The solo 401k plan is for the self-employed

BACKGROUND: The solo 401k plan is for those with OWN businesses, the self-employed or self-practitioners.  This I already understand.

I recently lost my job so I want to fully use the solo proprietorship business that I
registered in my county way back.

No, I don't have a history of income with this entity.  But what I want to do is to use
this registered business now in investing in real estate--buying and holding/selling.

This will be my source of livelihood.

I prefer to open a solo 401K since I would be able to make a solo 401k loan from it too which
I can use (without the 20% early withdrawal tax) to buy properties.  This way,I can
also file whatever I profit or earn appropriately as a self-employed person buying
and holding/selling properties.

QUESTION: So unless my application requires a history of self-employment, do you think it
will work for someone who's just going into a solo business and wants to start a solo 401k?

ANSWER: If purchasing and selling real estate is how you generate earned income, you report it as such to the IRS, and have not full-time employees, then on the surface you meet the requirements to set up a solo 401k. Reason being, your personal services (i.e., actively managing the properties) are a material producing factor. In other words, you are actually doing the work and not simply generating passive income, which is different from earned income.

However, it is important to understand that once your stop being self-employed you can no longer continue to participate in the solo 401k and will instead need to transfer it to an IRA (e.g., self-directed IRA) or another employer 401k (e.g., if you go back to the corporate world and the new employer offers a 401k plan, then you can transfer your solo 401k plan to it, but may need to first liquidate the investments held in the solo 401k and subsequently transfer the proceeds). Simply stated, the self-employment requirement for establishing a solo 401k is not just a one-time process, but rather the individual must continue to be self-employed.

Lastly, you will need to ultimately consult with your personal tax professional as to whether or not you will qualify for a solo 401k, as presumably he or she will understand your particular personal tax and business tax situation the best. 

Thank you.

Jake in NJ

 

Forming two separate Solo 401k plans and inasmuch do a participant loan from each

QUESTION: If one had two legitimate businesses and entities formed, is there anything that would otherwise prevent forming two separate Solo 401k plans and inasmuch do a participant loan from each, and if so permitted would that be a huge red flag for revenue agency and audits. We don't plan anything abusive or even creative but don't want to invite audits unnecessarily as the time, effort and costs are unwelcome.

Thanks,

Beth in Arizona

ANSWER: The rules are tricky. The companies cannot be related or affiliated. See following pages. 

http://www.mysolo401k.net/solo-401k-controlled-group.html

http://www.mysolo401k.net/be-aware-of-multiple-employer-rules-for-401k-contribution-purpose.html

The first thing the IRS will review in the event of an IRS audit is the outstanding solo 401k loans.

Taxability of "elective deferrals" that my client makes to the solo 401k plan

BACKGROUND: My specific question is related to the taxability of "elective deferrals"
that my client makes to the solo 401k plan that your company has set-up.

QUESTION: Is this similar to a regular 401k account that his "elective deferrals" ARE
subject to social security and medicare taxes, but not regular federal
income tax?  

Or is this a 401k hybrid that has absolutely NO tax implications until
distributions are taken?

ANSWER: Because the solo 401k plan sponsoring company is a corporation, both contribution types (salary deferral and profit sharing) will be based solely on W-2 income.  Further, the earnings generated within the solo 401k will grow tax-deferred and not taxed until distributions commence, usually at retirement.  Please visit our on-line solo 401k contribution calculator to calculate the annual solo 401k contribution amount.

Thanks,

Pat H.
Public Accountant
Fort Lauderdale, FL