Solo 401K qualification if Im a Property Manager for my rentals

Fort Myers Beach, FL · Member since 2016 · 225 posts · 124 votes

Fellow BP experts

Would my LLC which has buy and hold rental income only at this point, qualify me for a Solo 401K, if I have the LLC pay me as the Property Manager?

Would that self employment income be enough to make the LLC an "active business"?

Right now I set aside 10% PM fees in my numbers, but do not pay it out to anyone yet (just sits in the business checking account.

I would be willing to pay myself if it allows my roll over significant capital from my Traditional IRA to a LLC Solo 401K and start to take advantages of that plan also.

Pete

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Brian EastmanPro Member
Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes
9y
@Peter Schuyler
Generally speaking, the answer would be no. Rental income is passive investment earnings, not self-employment compensation.
You could work with a CPA to create a structure where you truly generate earned income, but the cost would likely outweigh the benefits. Why tax income at a higher rate so that you can set it aside into a tax-deferred plan?
You may wish to consider a self-directed IRA based plan.
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Peter Schuyler
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Fort Myers Beach, FL · Member since 2016 · 225 posts · 124 votes
9y
Originally posted by @Brian Eastman:

@Peter Schuyler
Generally speaking, the answer would be no. Rental income is passive investment earnings, not self-employment compensation.
You could work with a CPA to create a structure where you truly generate earned income, but the cost would likely outweigh the benefits. Why tax income at a higher rate so that you can set it aside into a tax-deferred plan?
You may wish to consider a self-directed IRA based plan.
Thanks you for clarifying that, maybe a SDIRA is a better way to go, or just start to generate some money through a flip. The Solo 401K benefits are hard to pass up.
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Brian EastmanPro Member
Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes
9y
@Peter Schuyler
If you were flipping, then that would generate self-employment income capable of sponsoring a Solo 401k plan.
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Mark Nolan
Professional · Carlsbad, CA · Member since 2012 · 12k+ posts · 1k+ votes
9y
@Peter Schuyler
The following IRS web page is a good resource regarding what constitutes self-employment.
https://www.irs.gov/businesses/small-businesses-self-employed/self-employed-individuals-tax-center
Following are the similarities and differences between the solo 401k and the self-directed IRA.
The Self-Directed IRA and Solo 401k Similarities
- Both were created by congress for individuals to save for retirement;
- Both may be invested in alternative investments such as real estate, precious metals tax liens, promissory notes, private company shares, and stocks and mutual funds, to name a few;
- Both allow for Roth contributions;
- Both are subject to prohibited transaction rules;
- Both are subject to federal taxes at time of distribution;
- Both allow for checkbook control for placing alternative investments;
- Both may be invested in annuities;
- Both are protected from creditors;
- Both allow for nondeductible contributions;
- Both are prohibited from investing in assets listed under I.R.C. 408(m); and
- Neither may be invested in your own business.
The Self-Directed IRA and Solo 401k Differences
- In order to open a solo 401k, self-employment, whether on a part-time or full-time basis, is required;
- To open a self-directed IRA, self-employment income is not required;
- In order to gain IRA checkbook control over the self-directed IRA funds, a limited liability company (IRA LLC) must be utilized;
- The solo 401k allows for checkbook control from the onset;
- The solo 401k allows for personal loan known as a solo 401k loan;
- It is prohibited to borrow from your IRA;
- The Solo 401k may be invested in life insurance;
- The self-directed IRA may not be invested in life insurance;
- The solo 401k allow for high contribution amounts (for 2016, the solo 401k contribution limit is $53,000, whereas the self-directed IRA contribution limit is $5,500);
- The solo 401k business owner can serve as trustee of the solo 401k;
- The self-directed IRA participant/owner may not serve as trustee or custodian of her IRA; instead, a trust company or bank institution is required;
- When distributions commence from the solo 401k a mandatory 20% of federal taxes must be withheld from each distribution and submitted electronically to the IRS by the 15th of the month following the date of each distribution;
- Rollovers and/or transfers from IRAs or qualified plans (e.g., former employer 401k) to a solo 401k are not reported on Form 5498, but rather on Form 5500-EZ, but only if the air market value of the solo 401k exceeds $250K as of the end of the plan year (generally 12/31);
- When funds are rolled over or transferred from an IRA or 401k to a self-directed IRA, the amount deposited into the self-directed IRA is reported on Form 5498 by the receiving self-directed IRA custodian by May of the year following the rollover/transfer.
- Rollovers (provided the 60 day rollover window is satisfied) from an IRA to a Solo 401k or self-directed IRA are reported on lines 15a and 15b of Form 1040;
- Pre-tax IRA contributions on reported on line 32 of Form 1040;
- Pre-tax solo 401k contributions are reported on line 28 of Form 1040;
- Roth solo 401k funds are subject to RMDs;
- A Roth 401k may be transferred to a Roth IRA (Note that from a planning perspective, it may be advantageous to transfer Roth Solo 401k funds to a Roth IRA before turning age 70 ½ in order to escape the Roth RMD requirement applicable to Roth 401k contributions including Roth Solo 401k contributions and earnings.);
- Roth IRA funds are not subject to requirement minimum distributions (RMDs);
- The fair market value (FMV) of assets held in a self-directed IRA is reported on form 5498;
- The fair market value of assets held in a solo 401k are reported on Form 5500-EZ;
- At termination, the solo 401k is required to file a final Form 5500-EZ and 1099-R; and
- At termination, the self-directed IRA is only required to file a form 1099-R.
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