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Can I set up an individual 401K just to roll over my IRAs

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  • Avatar mitchch 
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    I currently don’t have a 401k. I would like to do this to take advantage of the backdoor Roth IRA

    #118783 Reply
    Avatar Peds 
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    if you have a 401k already through work, see if it accepts incoming rollovers. if it does, then you dont need anything else.

    to open a solo 401k, you need 1099 income. if you have this, then go ahead. make sure you dont open at vanguard as they do not allow incoming rollovers.

    #118801 Reply
    Liked by Dr. Mom
    Avatar rxor49 
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    What if you and your spouse each create a business entity, and (s)he pays you $1 via 1099? I’m not suggesting this, as I have no idea as to legality or feasibility. Just asking if anyone else knows if it would work.

    #118806 Reply
    MPMD MPMD 
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    What if you and your spouse each create a business entity, and (s)he pays you $1 via 1099? I’m not suggesting this, as I have no idea as to legality or feasibility. Just asking if anyone else knows if it would work.

    Click to expand…

    I doubt you can ever call money transferred from one spouse to another “income.”

    Could probably open one by having your buddy pay you $100 for “consulting.”

    #118823 Reply
    Liked by adventure
    ProximalLADLesion ProximalLADLesion 
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    WCI has stated on the podcast that there is no minimum 1099 income requirement to open a solo 401(k). You could make $5 filling out surveys online as 1099 income, open a s401(k), and roll your IRAs into it (as you suggest) to enable yourself to perform a back door Roth IRA. Probably a better option than rolling into your employer’s 401(k) in that you likely have more investment latitude.

    #118863 Reply
    Avatar spiritrider 
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    WCI has stated on the podcast that there is no minimum 1099 income requirement to open a solo 401(k). You could make $5 filling out surveys online as 1099 income, open a s401(k), and roll your IRAs into it (as you suggest) to enable yourself to perform a back door Roth IRA. Probably a better option than rolling into your employer’s 401(k) in that you likely have more investment latitude.

    Click to expand…

    I have told WCI on several occasions that this advice is reckless. There is no way filling out a survey for a minuscule amount of money constitutes anything but a hobby. A hobby is NOT self-employment and you are not eligible to adopt a one-participant 401k. It is true that the IRS has not established a minimum. In fact there is no requirement for the income to come from a 1099 which is only required with payments >= $600.

    However, 401c specifically requires you to have net earnings from self-employment only with respect to a trade or business in which personal services of the taxpayer are a material income-producing factor. The IRS uses nine factors to determine if the income is from a hobby or you are engaging in a trade or business with the intention of generating a profit. The filling out of a few surveys doesn’t even come close, let alone just one.

    My opinion and that of every CPA I have discussed this issue with. Believe you need to engage in what can clearly be described as a trade or business with the intent of making a profit. While there is no minimum required. I have always recommended that you make enough to at least be required to file a Schedule C/SE and pay SE tax. The former is $400 and the latter is $434.

    #118875 Reply
    DMFA DMFA 
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    Status: Physician
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    https://www.irs.gov/faqs/small-business-self-employed-other-business/income-expenses/income-expenses

    Question
    How do you distinguish between a business and a hobby?
    Answer

    In making the distinction between a hobby or business activity, take into account all facts and circumstances with respect to the activity. No one factor alone is decisive. You must generally consider these factors in determining whether an activity is a business engaged in making a profit:

    • Whether you carry on the activity in a businesslike manner and maintain complete and accurate books and records.
    • Whether the time and effort you put into the activity indicate you intend to make it profitable.
    • Whether you depend on income from the activity for your livelihood.
    • Whether your losses are due to circumstances beyond your control (or are normal in the startup phase of your type of business).
    • Whether you change your methods of operation in an attempt to improve profitability.
    • Whether you or your advisors have the knowledge needed to carry on the activity as a successful business.
    • Whether you were successful in making a profit in similar activities in the past.
    • Whether the activity makes a profit in some years and how much profit it makes.
    • Whether you can expect to make a future profit from the appreciation of the assets used in the activity.

    I’d recommend doing a whole lot of surveys to intend to make it profitable, and log your time in a businesslike manner while maintaining records.  Not sure a physician earning six digits can rely on $10/year for their livelihood, and you won’t have losses…

    "I like money." - Frito Pendejo (Idiocracy)

    [Not a financial professional (yet), lawyer, or employee of The White Coat Investor]

    #118885 Reply
    Liked by Dr. Mom
    Avatar rxor49 
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    Perhaps the OP could drive an Uber for a weekend or two. There are definitely other options out there.

