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Which income can count towards solo 401(k)?

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  • Which income can count towards solo 401(k)?

    Not sure if anyone here can answer, but hoping for some insight on what income is eligible to count towards a solo 401(k) plan.


    I currently work at a university on faculty as my primary source of income (W2) and contribute to a 403(b) plan.

    I consult on the side for 1099 income (this year ~$30k, next year ~$75k).

    I also receive patent royalties (about $5k in cash + $20k in stock) from my former university (1099).


    I just opened a solo401(K) for my consulting income. The question is can I also count my patent royalties towards the solo401(k)? Section 401(c) does classify patent royalties as earned income and is eligible to contribute to a retirement plan. I would be very keen to be able to contribute, since it would greatly raise my maximum "employer" contribution to the solo401(k).


    The other question would be can I open a second solo401(K) for my wife, who is a resident and received her own patent royalties in the form of shares worth $10k (no cash)?

  • #2
    Contributions to a one-participant 401k must be based on earned income.

    Royalties can be considered earned income if:

    • earned by an individual in connection with any publication of the work of the individual, and that portion of any honorarium which is received for services rendered.

    • received as part of an individual’s trade or business.

    I would think that a patent by definition is a publication of the work of the individual. Which is good, because it might be harder to establish the nexus between the patent royalties and your trade or business.

    A couple of things to keep in mind when having both a 403b and a one-participant 401k for a business which by definition is >= 50% owned by you.

    There is one employee deferral limit (2017 = $18K and 2018 = $18.5K) for all qualified plans (401k, 403b, SIMPLE IRA and SARSEP IRA). Your 2017 one-participant 401k employee deferral is limited to $18K - your 403b employee deferral.

    There is a separate annual addition limit (2017 = $54K and 2018 = $55.5K) for all employee + employer contributions to each unaffiliated employer.

    Unfortunately, in these circumstance a 403b plan is considered controlled by both the employer and the participant. This means for purposes of the annual addition limit the 403b contributions are aggregated with both the employer's other plans and with the one-participant 401k plan.

    Your 403b employee + employer contributions are aggregated for the annual addition limit with any other plans of your employer. Your 403b employee + employer contributions are also aggregated with the employee + employer contributions of the one-participant 401k plan.

    Now it doesn't seem like in your current circumstances, that this presents a problem, but circumstances change.

    I'm not entirely sure about your wife's situation. However, I still believe the shares constitute earned income. This would make her eligible to adopt an employer retirement plan. While she can not contribute the shares to a one-participant, but as a sole proprietor any other cash (including from a spouse) could be used to make a contribution. I think she would be required to use the FMV of the shares on the date of issuance as the income amount.

    This sounds like it requires a good CPA.