Account Manager/Adjunct Professor · North Hills, CA · Member since 2016 · 7 posts · 0 votes
I've done some reading on the advantages of Solo-401K options (this article was awesome!).
I am hoping to use funds from my adjunct teaching to invest in real-estate and was hoping I'd be able to shelter this income by dumping it exclusively into the Solo 401K. It doesn't appear that the Solo 401K applies to contractors, however.
Since the Solo 401K isn't an option for me, are there other tax advantaged options that 1. Allow me to significantly reduce taxes on the contracted income 2. Allow me to invest in real estate?
Account Manager/Adjunct Professor · North Hills, CA · Member since 2016 · 7 posts · 0 votes
10y
Ahh! Thanks for clearing that up, Brian!
I took the two sentences from the linked article above to say that it was not an option:
"Solo 401k can be established by anyone who has legitimate self-employment activity (part time is OK) and who does not have full time employees working for them. Independent contractor are not considered employees."
So I have two follow up questions:
1. Do I avoid paying Social Security/Medicare tax if place all my money in the pre-tax option?
2. Are tax consequences of a sale of future property incurred at time of sale or at time of distribution?
Exactly. You are not an employee of the firm you contract with (not really what was being said there, but I added for clarification). What that is saying is that if your business has contractors, they are not viewed as employees that would need to be provided benefits under your 401k.
There are two types of contributions to a Solo 401k:
Employer profit sharing will come after the business pays its 1/2 of social security and medicare, but before your half as employee is paid.
Employee contributions come after the full payroll taxes are paid.
Both would not be subject to income taxation. That taxation is deferred.
When you sell a property that has been held passively (not a flip), there is no tax implication. The 401k has simply been reallocated from holding property to holding cash. Taxes are paid when you take distributions from the plan in retirement.
Flipping of houses can create a tax liability within the plan known as UBIT.
I'm glad you enjoyed the article, just want to confirm that contractors are listed as being eligible for a Solo 401k plan (somehow you missed it), you should be good to go.