouse can be added to your solo 401k plan whether they act as an employee or an owner in the business.
- You and your spouse would both have your own individual contribution limits. For 2022, the solo 401k contribution limit is $61,000 ($67,500 if you’re over 50). Your household total contribution limit would be $122,000.
- All business structures are allowed to include their spouse. How they get included could differ slightly depending on what type of business entity you have.
The solo 401k plan requires that you must not have any full-time W-2 employees in your business that works over 1,000 hours per year. There is only one exception to this rule: Your spouse. Having your spouse work in your business can double your contribution limits for your household.
Here’s everything you need to know about including your spouse into your solo 401k plan.
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Reasons to include your spouse into your solo 401k plan
If you need help in your business, but still want to qualify for the many perks of a solo 401k.
Remember that to qualify for a solo 401k, you can’t have any full-time employees. But if your spouse is in a position to help you, they’re qualified to work as much as they want in your business, whether it’s part-time or full-time. And if they do, you would both qualify to contribute to a solo 401k.
You get to double the contribution limits for your household.
A solo 401k plan’s contribution limit is $61,000 ($67,500 if age 50+) for 2022 and $66,000 . It’s the highest out of any retirement account. If your spouse works in your business, you each have a contribution limit of $61,000, bringing your household total contribution limit to $122,000.
If your business makes a lot of money, a solo 401k can help you and your spouse save a bigger retirement nest egg faster and with less money earned compared to other retirement accounts available.
Employee or partner?
One of the most common questions around adding your spouse into your solo 401k is if they need to be a W-2 employee in order to qualify.
The short answer is that it doesn’t matter if they’re a W-2 employee or a partner in your business. In both situations, you and your spouse can both contribute to a solo 401k. However, note that they must earn compensation from the business. They cannot just be listed as an owner, but not actively work in the business.
The long answer is that how they contribute depends on what type of business structure you operate as.
What business structures are allowed?
Any business entity is allowed to include a spouse into their solo 401k, whether they act as an employee or as a partner in your business.
However, they each come with different options on HOW you include them into your plan.
Let’s go through each business entity and see how they differ:
If you are the only business owner of your sole proprietorship, then your spouse would be included as a W-2 employee in your business.
If you and your spouse are both owners of a partnership, then each spouse would receive a share of partnership income through a K-1(Form 1065).
For an LLC, it depends on whether your LLC is taxed as a sole proprietorship or as a corporation.
- For an LLC taxed as a sole proprietorship, then each spouse would receive a share of partnership income through a K-1(Form 1065).
- For an LLC taxed as a corporation, you and your spouse would both receive W-2 wages from your business.
For an S corporation, you and your spouse would both receive W-2 wages from your business.
For a C corporation, you and your spouse would both receive W-2 wages from your business.
What if your spouse stops working in the business?
If your spouse stops working in your business, they’ll still be able to keep their solo 401k plan. They’re not required to withdraw or rollover their funds. They can still leave it there and continue investing through the account. However, they cannot contribute new funds to the plan while they are not active as an employee in the business.
Should you have the same solo 401k or separate solo 401k plans?
Both are allowed.
A common misconception is that pooling the money together into a single solo 401k retirement account can help the money grow faster.
That is false, in most cases. The money will grow at the same rate whether it’s in one plan or two. It just depends on personal preference on how you want to organize and manage your accounts.
Having two accounts will require two separate fees for things like set up and management from your plan provider.
There is one instance, though, where pooling the money may make sense: If you and your spouse want to make a large investment together into something like a property. Pooling your capital together could make sense in this case.
But for any other investments (like stocks, mutual funds, ETFs, crypto, etc) it doesn’t make a difference whether you’re in the same plan or in separate plans.
Advantages of having two separate accounts
- You each can pick your own investment selections.
- If you and your spouse are different ages, it’s easier to determine who can draw from the account from qualified distributions at the eligible age of 59½.
- If you and your spouse are different ages, it’s easier to determine who has to take required minimum distributions once they reach the age of 70½.
- In the case of separation, it becomes easier to determine who owns what.
Including your spouse into your solo 401k plan can be a huge advantage. Your household solo 401k contribution limits essentially get doubled. You would both be able to contribute up to the maximum of $61,000 for 2022.
Your spouse qualifies for solo 401k contributions whether they act as an employee, or as a co-owner of the business. All business entities are qualified to add a spouse into a solo 401k.
You and your spouse can choose to contribute to the same solo 401k plan, or you could have separate accounts. Having separate accounts is the cleaner option, but you’ll have to pay twice for set up and management fees.
Having one plan allows you to pool your funds together and make a larger investment into something like a property.
Your spouse doesn’t have any time or income requirements. It doesn’t matter how much they make or how long (or little) they work in your business. As long as they receive employment income, they’re eligible to be added into the solo 401k.
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