Overview
- Income contributed to a solo 401k must be active earned income subject to self-employment taxes.
- Eligible income includes business income, W-2 wages or salary that you pay yourself from the business, profit-sharing income, and tips and commissions.
- All contributed income must come from your business or self-employment under your solo 401k plan.
- W-2 income from a day job, or other unrelated employer income that is separate from your business or self-employment, cannot be contributed.
A solo 401k has a contribution limit of $69,000 for 2024. If you’re 50 years of age or older, you can contribute an additional $7,500 in catch up contributions.
Solo 401k contributions are broken down by employer and employee:
Employee contributions: You can contribute 100% of your compensation up to a maximum of $23,000 ($30,500 if age 50+).
Employer contributions: You can contribute 25% of your compensation if your business is incorporated, and approximate 20% if your business is not incorporated.
Compensation refers to your net adjusted self-employment earnings or W-2 income.
Eligible income for solo 401k contributions
A common misconception is that all types of ordinary income can be contributed to a solo 401k. Ordinary income is any income taxed at ordinary income tax rates, examples including W-2 wages, business income, royalties, short-term capital gains, or retirement plan distributions.
Income contributed to a solo 401k must be active earned income subject to self-employment taxes. Only income from your business or self-employment can be contributed. W-2 income from a day job or other unrelated employer income, that is separate from your business or self-employment cannot be contributed.
These include:
- Business income
- W-2 wages or salary you pay yourself
- Profit-sharing income
- Tips, bonuses and commissions on top of your salary
What’s not allowed?
Passive (unearned) income and investment gains are not allowed to be contributed to a solo 401k.
These include:
- Income from rental properties
- Royalties
- Income from limited partnerships
- Interest from a bank account, CD, or bond
- Dividends
- Capital gains
- Retirement plan distributions
- Prize money
- Gifts, allowances or inheritances
Rental property income vs management income
You cannot contribute rental income into a solo 401k because it’s considered passive unearned income and is not subject to self-employment taxes.
However, if you manage properties for others and earn a percentage of rental payments as your income, this would be considered earned income and can be contributed to a solo 401k.
If you only manage properties you own, you can also choose to pay yourself a management fee or a reasonable salary as the property manager and use that income to make contributions into a solo 401k.
Rental income within a solo 401k
While you can’t contribute rental income into a solo 401k, self-directed solo 401k plans like the Carry Solo 401k, allow you to invest in alternative assets like rental properties through your plan.
All profits, including rental payments and capital gains, from your solo 401k investments are tax-deferred (in a pre-tax solo 401k) or tax-free (in a Roth solo 401k). For example, if a tenant pays you rent, you don’t have to pay any ordinary income taxes on the rental income. If you sell your property for a profit, 100% of it can go straight back into your solo 401k without any capital gains taxes owed.
Investment gains vs investment fund management fees
Similar to rental income, you cannot contribute your own investment profits into a solo 401k as it’s considered passive and not subject to self-employment taxes.
However, if you manage investments for other people and earn management fees, it would be eligible for solo 401k contributions. If you manage your own investments, you can also choose to pay yourself a management fee or wage and contribute that income to a solo 401k.