    #118889 Reply
    MPMD MPMD 
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    WCI has stated on the podcast that there is no minimum 1099 income requirement to open a solo 401(k). You could make $5 filling out surveys online as 1099 income, open a s401(k), and roll your IRAs into it (as you suggest) to enable yourself to perform a back door Roth IRA. Probably a better option than rolling into your employer’s 401(k) in that you likely have more investment latitude.

    Click to expand…

    I have told WCI on several occasions that this advice is reckless. There is no way filling out a survey for a minuscule amount of money constitutes anything but a hobby. A hobby is NOT self-employment and you are not eligible to adopt a one-participant 401k. It is true that the IRS has not established a minimum. In fact there is no requirement for the income to come from a 1099 which is only required with payments >= $600.

    However, 401c specifically requires you to have net earnings from self-employment only with respect to a trade or business in which personal services of the taxpayer are a material income-producing factor. The IRS uses nine factors to determine if the income is from a hobby or you are engaging in a trade or business with the intention of generating a profit. The filling out of a few surveys doesn’t even come close, let alone just one.

    My opinion and that of every CPA I have discussed this issue with. Believe you need to engage in what can clearly be described as a trade or business with the intent of making a profit. While there is no minimum required. I have always recommended that you make enough to at least be required to file a Schedule C/SE and pay SE tax. The former is $400 and the latter is $434.

    Click to expand…

    That’s very interesting. My understanding of the IRS hobby/job factors was that they were more designed to assess your ability to deduct expenses.

    So at one point I had a wild scheme to try to become a guide at this little hunting club I belong to a few weekends a year earning a few hundred bucks. Then I was wondering if after doing that I could deduct truck, clothes, boots etc.

    That IRS pub clearly says “no” to my scheme but I didn’t think it made the income “hobby income” instead of self-employment. My understanding (clearly not as good as yours @spirit) was that this pub basically creates 2 different types of income streams:

    1) Legitimate self-employment

    2) Hobbies that also generate some money

    #118897 Reply
    Side Hustle Scrubs Side Hustle Scrubs 
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    Any physician side gig that pays 1099 income – (locums, chart reviews, expert witness, etc) would allow you to open a solo 401k.  I suppose you could become an Uber driver, make $10 and contribute $2 into a solo 401k.  Why not use your medical degree and make $1,000/day moonlighting in a walk-in instead?

    When I got my first attending job I worked a locums job on the side just so I could open a solo 401k to clear the path for a Backdoor Roth.

    Fidelity accepts IRA rollovers into the solo 401k which is why I used them instead of Vanguard.  It was easy to set up, saved me money on taxes and I’ve been Backdoor Rothing ever since.

    See hustle. Do hustle. Teach hustle.
    SideHustleScrubs.com

    #119083 Reply
    Liked by Dr. Mom
    The White Coat Investor The White Coat Investor 
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    WCI has stated on the podcast that there is no minimum 1099 income requirement to open a solo 401(k). You could make $5 filling out surveys online as 1099 income, open a s401(k), and roll your IRAs into it (as you suggest) to enable yourself to perform a back door Roth IRA. Probably a better option than rolling into your employer’s 401(k) in that you likely have more investment latitude.

    Click to expand…

    I have told WCI on several occasions that this advice is reckless. There is no way filling out a survey for a minuscule amount of money constitutes anything but a hobby. A hobby is NOT self-employment and you are not eligible to adopt a one-participant 401k. It is true that the IRS has not established a minimum. In fact there is no requirement for the income to come from a 1099 which is only required with payments >= $600.

    However, 401c specifically requires you to have net earnings from self-employment only with respect to a trade or business in which personal services of the taxpayer are a material income-producing factor. The IRS uses nine factors to determine if the income is from a hobby or you are engaging in a trade or business with the intention of generating a profit. The filling out of a few surveys doesn’t even come close, let alone just one.

    My opinion and that of every CPA I have discussed this issue with. Believe you need to engage in what can clearly be described as a trade or business with the intent of making a profit. While there is no minimum required. I have always recommended that you make enough to at least be required to file a Schedule C/SE and pay SE tax. The former is $400 and the latter is $434.

    Click to expand…

    I apparently have never heard you say it. At any rate, I’ll post what I put on a blog comment earlier today:

    If you get paid $5 to do a survey, is that reportable income to the IRS? Absolutely it is. And where do you report it? You report it on Schedule C. What is Schedule C for? It’s for a business. What do you need to open an individual 401(k)? A business.

    A hobby? Whose hobby is doing online surveys? Do you know anyone who would do that consistently if they weren’t paid for it? Of course not. It’s not a hobby. The IRS’s concerns about hobbies is so you can’t keep deducting losses for years and never turn a profit in a business. If you do that, they reclassify it as a hobby and you don’t get the deductions. I doubt the IRS would apply that issue to the ability to open a solo 401(k), but if you’re worried, go spend a weekend driving for Uber or better yet, moonlighting as a doc.

