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How does a change to my self-employed business entity type impact my Solo 401k?
If you operate your business as a sole proprietor, independent contractor, partnership, or through a limited liability company (LLC) or an S-corporation, you qualify to open a Solo 401k retirement savings account provided that no non-owner/non-spouse full-time w-2 employees are working for any business owned by you or a spouse (if any).
Our Solo 401k plan allows you to make substantial tax-deductible contributions for retirement as well as take advantage of the other benefits of our self-directed Solo 401k plan including investing in alternative investments, Roth/Mega Backdoor Roth Solo 401k contributions, Solo 401k participant loans, etc.
A common question we receive is whether you can change your business legal entity type without impacting an existing Solo 401k. The good news is that yes, you certainly can change your business structure without affecting your ability to keep contributing to a Solo 401k.
Changes to Business Structure and Solo 401k Eligibility
Possible changes to your self-employed business structure may include the following:
- Convert your sole proprietorship to a single-member LLC or S-corporation
- Transition your multi-member partnership to a multi-member LLC
- Switch your LLC or partnership from one state to being organized in another state
When one self-employed business is reorganized, the Solo 401k plan documents are simply updated to reflect the new business entity name and tax ID number (as applicable).
It is important to note that changing the business entity will only impact the Solo 401k plan documents and does not impact the 401k accounts or investments.
To explain further:
The Solo 401k accounts themselves remain untouched when the plan documents are updated. For example, if you originally set up ABC Ventures LLC as the plan sponsor of your Solo 401k, the actual 401k accounts would have been established at a financial institution in the name of the Solo 401k (ABC Ventures Trust).
If ABC Ventures LLC then converts to a corporation (ABC Ventures Inc.) taxed as an S-corporation, those underlying 401k accounts do not need to be closed, transferred, or altered in any way. Rather, the Solo 401k plan documents simply need to be updated to reflect that ABC Ventures Inc. is now listed as the sponsoring employer of that 401k plan going forward.
To illustrate with a hypothetical scenario:
John established Grey Enterprises LLC in 2015 and opened a Solo 401k plan that same year. The 401k accounts were created at Schwab. Over the next six years, John contributed $40,000 to traditional 401k accounts and his Roth 401k, which grew through investments to a total balance of $65,000.
In 2022, John opted to dissolve Grey Enterprises LLC and operate the business instead as a sole proprietorship under his name, John Smith. His retirement savings accounts and investment activity can remain unchanged at Schwab. He simply requests an updated Solo 401k plan document from his 401k provider listing him (John Smith as sole proprietor) as the sponsoring employer. His savings balance and investments continue uninterrupted.
The key is informing the Solo 401k provider about the change in business structure so they can update the supporting documents accordingly. But this transition of entity type alone will not mandate creating new accounts, liquidating investments, or starting over accumulating retirement funds.
