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How to Qualify for a Solo 401k Account

How to Qualify for a Solo 401k Account

Opening a Solo 401k account requires two elements of qualification:

  1. You must own a business
  2. Your business must have zero employees (employees defined as those who work for you more than 1000 hours per year and receive W2 wages)

If you already qualify, that’s excellent! Everyone else: read on because this is a core issue that affects multiple facets of your financial future and freedom.

The Solo 401k is designed for the modern investor who wants investment freedom in the “Information Era.” Here are a few things about the modern investor:

The modern investor owns a small business

In the Information Era, business ownership is more common and much different than in the Industrial Era. Business ownership can be as simple as doing a few extra things on the side. Even full-time employees can separately be business owners too.

Business ownership can be structured as:

  • C or S Corporation: Most complicated; Requires corporate tax returns.
  • LLC Partnership: Requires partnership tax return and K-1 forms for each partner)
  • Single-Member LLC: Simple; Requires no tax return; Very similar to sole proprietor)
  • Sole Proprietorship: Simplest and most common form of business ownership on the planet—It is a person who does work on his/her own, such as a freelancer, independent contractor, or “Solopreneur.”

Sole Proprietorship is most common because it is simply a person working for him- or herself. It requires no filings, no government stamps, no extra tax returns, and that’s why it’s the most popular form of business ownership in existence.

Not owning a small business today is a big mistake

Many people today don’t own a business because of certain misconceptions that used to be true in the Industrial Era.

For instance, owning a business used to involve substantial capital investment, risk, and time commitment. This is no longer the case. Today, downloading and using an “app” on your smartphone can make you a business owner.

Becoming a business owner can, in many cases, immediately lower your taxes by making some of your expenses tax-deductible. The biggest lifetime expenses of an American is taxes, and most people overpay their taxes.

The modern small business owner is lean and efficient

While employment offered stability for factory workers and factory owners in the Industrial Era, employment has many disadvantages in the modern Information Era.

Disadvantages of employment to the worker now include:

  • Employment is becoming harder and harder to find
  • Over 70% of college graduates today will not work in their field of study
  • Employees get less tax deductions
  • Employees usually have their retirement money locked up in the stock market, leaving their financial future at high risk
  • Employees in the Information Era are less likely to have career stability because their employers are less lean and efficient than modern small businesses

Disadvantages of employment to the business owner now include:

  • It’s harder to attract great staff because with employment more money goes to taxes and less goes to the staff’s take-home paycheck
  • It’s nearly impossible to provide powerful retirement and investment tools to employees
  • It’s more difficult to compete with lean and efficient companies and respond to changes in the marketplace with employees

The modern small business owner hires independent contractors and vendors instead of employees (if needed)

Many small businesses work just fine without hiring others. For example, Bob does some consulting and it’s just him—he’s a Solopreneur.

Millions of business owners thrive as Solopreneurs.

For those who do need to hire staff, the advantages of independent contractors include:

  • Your staff member(s) can take home more pay by taking advantage of their tax deductions
  • You can hire contractors on a project basis and have the contract expire at the end of the project (a project can last months, weeks, or even days)
    • If you don’t want a certain contractor or vendor to continue doing work for you, simply don’t renew their contract
    • No need for getting sued or paying unemployment
  • You can quickly and easily adapt to the changing marketplace, increasing your chances of keeping up with and beating your competition
  • You can take advantage of your own Solo 401k account
  • Your contractors and vendors can each take advantage of their own Solo 401k account

Frequently Asked Questions

Can I own a business on the side of the W2 job I work? Yes.

Can my spouse or I own a business that has full time W2 employees? No. If you or your spouse own a business that has W2 employees who work more than 1000 per year, you do not qualify for a Solo 401k account and the Checkbook IRA is the best type of Self-Directed retirement account for you.

Can my spouse participate in my Solo 401k? If your spouse performs services for the business and receives compensation, s/he can participate in the Solo 401k and get his/her own set of annual contributions, rollovers, and line of credit.

How much do I have to contribute to the Solo 401k each year? There must be intent to earn revenue and make contributions to the Solo 401k, but there are no minimum annual amounts. The IRS does not discriminate against business owners with a required minimum business success, and today it’s easy to have some amount of legitimate business activity each year.

What can I do to start a business quickly and easily? Contact us for a free report that outlines what millions of Americans are doing to take advantage of simple, efficient business ownership in the modern Information Era.