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Opening a Solo 401k Without Income

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  • Opening a Solo 401k Without Income

    Can I open a solo 401k and fund it only with a transfer/rollover from my employer's 401k when I leave the employer, or do I need to have some independent contractor/consultant work to fund it (please don't respond telling me to do some surveys, drive for uber, do chart reviews, or otherwise find some income to use to open and fund the solo 401k, as I am trying to find out it I can open and fund such an account without such income).

  • #2
    No, you need self employment activity to open an i401k.


    • #3
      the more qualified tax people will certainly comment and give a more definitive answer than I can.  However, a 401k is a tax deferred retirement account provided by an employer for an employee.  A solo 401k is for those situations when you are both the employer and the employee.  If you are in a situation where you want  a solo 401k to do a rollover, you need a legitimate business under which to open that account.  For those people doing small things like driving Uber and doing surveys, the primary reason for that side business to create a space to roll a previous 401k or an IRA to avoid the pro rata rules for a back door roth IRA.


      • #4
        All of the above responses are 100% correct.

        A 401k plan is an employer retirement plan. Under 26 U.S. Code Section 401(c), in order to be considered a "self-employed individual" eligible to adopt, maintain and contribute to a 401k plan. You must have net self-employment earnings in the current and/or any prior year.

        You may not like the suggestions about how to generate net self-employment earnings, but those earnings are the only way you can adopt a one-participant 401k.


        • #5
          Side hustling isn’t for everyone (even though it is easy)
          You have other options:

          1. Keep the 401k money where it is
          2. Move the 401k to your new employer’s plan
          3. Rollover IRA - beware the roadblock this will cause for future backdoor Roths


          • #6
            What are the steps that I would need to take in order to open a solo 401k based on an Amazon gift card for $20 earned for filling out a survey?   All my other income is on a W2, plus 1099b for interest,etc.

            I see that I can fill out form 1040c.  Would that suffice?  What about self-employment tax.  I'm already over the SS limit on my w2 earnings.    How do I pay any medicare tax.  If I were not over the SS limit, how would I pay the SS/Medicare taxes.


            • #7
              This is where I vehemently disagree with WCI. An insignificant amount of money does not constitute; "engaging in a trade or business with the intent to make a profit."

              In my opinion there is a big difference between filing a Form 1040 Schedule C and claiming to be a "self-employed individual" under 401(c), is that you have a "business profit in the current or any prior year", sufficient to require filing Schedul SE ($400).

              $20 from filling out a survey doesn't cut it.


              • #8
                Let me know when you find the IRS page listing the minimum business income required to open a solo 401(k). As near as I can tell, there is no minimum. I agree there must be a legitimate business though, but it's not clear what a legitimate business is, particularly a business that fails its first year. I'd love to hear some case law (or even results of an audit) but I doubt the IRS has ever taken someone to court on this issue and doubt it's audited very often either.
                Helping those who wear the white coat get a fair shake on Wall Street since 2011


                • #9

                  $20 from filling out a survey doesn’t cut it.
                  Click to expand...

                  If one wants to be on the safe side, recognizing there is not explicitly clear numbers for this, what kind of minimum would you think is above questioning? The $400 you mention for schedule SE?


                  • #10
                    you'll get nothing but opinions, which when it comes down to it is worth what it costs you - nothing

                    if you want "above questioning" then you operate a real business, in a businesslike manner


                    • #11
                      As you noted, there is no explicit minimum amount of business profit necessary. In the final Section 199A regulations issued this year. The IRS again affirms that they follow the seminal SCOTUS Higgins v. Commissioner case on what determines whether a trade or business exists. Quoted from that decision;

                      "The courts have developed two definitional requirements. One, in relation to profit motive, is said to require the taxpayer to enter into and carry on the activity with a good faith intention to make a profit or with the belief that a profit can be made from the activity. The second is in relation to the scope of the activities and is said to require considerable, regular, and continuous activity."

                      So if you have a business with revenues of $100/month and $1200 in expenses. Even without a profit, it is probably sufficient to claiming you are engaged in a trade or business without any SE taxes. However, Section 401(c)(1) requires you to have self-employed earned income (business profit - 1/2 SE tax) in the current or any prior year to be considered a self-employed individual eligible to adopt a one-participant 401k. On the other hand, if you do a few surveys for $200 with no business expenses, I find it hard to justify claiming that you are engaged in a trade or business rather than a hobby even though you made a profit.

                      So, I think the effort has to be clearly a business and the revenue from something that would pass the smell test. While having enough business profit to pay SE taxes is not above question, I do think it is a far more defensible to have filed a Schedule C and Schedule SE than just a Schedule C for lesser insignificant amounts.


                      • #12
                        What would be the range of possible consequences if one's i401k was later deemed to be inappropriately opened? Is there some statute of limitations on these things? If annually rolling max SEP IRA contributions into the i401k for ~10-20 years and eventually reaching a balance of $2-3MM, loss of these funds or paying taxes on them as a forced distribution to a taxable account, or w/e the consequence might be seems, like it could be quite devastating.


                        Also, the decision you quote indicates

                        require considerable, regular, and continuous activity
                        Click to expand...

                        Does this mean even once established, you need to having continuing self employment activity to maintain and use an i401k to accept rollovers on an ongoing basis? From a prior post of yours ( it seems the i401k could be maintained and used indefinitely once legitimately opened, without ongoing self-employment.


                        • #13

                          If annually rolling max SEP IRA contributions into the i401k for ~10-20 years and eventually reaching a balance of $2-3MM

                          This would be an uncommon situation. The SEP IRA would be from an employed position? And the solo 401k from self employment income on the side?


                          • #14
                            Yes, essentially to open door for backdoor Roth IRA due to employed group sep ira plan (that just is what it is, at least for now). Not currently moonlighting and would rather just pick up extra shifts at main employer while paying off loans and saving down payment, but need some way to open the backdoor Roth option.


                            • #15
                              How big is this employed group? Are you in a position where you could get them to consider a 401k instead?

                              Are there any hospital committees that you could serve on? Folks are often paid on 1099 for these positions. Case reviews for quality committee. Hours for credentials, med exec, that sort of stuff.