Solo401k contributions are one of the plan’s greatest advantages. Read on for a question we received that includes various aspects of Solo401k contributions, self-employment, and real estate investing.
Establishing self-employment for the Solo 401k
I would like to buy and hold a duplex or triplex with property management in place within a self-directed IRA (SDIRA). But 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.
One way I can have self-employment for the Solo 401k is through contract work as a licensed occupational therapist on a 1099. 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.
Questions on Solo401k contributions
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 my self-employed income contribution to a Solo 401k. I lose some pre-tax savings on my W2 income, but I gain the no-UBTI advantages of the Solo 401k. I can conduct the note investing and any future “buy and hold” investments through the Solo 401k and avoid UBTI.
This may be a CPA issue, but is my thinking accurate so far?
And is there a minimum amount of self-employed income necessary to establish and 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?
Answering the question
First of all, yes, the maximum employee elective deferral limit is per person, not per plan. 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.
Second, there is no minimum amount of self-employed income necessary to establish and maintain the Solo 401k. As long as you have the self-employment activity and intent to generate profits, you can maintain the Solo 401k. However, in order for your plan to retain its qualified status, substantial contributions must be made occasionally.
Third, you can do annual rollovers from an IRA into Solo 401k. Keep in mind that the IRS does not allow Roth IRAs to be rolled over into any 401ks, including the Solo.
Lastly, the Roth Solo 401k is a great option that is included with your Solo 401k by Sense Financial. You can elect to make either pre-tax or Roth Solo401k contributions into your plan. Pre-tax contributions are tax-deductible; they lower your taxable income for the year. Roth Solo401k contributions do not, but distributions from those funds will be tax-free.