BACKGROUND & QUESTION: Please address my particular situation retirement account planning situation. My wife is a realtor that we currently report via schedule C. We want to establish an LLC for her that we both own 50/50 and a related 401k for investments and real estate related earnings. I am a W-2 employee with a traditional IRA held at Fidelity investing in stocks that I would like to transfer to the 401k. How can we optimize this structure? If we do it right we should be able to max out the yearly contribution tothe Solo 401k.
ANSWER: Because a solo 401k is for
spouses who are self-employed, as long as you are both performing
self-employment activity whether through an LLC or a sole proprietor entity
type, you can both participate the plan—meaning,
that you can each transfer retirement accounts from former employers or your
Fidelity Traditional IRA to the new solo 401k and then invest the solo 401k
funds in alternative investments such as real estate, tax liens, trust deeds,
precious metals, in addition to equities. Again, if you both want to open a solo 401k
and both plan to participate in the solo 401k plan, you both must be self-employed (this means performing services
that are intended to lead to earned income, as passive income(gains from investments)
does not qualify). See IRS publication 560 for more information on qualifying for a solo 401k as well the
definition between earned income and passive income.
Lastly, note that the earnings
generated from the solo 401k investments (e.g., real estate rentals) must flow
back to the solo 401k account and not your personal account or business
account. Reason being, solo 401k assets may not be commingled with the solo 401k
owners personal assets and the solo 401k distribution rules come into play when
distributing funds from the solo 401k.
Thanks,
Sam in Dallas Texas
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