High contributions, plenty of available flexibility and freedom, and plenty of opportunity for growth. Many people know these benefits of a Self Directed Solo 401k.
They’re convinced that it might be a good idea for their own retirement portfolio. But how many people actually qualify for a Self Directed Solo 401k? That’s a different question altogether.
The truth is, the “recipe” for someone who qualifies for this unique type of retirement account is very simple…but with it does come with a few complications along the way. But if you have some suspicions that this type of retirement account might not only be right for you, but may in fact be designed with people like you in mind, keep reading to find out if you might qualify to use one of these powerful retirement vehicles:
Understanding the Self Directed Solo 401k
The first key to understanding this type of retirement account? Simple. As the IRS says:
“The one-participant 401(k) plan isn’t a new type of 401(k) plan. It’s a traditional 401(k) plan covering a business owner with no employees, or that person and his or her spouse. These plans have the same rules and requirements as any other 401(k) plan.”
If you know all about 401(k) plans, then you’ve got the basics of the Self Directed Solo 401k: they’re very similar. One obvious difference? Most “standard” 401(k) plans typically come with companies with multiple employees. Running a “solo” version of the same thing includes a few different requirements.
Determining Your Eligibility
Without your eligibility, there’s little point in researching the Self Directed Solo 401k. Fortunately, the eligibility requirements are easy to understand. There are two basic requirements that you’ll absolutely have to meet if you want to set up one of these accounts for yourself:
- First, there needs to be the presence of some sort of self-employment. An easy way to measure this is simply to ask yourself if you run a business or enterprise that generates income for yourself. If so, that would certainly qualify as the activity of self-employment.
- Second, you can’t have any full-time employees, although the one exception is your spouse. Essentially, the Self Directed Solo 401k is built for someone who’s “on their own” and needs a powerful retirement vehicle with a high capacity for investment contributions.
One important requirement to consider is that you should not be employed by a business owned by you or your spouse—what this retirement account looks for is self-employment. The terms sound the same, but there is a stark difference.
“But I do pay some people. Can I still utilize this kind of account?”
Just because your business pays people doesn’t necessarily mean that you’re not eligible for a Self Directed Solo 401k. You can still employ part-time employees and independent contractors in your business, which means that if you’ve been operating that way in the past, you won’t have to change your business behavior in order to maintain eligibility for this kind of retirement account. That’s good news for anyone who runs a business that depends somewhat on other people (such as independent contractors), but doesn’t have full-time employees.
If you do employ anyone full-time, however, then the circumstances change. In that event, you won’t be eligible for a Solo 401(k), as you’re no longer considered a “solo” operation. You can still set up retirement plans, but you’ll likely have to set up a plan for the entire company.
If you want to learn more about these retirement accounts, you can read up on them here at AmericanIRA.com. Additionally, feel free to call us at 828-257-4949 to learn about retirement options like the one you just read about.