Funding a solo 401k from rental income.

[Joseph Hammel]

Can I "pay myself" to manage my rentals 20.5 k on a sched C and write off the fee. I would pay the same income tax and add fica on the sched C. Goal is to fund a roth solo 401.

[Michael Plaks]

@Joseph Hammel

I wanted to avoid going too deep down this foxhole, but it seems unavoidable now.

A lot of that is due to confusing use of terminology. As @Dmitriy Fomichenko (who is a true 401k expert) stated, you can have an elective deferral of 100% of your SE compensation. The trick is the definition of SE compensation. It sounds like it is the same as your total business income, but it is not. It is actually defined as net profit MINUS half of you self-employment tax MINUS your own contribution. Which creates a crazy circular calculation that defies common sense, not unlike a lot of the other tax rules. Bottom line: if your business made $20k after deductions, you cannot redirect all $20k into your 401k, you can redirect a smaller amount.

I do not recommend the self-torture of trying to figure it out, but if you insist, go here and don't blame me: https://www.irs.gov/publicatio...

This is not all. A legitimate business needs to have business expenses. Your property management company will at least have the expenses of creating the company (I would strongly recommend creating an entity), bookkeeping, tax preparation and the 401k plan setup and management fees. In reality, you would need more, in order to look like a real business and not a sham. The IRS is still around, like it or not, and they are hiring and training a new army of auditors as we speak.

All of these factors combined add up to the same message I posted earlier: in order to fund your 401k with $20k, your business need to make significantly more than that number. And, as I also said, structuring multi-company setups takes more than a few tidbits from an online forum.