Can I use rental income to fund solo 401k? SEP-IRA?

Question

I love maxing out our tax-advantaged accounts (my 401k at work and Roth IRAs for my wife and myself).

Usually we have a few thousand dollars each year to invest after we max out these accounts (and it usually just goes into a taxable brokerage account where we use it to buy Berkshire Hathaway or Markel or some other stock that does not pay a dividend).

That extra money was actually how we ended up buying this duplex - thought it might be a good way to diversify our investments.

I was wondering if I could use net income from our duplex (assuming we have net income, and by net income I mean what we report to the IRS) to fund a solo 401k or some other kind of tax-advantaged plan?

I understand that these plans are for self-employed individuals or those running a side business of some kind.  Does running a rental property qualify as "self-employment"?

Note: I am not interested at all in using a retirement plan to BUY more properties...just to put money into it a tax-advantaged way and then using that money to buy stocks/ETFs.

Thanks!

David Romano · Answer

What you do is create a management company and charge out a fee to your rental properties. With this income, you then fund the solo 401k to effectively tax defer your earnings.

The guy above discussing tax rates doesn't know what he is talking about. It would only be applicable to capital gains and you are recaptured on most your depreciation. Also, any property investor would just 1031 exchange the property.

Good luck!

Kevin Merck · Answer

The guy was not wrong about the lower rate. He didn't say it the best way, but he meant that the income is not subject to self-employment tax.

Pixel Rogue · Answer

Since this would only ever be from the 'Employer' side for foreseeable future, would the contribution to the employee be limited to 25% (5k - expenses -50% self employment tax,) or ok to use net? How would contribution limits work?

Pixel Rogue · Answer

UPDATE: The above strategy is a thing... and many open up management companies for this purpose. Presume standard annual 401k/IRA are maxed. Husband and wife are both W2. 5k earned that year in rental income for discussion.Thoughts on the below plan? • Establish company specifically for rental management.• Over the course of the year new company will be paid $5k for services from rental income.• Schedule C shows $5k (and payments are shown as expense on rental side.)• 15.9% of $5k paid for Self Employment (apx. $800.00)   (note this would be less than ordinary income paid otherwise, plus 50% of SE tax is a deduction.)• $4,200 contributed to solo traditional 401, then converted to Roth. What other considerations are missing? How about IRA requirements, for instance to be a real estate professional you need to document x# of hours (which is nearly impossible to do w/a W2 job.) Contribution limits (presuming max is the number around 60k, and this wouldn't be close.) Are checks/receipts/proof of payments needed or would transfers be ok? I would likely open a dedicated bank account to receive payment from rental income, then contribute to solo 401k from this account.

Pixel Rogue · Answer

Resurrecting this post in the hopes the OP @John Doyle  or @David Romano might be around or others in a similar boat. As an independent contractor years back I was able to exceed traditional 401k limits w/super/megaroth. This was glorious, albeit limiting criteria. Since then the company which provided the solo 401k was acquired, rules changed so that now (in 2023) what companies offer this option? I'm also now a W2, not a 1099. Specific to the OP, we have a rental that may eek out profit by the end of the year. Passive income would no qualify...(note passive income S taxed as normal income...gets added to reportable income for that year) Do people (have you) actually set up a company to charge for management expenses? My wife and I do spend a fair amount time in the management...we do everything ourselves but landscaping. How can we take earnings and invest in a tax advantaged (ideally roth401k?) My understanding is that any 'source of income" can have its own retirement options. Note the standard 401k and IRA limits will be maxed..This needs to be AFTER TAX contributions that can then convert to Roth.Thank you for any insights

-pr--Respectfully ask not to be contacted directly by financial advisors seeking new clientele.

Tien Bui · Answer

thank you all, this is a good post

Michael Kuzy · Answer

Do you have to set up a separate management company?  Could you just pay the management fee to your Schedule C and avoid a new company?

David Romano · Answer

By the way - I loved the Sonics.... sigh.

Can I use rental income to fund solo 401k? SEP-IRA?

Most Popular Reply