Solo 401k questions: qualification, Roth contribution, and adoption deadline

  

Good morning,

BACKGROUND: I have been considering starting an account before the end of the year.
 

My situation may be slightly different than what you're used to seeing.
I've been looking at the traditional self-directed IRA options (truly
self-directed) using custodians, etc.  My direction was to open a
standard SD IRA and a Roth.  Fund the standard IRA fully once per year
and convert it to the Roth.  (I can't contribute to a Roth due to
income.)  I planned to "invest" in a trust with all of the assets of the
Roth, and make investments through the trust, thus achieve checkbook
control over the entire account.  I've known about solo 401k options for
a while, but didn't think they would work for me.  I'm rethinking that
now that I've come across your website.  So, I have a few questions that
I hope you won't mind answering for me.

Here's my situation.
 

I do own a business, but almost none of my income is earned income.
It's all interest and investment income.  But I can convert all or part
of it to earned income at any time to create income that is eligible for
a solo 401k.
 

I do not have any employees in my business.
 

My wife's earned income is over $200,000 per year.
 

My wife has 401k options available at her work, but does not utilize
them in an way.  We have no other IRA accounts of any kind.
If possible, I prefer to get my money into a Roth, ultimately.

Given these facts, my questions are:

QUESTION 1) If I convert some of my business income to earned income, am I
eligible to open a solo-401k?

ANSWER: As long as you are doing actual work yes. However, if you are not doing work for the business it is not a good idea to just simply treat some of the passive income as earned income as it may be construed by the IRS as trying to circumvent the solo 401k self-employed qualification rules. This may be hard to track by the IRS but it may come up in the event of a routine audit.

QUESTION 2) If I were to hire part time employees, would I still be eligible for
solo-401k?

ANSWER: Yes as part-time employees (those working less than 1,000 hours per year) may be excluded from the solo 401k plan.

QUESTION 3) Do my wife and/or kids count as employees?

ANSWER: Spouses count as owner only employees. Children may not participate in the solo 401k plan.

QUESTION 4) Can I open a solo-401k Roth and convert what's in the solo-401k each
year into the Roth account each year, like described above?

ANSWER: Yes the solo 401k allows for what the IRS calls Roth Designated contributions, meaning that the employee contribution ($17,500 for 2013)   may be applied as a Roth 401k contribution. Yes the pre-tax solo 401k contributions may be converted to a Roth solo 401k.

QUESTION 5) If I can't do 2, can I sweep the solo-401k into a standard custodial
self-directed Roth IRA?

ANSWER: Yes the Roth solo 401k amounts may be transferred to a Roth IRA; however, the transfer would need to be reported on Form 1099-R as non-taxable.

QUESTION 6) My wife received half of the unearned income from the business.  If I
convert some of it to earned income, as in #1 above, is she eligible for
any of this even though she's also employed otherwise?

ANSWER: Yes as long as she has true earned income from self-employment activity. Yes the rules allow for contributions to multiple retirement plans (e.g., full-time employer plan and part-time self-employed plan).  

QUESTION 7) Aside from contribution limits, are the rules and regulations on
management of the solo accounts the same as they are for the standard
self-directed accounts?

ANSWER: Yes for the most part. But variances exist. For example, unlike an IRA, the business owner may borrow form his or her solo 401k. This is known as a solo 401k loan. Also, UBIT does not apply to most solo 401k investments in real estate, but it does to an IRA.

 
QUESTION 8) If it looks like I can make this work, can we get it done by the end
of the year so that I can fund the account fully for 2013?

ANSWER: Yes as we can generally draft the solo 401k documents in 24 hours after you fill out the information on our solo 401k sign up page. Note that the solo 401k needs to be adopted (i.e., the solo 401k documents must be signed) by 12/31 in order to make the annual solo 401k contribution by next year’s business tax return due date plus extensions.

I know it's a lot of questions.  I apologize for inundating with so
many.  Hopefully, you'll be able to help me with them and we can get
started on this.

Thank you!

David in Arizona