qualifying for a solo 401K?

Question

I have a group 401K plan at my W-2 employer. I have an unexpected opportunity to transfer funds out of 401K plan while I'm still employed. Yeah! I'd like to transfer funds to a self directed retirement plan and invest largely in real estate syndications which take advantage of debt leveraging. I know a self directed IRA would be subject to UDFI, so I"m interested in solo 401k instead, which is exempt from UDFI.

I don't currently have self employment income, which I need to qualify for solo 401K. However, I'm a major volunteer of Information Technology professional services to a local non-profit Christian school for the last 13 years. I volunteer for mission, not $, and have likely saved organization >$100,000 over that time.

Finally to my question: How much $ do I need to make to legitimately qualify for creating a solo 401K as the destination for the transferred retirement funds? If I billed the non-profit a nominal amount of say $150 per quarter and received an annual 1099 for $600 of services, would that satisfy a solo 401k IRS auditor's scrutiny?

Dan Schwartz · Answer

@Russell Roberts if the opportunity is time-limited, then evacuate the money to an IRA ASAP.  Doesn’t even have to be a self-directed one.  Just any old IRA. You can always roll an IRA into a solo 401k down the road.  Again, this advice is if your time window on getting the money out of the work 401k is shorter than the time it will take to start a legitimate business in order to have a solo 401k. Good luck!

Daniel Dietz · Answer

@Dmitriy Fomichenkotriy has a good point that $600 does not seem "like a business". He is also my plan provider and I value his opinion :-)

With that said, I do have a friend who was in a similar situation as you and had a large IRA he wanted to roll over to a SOLO401K to avoid the UDFI tax issue. He rolled in the mid six figures over. He works a W2 job in construction management as a 'day job', but started doing it as a a self employed side job too and set up a SOlo401K and puts almost ALL of his earnings in it each year in addition to what he rolled over.

The difference, I think is that he makes about 5-10K per year, and works for multiple people who change each year. He also set up an LLC to run this in. With those things in mind, he used KKOS for legal advice (this is one of their speicalties) and they said it should pass with flying colors

Not sure Dmitriy or the other pros would agree with that assessment or not?

Dmitriy Fomichenko · Answer

@Russell Roberts

In order for the self-employment activity to be legitimate it must be for profit. Can't be a hobby. $600/yr looks like a hobby to me.

IRS has a guidance to help you understand what legitimate self-employment activity is:https://www.irs.gov/businesses/small-businesses-self-employed/self-employed-individuals-tax-center#SelfEmployed

Russell Roberts · Answer

@Dan Schwartz

A great thought. Thanks.

Russell Roberts · Answer

thanks for thoughts.  I see where the IRS says, "You have to file an income tax return if your net earnings from self-employment were $400 or more."    It seems like they think >$400 is significant self employment income from that statement.

I read the "Hobby or Business? IRS Offers Tips to Decide"   I think an argument could be made either way.   I.T. services work is certainly not recreation. :)   Maybe if I just billed a few hours of my work at full market rate and then volunteer donated whatever other amount of labor I wanted personally, it would be arguably more for profit incentive.

Dmitriy Fomichenko · Answer

@Daniel Dietz

I don't see any issue in your example to question legitimacy of the self employment activity for your friend.

qualifying for a solo 401K?

Most Popular Reply