Directing passive income into a Solo 401k?

Question

I know the correct answer to this ... contact a knowledgeable CPA ... and I am looking for one, but in the mean time I wanted to see if anyone any insight into this.

Here is what I want to try to do:

Set up an S Corp to run all my rentals through (I only have one so far, but plan on a lot more).

Pay myself a salary (and my wife for that matter) for managing the S Corp.

Funnel the salary money and potential profit sharing into a self directed solo 401k's.

For the most part my research says this is okay, however can I do this if the properties are generating positive cash flow, but after depreciation are generating little to no taxable income.

My overall goal is to be able to put more money into retirement plans.  My wife an I are already maxed out in employer plans.  We have a fair amount of capital available to purchase rentals, but this capital is all the result of shares vesting, causing us no end of tax liability issues.  So I want to turn that money into something that can be funneled into a retirement account of some sort.

Let me know if this makes sense.  I know this is a very complex issue and may not be suited for this type of discussion.

Thank you,

Graeme Black

Account Closed · Answer

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One-Participant 401(k) Plans

A one-participant 401(k) plan is sometimes called a:

• Solo 401(k)
• Solo-k
• Uni-k
• One-participant k

The one-participant 401(k) plan isn't a new type of 401(k) plan. It's a traditional 401(k) plan covering a business owner with no employees, or that person and his or her spouse. These plans have the same rules and requirements as any other 401(k) plan.

Contribution limits in a one-participant 401(k) plan

The business owner wears two hats in a 401(k) plan: employee and employer. Contributions can be made to the plan in both capacities. The owner can contribute both:

• Elective deferrals up to 100% of compensation (

Dmitriy Fomichenko · Answer

@Graeme Black

contributions to the 401k can only be made based on the earned self-employed income. Passive rental income can not be considered when making contributions.

You could potentially set up a management company to manage the rentals, but the amount of the management fee you charge will be limited to be reasonable. Plus it will be subject to self-employment taxes therefore you need to seek help of knowledgeable CPA if this strategy would make overall sense.

Account Closed · Answer

I took an old 401k and rolled it into a solo 401k. I then bought a 49,500 house cash and it's making around 795 per month (TX contact put me onto THAT deal!)  I did a bit of rehab on it, and now the occupant maintains it. Cash flow goes right into that account every month. Love my 401k for this kind of passive investing.

Graeme Black · Answer

I should add that I also have a previous employer's 401k that I want to roll over into this to start it, thereby getting the solo 401k going on passive real estate investing too.  All the money I plan to funnel into here would be in turn used for more rental properties.

David Romano · Answer

Graeme,

Please do not put the rental properties inside of an S corporation. If you want this strategy to work, I would just buy your properties with an LLC (or contribute to the LLC after financing), and start a property management company outside of the LLC group. You can then charge out property management fees and either pay yourself a salary through an S corporation or just leave as an LLC. Since you are a high compensation individual, you are only being hit with the Medicare tax. Then if you start a solo 401k, you and your wife can both contribute the 18,500 and 20% of earnings. If you generate losses in the LLC's, make sure you are not being limited on the losses which you most likely will based on income. Depending on what your wife does, there is a way to make her an active participating real estate professional to get around these rules.

Email me if you want more information.

Brian Eastman · Answer

@Graeme Black

It very much sounds like the Solo 401k is not going to be a solution.  Converting passive income taxed at a low rate into higher rate earned income, for the purposes of deferring that income into a retirement plan is, simply put, bad math.

A Solo 401k (if you qualify) or a self directed IRA would be a good means for you to diversify your investments into real estate, but the contribution side looks to be out of reach.

Please consult with your tax advisor to run the numbers.

Graeme Black · Answer

One of the big reasons I'm looking to do this is that I am considered a highly compensated employee in my corporate 401k and limited in my contributions, and there is no profit sharing, so I want another vehicle available so I can get up to the $55,000 combined contribution limit.

Graeme Black · Answer

@Dmitriy Fomichenko

Our posts crossed.  I know that once money is in the solo 401k, it must be passive and that would be my intention.

I'm trying to figure out a way to legally increase my contributions to a 401k from earned income.

The first rental we have is not property managed, so it could qualify as earned income through the S Corp.  Beyond that perhaps I'll look at other RE activities that are considered active, and save the passive RE for inside the 401k.

Graeme Black · Answer

@Dmitriy Fomichenko

@Tom V.

That's kind of what I thought, but since the properties will not (at least at first) be generating much cash flow, and even less passive income, the amount I would be paying myself to manage would be very reasonable.

Do you have to pay self employment taxes on money that is contributed to a solo 401k?  If so it may not make sense.

And as always, I should seek the counsel of a knowledgeable CPA.

Dmitriy Fomichenko · Answer

Assuming that you qualify for the Solo 401k, you can rollover your previous employer 401k and use that for real estate investing. All rental income (or other gains from investments) must go back into 401k.

Directing passive income into a Solo 401k?

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