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.
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.
It is your rental business so it is up to you who manages your properties and how much you pay, but I would suggest that you discuss this strategy with your CPA to ensure that you are fully understand all the numbers.
It is your rental business so it is up to you who manages your properties and how much you pay, but I would suggest that you discuss this strategy with your CPA to ensure that you are fully understand all the numbers.
Hey I've asked my CPA and I've even called a couple of CPAs and I can't find a good answer to this question. I know there are some experts in this particular type of scenario funding a 401k. I'll wait for them to jump in.
Talk to a CPA (which I am not)... you could do a 401(k), but 401(k)'s have a lot of rules and are fairly expensive to set-up and administer unless you already have one set-up for your business. If I had to guess a 401(k) would be more expensive and onerous than the taxes you would save. I suggest SIMPLE IRA for a small business. The rules are less complex, there aren't any fees (at least at Schwab), and more tailored for small businesses; however it doesn't allow for quite as much in contributions ($14k in 2022).
Talk to a CPA (which I am not)... you could do a 401(k), but 401(k)'s have a lot of rules and are fairly expensive to set-up and administer unless you already have one set-up for your business. If I had to guess a 401(k) would be more expensive and onerous than the taxes you would save. I suggest SIMPLE IRA for a small business. The rules are less complex, there aren't any fees (at least at Schwab), and more tailored for small businesses; however it doesn't allow for quite as much in contributions ($14k in 2022).
Talk to a CPA (which I am not)... you could do a 401(k), but 401(k)'s have a lot of rules and are fairly expensive to set-up and administer unless you already have one set-up for your business. If I had to guess a 401(k) would be more expensive and onerous than the taxes you would save. I suggest SIMPLE IRA for a small business. The rules are less complex, there aren't any fees (at least at Schwab), and more tailored for small businesses; however it doesn't allow for quite as much in contributions ($14k in 2022).
I do not think that is a good idea.
you paid Income Tax and FICA based on $20.5K on schedule C, your net income probably only left $15K (15.3% self-Employee tax + 10%+ Income tax), and you can only contribute 20% of your net income as "Employee" to 401K, that is only $3000. even you can contribute another 20% as "Employer" contribution to 401K, then you need to maintain 2 separate 401K accounts.
Also IRS may not allow to convert the passive income to the Active income just transferring the rental Income from Schedule E to Schedule C, you'd better to have a LLC as the management.
In theory, it's possible. In practice, it is all case by case.
One of the first hurdles is the economic substance of the setup. Management fee is typically around 10% of the gross rent. To generate $20k in management fees, you need $200k in rents. Are you there?
Next, you cannot redirect 100% of your income to a retirement account, so your numbers need to be a lot higher. And so on...
In theory, it's possible. In practice, it is all case by case.
One of the first hurdles is the economic substance of the setup. Management fee is typically around 10% of the gross rent. To generate $20k in management fees, you need $200k in rents. Are you there?
Next, you cannot redirect 100% of your income to a retirement account, so your numbers need to be a lot higher. And so on...
800k plus
secondly with a solo 401k you can set it up so it's 100% match up to $20,500
With Solo 401k there are two way to contribute: elective deferrals (which is $20,500 for this year) + profit sharing of potentially another $40K, but it is not a match but rather based on the percentage of your net SE income. Here is a link to the IRS website for reference:
https://www.irs.gov/retirement...
Another great resource to learn will about this topic be this discussion on the forum:
With Solo 401k there are two way to contribute: elective deferrals (which is $20,500 for this year) + profit sharing of potentially another $40K, but it is not a match but rather based on the percentage of your net SE income. Here is a link to the IRS website for reference:
https://www.irs.gov/retirement...
Another great resource to learn will about this topic be this discussion on the forum:
Here is the numbers, We know only the Active Income can contribute to 401K, in order to contribute $20500 to 401K, you need $102500 Net Active income, because Self-employed only allow 20% of the net Income to contribute to 401K. that means you need to put $121015 minimum to schedule C as active income, and you need to pay $18515 for the self-employee tax to convert the passive income to Active Income, is that worth it?
With Solo 401k there are two way to contribute: elective deferrals (which is $20,500 for this year) + profit sharing of potentially another $40K, but it is not a match but rather based on the percentage of your net SE income. Here is a link to the IRS website for reference:
https://www.irs.gov/retirement...
Another great resource to learn will about this topic be this discussion on the forum:
Here is the numbers, We know only the Active Income can contribute to 401K, in order to contribute $20500 to 401K, you need $102500 Net Active income, because Self-employed only allow 20% of the net Income to contribute to 401K. that means you need to put $121015 minimum to schedule C as active income, and you need to pay $18515 for the self-employee tax to convert the passive income to Active Income, is that worth it?
Gary, your understanding is incorrect. It would be correct for SEP IRA, but not for the Solo 401k. As I explained above there are two contribution components, the profit sharing component is based on the percentage, but not the elective deferral. Elective deferrals can be up to 100% of you SE compensation.
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.
@Joseph Hammel get a free version of the online federal tax prep software available from a number of vendors. Plug in your numbers. You don t have to be a math genius to plug in the numbers.
Great idea to open up a Solo401k. The SE tax is a minor expense compared to the advantage of owning RE tax free( capital gains and cashflow) including short term vacation rentals inside your Solo401k.
Opening a Solo401k also allows you to transfer funds from existing IRAs and old 401ks to your Solo401k . This allows you to UBIT because debt financing in a Solo401k is not subject to UBIT.
This is an area of great interest to me. I have a solo 401k with Roth provisions as well. But I am NOT an expert. This question has at least 2 major facets: 1) you personally own the property (or maybe through an LLC) and 2) Your 401k owns the property being rented. It is my understanding that you can not use "Passive Income" like rental proceeds to fund a solo 401k. Maybe, you could use the fee for managing the property as a side income that could be used for funding the solo 401k if you set it up properly, so this is with respect to case 1 above. If on the other hand, case 2, you have some strict rules regarding how you can or cann't participate in the management of the property. But in the case you have already funded the 401k and you are benefitting from either defered tax in the case of 'regular' 401k or you benefit from no taxes on the income and legal dispersement of the Roth portion of your 401k. If you want to fund a solo 401k (and I think everyone should) you need a side hussel of some sort or just go into contract/consulting work full time. Also, if you look at "backdoor Roth contributions" you can get to over $76K per year contributions to a solo 401k Roth, if you can afford the funding.