    The $400 limit is if that is your ONLY income.

     

    Site/Forum Owner, Emergency Physician, Blogger, and author of The White Coat Investor: A Doctor's Guide to Personal Finance and Investing
    Helping Those Who Wear The White Coat Get A "Fair Shake" on Wall Street since 2011

    #120710 Reply
    Liked by MPMD
    Avatar spiritrider 
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    Status: Small Business Owner
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    Joined: 02/01/2016

    I apparently have never heard you say it. At any rate, I’ll post what I put on a blog comment earlier today:

    The $400 limit is if that is your ONLY income.

     

    Click to expand…

    Well, we have had back and forths. So you are continuing to do a disservice to this community with this reckless advice.

    I suggest you refer to Schedule SE Line 4. The $400 limit is for 92.35% of business profit, irregardless of other income.

    What you seem unable to understand is that merely filing a Schedule C does not make you a self-employed individual as defined under Section 401.

    #120712 Reply
    The White Coat Investor The White Coat Investor 
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    I apparently have never heard you say it. At any rate, I’ll post what I put on a blog comment earlier today:

    The $400 limit is if that is your ONLY income.

     

    Click to expand…

    Well, we have had back and forths. So you are continuing to do a disservice to this community with this reckless advice.

    I suggest you refer to Schedule SE Line 4. The $400 limit is for 92.35% of business profit, irregardless of other income.

    What you seem unable to understand is that merely filing a Schedule C does not make you a self-employed individual as defined under Section 401.

    Click to expand…

    Do quote out what it takes to be self-employed if you think starting a business and earning a profit in said business isn’t sufficient to qualify.

    Also, please cite an incidence of a court case where someone with a very low profit in their business was told they could not do a rollover into an individual 401(k) opened for their business. Or at least an anecdote about someone audited on this point. Oh, there are none? Weird.

    Schedule SE line 4 has NOTHING to do with opening a solo 401(k). It simply determines if you owe SE (i.e. payroll) tax on those earnings. That’s not a requirement to be a business.

    This reminds me of all the people who said “you can’t do Backdoor Roth IRAs, it violates the Step Doctrine” for years.

    I’ll tell you what I told them- if you’re worried about the Step Doctrine wait a month or a year or decade or whatever between contribution and conversion.

    If you’re worried $10 isn’t enough profit to justify opening an individual 401(k), then make $400 or $600 or $1000 or $10,000 or get a 1099 or whatever makes you feel more comfortable. I can tell you this though- nobody asked me how much money I was making in my business when I opened the 401(k), contributed to it each year, and eventually started filling 5500-EZ forms. And whatever “requirement to be a business” you dredge up out of some obscure corner of the tax code, it is likely a pretty darn easy box to check. Open a business bank account. Check. Actually make a profit? Check. Get a 1099? Check. Make $400? Check. Pay payroll tax? Check. Carry it on in a business like manner. Check. Keep accurate records. Check. Try to improve profitability? Check. Expected future profit? Check.

    I stopped accepting “I know a CPA who says…” as a reason not to do something long before I learned my Uber driver was a CPA. Probably about the time I had dozens of doctors email me asking why their CPA doesn’t know how to fill out an 8606 properly.

    You say this isn’t legal. Cite chapter and verse.

     

    Site/Forum Owner, Emergency Physician, Blogger, and author of The White Coat Investor: A Doctor's Guide to Personal Finance and Investing
    Helping Those Who Wear The White Coat Get A "Fair Shake" on Wall Street since 2011

    #120886 Reply
    Liked by MPMD, CordMcNally
    Dr. Mom Dr. Mom 
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    I needed a solo 401k to rollover my tIRA to open the Backdoor Roth.  I wasn’t comfortable with the advice to do one survey and open a solo 401k. Not saying it is right or wrong because I don’t know or care.  So, I started doing telemedicine with Teladoc to do a few consults which made me feel more comfortable about opening the solo 401k.  Initially, I though I’d do one or two consults.  Then, I decided I was more comfortable with doing enough to meet the $400ish needed to file SE tax.  Then, I decided I was more comfortable with the $600 needed for them to give me a 1099.  Next thing I knew, I was enjoying it and now have what I consider to be a fun, flexible, part-time gig going with the ability to put 24.5K employee contributions into the solo 401k annually.  YMMV.

    #120913 Reply
    Liked by RadMD
    legobikes legobikes 
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    Status: Physician
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    Joined: 05/25/2017

    I’m confused. Can’t you just open a TIRA and then roll that into s RIRA?

    #120927 Reply

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