Many small business owners and self-employed individuals struggle to know where to get started with retirement savings through their businesses. A Solo(k) is a type of self-employed retirement plan and one viable option, as it gives you the flexibility to save more for retirement. With this type of account, you can contribute pre-tax or Roth dollars that grow through compound earnings tax-free until you’re ready for retirement. 

If this sounds like a good plan, you might be wondering if you qualify for a Solo(k). Small business owners and self-employed individuals may meet the criteria, but what are the exact qualifications for a Solo 401(k)?

Here’s what you need to know to decide whether this is the right move for you. 

Who Qualifies for a Solo 401(k)?

Before diving into the rules and limitations of a Solo(k), we must first cover who qualifies for this specific type of retirement savings account. Most often, self-employed individuals who have no full-time employees apart from themselves opt for this type of retirement savings plan. 

However, that’s not the only time you can use a Solo(k). Spouses working in the business, for example, can qualify for Solo(k) accounts. 

Having employees does not automatically make you ineligible for a Solo(k). Business owners who have part-time employees or independent contractors can still have a Solo(k) if their employees do not qualify for the plan. Eligibility is based on hours worked, which is over 1,000 hours per year or over 500 hours for 2 consecutive years. For example, if your part-time employee works 1,000 hours in a year (which is about 19 hours per week), they will qualify. 

You must understand that you cannot sidestep these requirements by having employees on call or letting them go only to rehire them later. When you eventually bring them back, they’ll likely be eligible for retirement savings accounts. 

Once you have employees who qualify for a retirement plan, you would have to forgo the Solo(k) in favor of a more traditional 401(k) that can include these workers.

Rules and Limitations of a Solo 401(k)

For business owners interested in navigating through a Solo(k), it is important to note the plan’s generous contribution limits. For 2024, employees can contribute up to $23,000 before considering their employer contribution. If you want to make the biggest impact for your golden years, max out these contributions combined with employer matching. 

Employers can contribute up to 25 percent of the total income or the total wages of all employees. This is a significant contribution that can really pad your retirement savings account, so make the most of self-employed or small business income with matching. For 2024, the annual contribution limit is $69,000, which you must stay under. 

You may be able to qualify for catch-up contributions if you’re over the age of 50, too. Each year, you can contribute an extra $7,500 to your Solo(k) to make up for the leaner years earlier in your career. 

To set up a Solo(k), the general rule of thumb is that you should set up your plan document before the end of the calendar year on December 31. Employee contributions are generally due at this time; however, self-employed individuals can make an election before the end of the year to wait until their income has been determined. This is generally the due date of your company tax returns.

Employer contributions can be made until the tax filing deadline for the year. A Solo(k) allows you to use your employer’s tax filing deadline to make employer contributions. 

Frequently Asked Questions about Solo 401(k) Qualifications

While these rules and limitations may seem fairly straightforward, many people still have some lingering questions about who qualifies for a Solo(k). Here’s what you need to know. 

Can I have a Solo(k) if I also have a full-time job with another employer?  

Yes, you may have a Solo 401(k) even if you have another full-time job outside of self-employment for the year. 

The only thing to keep in mind here is that the 401(k) contribution limit combines 401(k) contributions across all companies, while employer contribution limits are based upon compensation earned from each unrelated company. If you’re participating in more than one company’s 401(k), it will be your responsibility to make sure you don’t go over the 401(k) calendar limit. 

Can I have a Solo 401(k) and another retirement plan such as an IRA or SEP-IRA?

Yes, you may have both a Solo(k) and another type of retirement account. However, for your own solo business, it’s generally best to compare a Solo 401(k) vs SEP-IRA and pick one. You can have a Solo(k) for your own business and still participate in an IRA at another place of employment. 

What happens if I hire a full-time employee in the future? 

If you hire a full-time employee to work in your business, then they are likely eligible for your retirement savings plan. Once this occurs, then you no longer qualify for a Solo(k) and will need to transition to a regular 401(k) to include your new full-time employee. 

How to Get Started with a Solo 401(k)

Creating a Solo 401(k) is easy and can be done from the comfort of your office. Using Retire4one, it takes minimal effort to open your account, select your investments, and fund your Solo(k). Managing your retirement savings plan has never been easier! 

Retire4one allows you to set up a Solo(k) with ease, taking many people just three to five minutes to get the help they need. You set up a single account, we handle the plan documents, and you can start picking and choosing mutual funds through our Voya partnership – all from our site for your convenience. 

Are you ready to start saving more for retirement with a Solo(k) for your small business? Get started now or reach out to Retire4one and we’ll guide you through every step of the way!