It was a pleasure to speak with you last week regarding SDIRA’s and REI. I plan to follow your advice to increase my savings for startup capital by opening a traditional IRA and rolling over my old 401k. Hopefully, within the next 12 months or so, I should have startup capital in the area of 15K. Rolling these monies into an SDIRA, I plan then to pursue either mortgage notes and/or tax liens within the SDIRA to build more capital.
Once more capital is available, I would like to buy and hold a duplex or triplex with property management in place within the SDIRA. This is where I start to question the SDIRA. Because of my probably slow-ish plan for building capital, I will most likely need to finance the multifamily buy and hold. I know that UBTI is an issue in an SDIRA, however: this is avoided in a Solo 401k. Aside from my other ideas for developing self-employment opportunities as a licensed occupational therapist (which require its own capital and significant time), I always have the opportunity to do contract work as a therapist on a 1099 throughout the summer months. This won’t be a huge money maker for me (maybe a few thousand per summer), however: it is a clear (and relatively easy) way to “go into business” for myself and get the solo 401k established.
However with Solo401k contributions, I understand that the IRS considers elective deferrals into a 401k by the person not the plan. So, if I am contributing to a 401k at my w2 employment (which I am), the total that I can contribute to any 401k in a given year (solo or employer-based) is capped at $17500 for 2014. So this raises some other thoughts: let’s say I back down my w2-based 401k contribution to allow for the self-employed income contribution to a solo 401k (I would say that the max would be 4K annually). I lose some pre-tax savings on my w2 income, however: I gain the no-UBTI advantages of a solo 401k. On the other hand, I could do VERY MINIMAL contract hours over the summer (maybe just enough to cover the annual costs of setting up and maintaining the solo 401k…a few hundred bucks, plus or minus), just to get the solo 401K established and then annually roll my traditional IRA contributions into the solo 401K. I would then conduct the note investing and any future “buy and hold” investments through the solo 401k and avoid UBTI. Is my thinking correct with this?
I know this is a CPA issue, but I think my thinking is accurate: minimizing the amount of self-employment income that I can create (a few hundred bucks), which will simply allow me to establish the solo 401k, will still allow me to max out the benefit of pre-tax contributions from my w2 income (which will always be significantly higher than any self-employed income I can manage to create). For the near future, I don’t see that I will make enough in self-employment income to benefit in any substantial way from the non-elective employer contribution (25% of self-employed compensation) available with the solo 401k. With my minimal self-employment earnings, the non-elective employer contribution would be negligible. Ultimately, I am interested in finding a retirement savings structure which will allow me to avoid UBTI when I am ready to go into buy and hold investing while not maintaining my contribution level to my w2-based 401k contribution.
Is there a minimum amount of self-employed income necessary to establish/ maintain a solo 401K…can a few hundred dollars a year on a 1099 be adequate? Annual rollovers from an IRA into a solo 401k are allowed, correct? Would a Roth solo 401k have a role here?
Solo401k Contributions, Real Estate Investing and More… Answer:
The employee elective deferrals are subject to the same limit on both, the Solo 401k and your employer 401k. So, for example, if you were contributing $10,000 at your employer 401k, then you can contribute up to $7,500 as salary deferral into your Solo 401k. You can split Solo401k contributions any way you wish.
There is no minimum amount – as long as you have the self-employment activity and intend generating profits you can maintain Solo 401k. However, in order for your plan to retain its Qualified-Status substantial contributions must be made occasionally.
Yes, you can do annual rollovers from an IRA into Solo 401k.
You can elect to make either pre-tax or after tax (Roth) Solo401k contributions into your plan. In first case they would be tax-deductible. And in second instance they distributions would be tax-free.