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If I am both the employee and employer of my own S corporation, am I eligible to open a Solo 401k?
This is a common question for self-employed individuals who have set up an S-corporation for their business.
The short answer is yes, as the owner of an S-corp you can open a Solo 401k even though you are both the employer and employee.
The key requirements are that you have earned income reported on your W-2 from the S-corp, and you have no other full-time W-2 employees working for the business. As long as it is just you as the only employee, you can sponsor a Solo 401k plan for yourself through your S-corp.
The IRS refers to Solo 401k plans as “one-participant plans” and uses an S-corp owner as an example of who can establish this type of 401k. So even though you hold both roles in the business, you can contribute to a Solo 401k as the employee via elective deferrals, and your S-corp can also make profit-sharing contributions as the employer. This allows you to maximize retirement contributions as a self-employed individual.
In summary, being both the owner and worker of your S-corporation does not prevent you from opening a Solo 401k plan and taking advantage of the higher contribution limits these plans offer.
Steps to Open a Solo 401k
Here are the steps to open a Solo 401k plan and enjoy the benefits of higher contribution limits and greater investment flexibility with your self-directed Solo 401k plan:
- Work with a provider to establish a customized Solo 401k plan document that is IRS-approved.
- Open a bank or brokerage account in the name of the Solo 401k trust. This will be used to hold contributions and make investments.
- Fund the Solo 401k by making contributions and/or rolling over funds from existing retirement accounts like IRAs.
- Begin investing the Solo 401k funds into any investments you choose, including alternative investments by writing checks or wiring funds from the 401k checking/brokerage account.
- Make ongoing contributions to the Solo 401k as the business owner and employee.
