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Rolling over Traditional IRA funds to a Solo 401k when my spouse does not have earned self-employment income
QUESTION:
Can my spouse rollover an IRA to my Solo 401k if my spouse doesn’t work in my self-employed business?
RESPONSE:
In short: no because the spouse needs to work in the self-employed business in order to participate in the plan and rollover funds to the Solo 401k from another retirement account (e.g. former employer plan and/or non-Roth IRA).
First, please note that even though a solo 401(k) is a one-participant plan there are exceptions to that one-participant requirement including one for a spouse who is working in the business. For example, if there are two self-employed spouses both working in the same business (with non-owner/non-spouse full-time w-2 employees working for any business owned by such spouses), they can set up one Solo 401k plan and both participate in the same plan.
In order to demonstrate the spouse is working in the business, the spouse needs to report the spouse’s own earned self-employment income (e.g. separate Schedule C for each spouse, or for a self-employed business taxed as an S Corporation, a separate W-2 for each spouse, etc.).
Key Considerations for Spouses Participating in a Solo 401(k)
- Both spouses must work in the business sponsoring the solo 401(k) plan in order to participate, including reporting their own self-employment income:
- For a self-employed business taxed as an S-corp: each spouse receives their own w-2;
- For a self-employed business taxed as a Sole Proprietorship: each spouse files their own Schedule C on Form 1040;
- For a self-employed business taxed as a partnership: each spouse receives a K-1 with earned self-employment income reported on Line 14
- Each spouse needs to have a separate participant account to hold their solo 401(k) funds.
- Multiple accounts may be needed if contributing different sources (Roth, Pre-tax, and/or Voluntary After-tax).
- Contributions for each spouse are based on such spouse’s particular situation including such spouse’s self-employment compensation, age, whether such spouse makes contributions to another plan (e.g. “day job” 401k), etc.
- Domestic partners can be treated the same as spouses for participation.
