Can My Spouse Participate in My Solo 401(k)?

Author: Siân Killingsworth / 10 Dec 2020 / Business

One of the benefits of a Solo 401(k) is that your spouse can also participate in the plan. If you both take taxable income from the same sole proprietorship, your spouse can make equal contributions.

A Solo 401(k) is designed for a business owner with NO employees. However, you may add a spouse to your plan as an exception to the rule. You may also employ:

• 1099 contractors
• Minors under 21
• Union workers
• Nonresident aliens, and
• Part-time workers who put in less than 1,000 hours per year

If you plan to hire full-time W2 employees, you will need to stop making contributions and rollover your self-directed Solo 401(k) to a self-directed IRA or small business 401k within a year.

What Is the Benefit of Adding a Spouse to a Solo 401(k)?

A married couple with a Solo 401(k) can contribute a maximum of $114,000 per year for retirement as both employer and employees. If you and your spouse are over 50 years of age, total contributions can reach $127,000. Once the plan reaches $250,000 or more in assets, Form 5500-SF will need to be submitted to the IRS.

How to Open a Solo 401(k)

Starting a Solo 401(k) online with Ubiquity takes only a few minutes. To get started, you’ll need an Employer Identification Number. You can choose your own investments or work with a broker of choice to select mutual funds, index funds, ETFs, individual stocks and bonds, or real estate investments.

Ubiquity handles all the day-to-day accounting and management for a low monthly fee, while you focus on growing your retirement nest egg. You can open your account at any time, but you’ll need to file the paperwork by December 31 to make it count for this year. Any contributions made until April of next year can be used to reduce tax liability for the year.

How to Include Your Spouse in Your Solo 401(k)

If you’re a sole proprietorship, your spouse will receive a W2 as an “employee.” This solution is best if the spouse has minimal duties in the business.

You can also choose to file as a partnership, where each partner receives a K-1 (Form 1065). The partnership bypasses income taxes, passing profits and losses onto each partner. The IRS views this structure as ideal if both partners contribute materially to the business.

A Qualified Joint Venture may be possible if both spouses work and contribute materially to the business and file a joint tax return. Each spouse reports income gains, losses, deductions, and credits separately on Form 1040 Schedule C.

Spouses can also form LLCs, and C or S corporations.

If you have any additional questions about starting a new Solo 401(k) or adding a spouse to an existing Solo 401(k), don’t hesitate to contact Ubiquity.