I work as an independent contractor mostly though third-party agencies and get paid on a W-2 or 1099 basis depending on the project. Can I open a solo 401(k) and invest money in it from the W-2 income?
FPA member James B. Rawlings, CFP®, founder and managing principal of OakBridge Asset Management, LLC, said there are a few stipulations on what’s been called the solo 401(k) that need to be taken into consideration. “The first is that the income needs to come to your company and not someone else’s,” he said. “If you have your own company set up and are paying yourself through the W-2, then you could include that income in the calculation for solo 401(k) contributions. If it is another company that you work for and are receiving a W-2, then it is that company’s responsibility to set up any type of qualified plan they wish and you as an employee can choose whether or not you desire to participate.”
“The other consideration is that you cannot have any employees in your own company other than your spouse to be eligible for the solo 401(k),” Rawlings said. “So based on the limited information that you have given and assuming you are the only employee in your own company, you could set up a solo 401(k) on the 1099s that are paid to you (your company). But I am assuming that the W2 income you are receiving is from companies that are not yours and have more employees than just you and thus would not qualify for the solo 401(k) type of plan.”
Learn more about retirement plans for small business owners.