- While a solo 401k requires that you do not have any employees, including part-time employees who are at least 21 years of age, and have worked over 500 hours per year for 3 consecutive 12-month periods, there’s one exception: your spouse.
- Your spouse can be added to your solo 401k plan whether they act as a W-2 employee, or an owner in the business.
- You and your spouse would both have your own individual contribution limits, allowing you to double your solo 401k annual contribution limits for your household.
- For 2023, the solo 401k contribution limit is $66,000 ($73,500 if you’re over 50). Your household total contribution limit would be $132,000 or $147,000 if you’ll both be at least 50 years of age by December 31, 2023.
A solo 401k plan requires that you must not have any employees, including part-time employees who are at least 21 years of age, and have worked over 500 hours per year for 3 consecutive 12-month periods. There is only one exception to this rule, your spouse. Having your spouse work in your business makes them eligible to be added to your solo 401k plan, and can double your solo 401k contribution limits for your household.
Here’s how it works.
Before we begin, download the Solo 401k Handbook: Everything you need to know about the solo 401k in a handy PDF format.
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 $66,000 ($73,500 if age 50+) for 2023 . It’s the highest out of any retirement account. If your spouse works in your business, you each have a contribution limit of $66,000. 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.
How to add your spouse to your solo 401k
Technically, your spouse has the option to open their own solo 401k plan completely separate from yours. However, this would mean double the maintenance and administrative fees that your plan provider may charge each year.
Instead, the better and more popular option is to have both participants listed under the same plan, but with separate bank and brokerage accounts. While you’ll both be contributing to one plan, all contributions, funds, and investments are kept separate from one other, and should never be commingled.
For example, here’s what a typical solo 401k plan structure looks like WITHOUT a spouse included:
When you open a solo 401k, you get 3 separate accounts:
- Roth (post-tax)
- Optional after-tax
Traditional pre-tax contributions go into your pre-tax account, Roth post-tax contributions go into your Roth account, and the optional after tax account is used to perform the mega backdoor Roth.
When your spouse gets added to your solo 401k, they get their own separate accounts separate from yours.
You each get your own separate bank and brokerage accounts, organized by contribution type, and your investments and contributions are kept separate from each other, even though they’re housed under the one plan. In this sense, they’re treated as two separate plans.
Operational and organizational rules
Having separate accounts allows participants of the plan to know who contributed what, who invested in what, and who rolled over how much.
- Separate contribution limits: You each have your own contribution limits, and contributions for one participant does not affect the limits for other participants. For 2023, you each can contribute up to $66,000 ($73,500 if age 50+) of compensation.
- Separate investments: You can each make your own investment decisions and invest in different assets.
- Separate funds and assets: All funds and investments must be kept separate for each participant. Your funds and assets should never commingle with your spouse’s.
Do I need to create a new solo 401k in order to add my spouse?
No, adding your spouse to an existing solo 401k plan does not require creating a brand new plan. Your plan provider simply needs to make a plan amendment to add your spouse. Once added, and separate bank and brokerage accounts are created for your spouse, they can start making contributions, performing rollovers, and investing their funds into assets.
How co-investing works
How does it work when you and your spouse want to make a single large investment together?
You and your spouse could decide to pool your funds together to make a single large investment in the name of the plan. While the investment is owned by the plan, and not you and your spouse individually, your investment stakes get recorded at the plan level.
Here’s what that means.
Let’s pretend that you and your spouse want to buy an investment property together that costs $100,000. You decide to invest $70,000 and your spouse agrees to invest $30,000. The money to purchase the property would get transferred to the escrow company from each person’s respective accounts. You would transfer $70,000 and your spouse would transfer $30,000. This puts you at 70% ownership and your spouse at 30% ownership. This 70:30 ownership ratio gets recorded at the plan level, but not on the title itself. The title of the property belongs to the solo 401k plan trust.
All income and expenses can be administered through one of the two participants’ accounts and reconciled at the end of the tax year. For example, all rental income or expenses incurred could be accepted and paid through one designated account. This prevents your tenants from having to write two separate checks, one for 70% of the amount, and the other for 30% of the amount.
The net funds would need to be reconciled between the two accounts at least on an annual basis. For example, if the rental property makes $10,000 in net income for the year, $7,000 would go to your account, and $3,000 would go to your spouse’s account.
For your spouse to be eligible to be added to the plan, they must actively work for the business, at least on a part-time basis, and not be the owner of any other business that has W-2 employees, per controlled group rules.
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 or a partner in order to be eligible.
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 and can only contribute to the plan what they earn each year.
The longer answer is that whether they’re added as a W-2 employee or a partner largly 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 can 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, 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.
S corporation and C corporation
For an S corporation and 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 and can continue investing through the account. However, they cannot contribute new funds to the plan while they are not actively involved in the operations of the business.
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 $66,000 for 2023.
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.