Menu

Opening a Solo 401k Without Income

Home Retirement Accounts Opening a Solo 401k Without Income

  • MPMD MPMD 
    Participant
    Status: Physician
    Posts: 2509
    Joined: 05/01/2017

    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 (https://www.whitecoatinvestor.com/forums/topic/two-questions-about-terminated-401k/#post-191225) it seems the i401k could be maintained and used indefinitely once legitimately opened, without ongoing self-employment.

    Click to expand…

    Not an expert but it definitely doesn’t mean that. You never need to maintain employment to keep any 401k alive.

    #235935 Reply
    Avatar Tim 
    Participant
    Status: Accountant
    Posts: 3067
    Joined: 09/18/2018

    “ 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.”

    The IRS does not take cases to tax court. The IRS accesses the penalties and deficiencies. The tax payer protests and initiates the case. $60 filing fees and court costs. The tax payer then has to “prove” to the judge the IRS is wrong.

    So…….. not surprising not many people would litigate small “incidental income” is a trade or business.

    Now my hypothesis is that IRS would simply send a tax deficiency notice for non allowable deduction without reporting a trade or business. Then the taxpayer has to begin the process. It would not be an audit either. Just a notice until you prove the IRS is incorrect. The taxpayer is taking the IRS to court.

    Do people push the gray areas? Sure. Not sure many would “litigate” business versus incidental income.

    #235971 Reply
    Avatar Uncle Scrooge 
    Participant
    Status: Spouse
    Posts: 32
    Joined: 07/24/2017

    So if I have had legitimate self employment income in the past, I can open a solo 401k?

    #235980 Reply
    Avatar Tim 
    Participant
    Status: Accountant
    Posts: 3067
    Joined: 09/18/2018
    Splash Refinancing Bonus

    @Uncle Scrooge,
    I hope spiritrider or another chimes in regarding past SE earnings.
    The way I read his comment:
    1) Opening would be one question
    2) Rolling over or conversion would be the next
    3) Contributions would require current SE earnings
    That approach needs clarification. I am curious too.

    #235984 Reply
    Avatar spiritrider 
    Participant
    Status: Small Business Owner
    Posts: 1905
    Joined: 02/01/2016

    Remember, your one-participant 401k plan is sponsored by the business. Even in the case of a sole proprietorship, it is a separate tax entity for retirement plan compliance purposes. It is extremely rare for the IRS to audit one-participant 401k plans. It is even more rare for the IRS to audit a one-participant 401k that is not required to file Form 5500-EZ.

    Stepping on to my soapbox.

    The odds of you ever getting caught for not having a legitimate trade or business when you adopt a one-participant 401k for the sole purpose of rolling over pre-tax IRA assets is extremely small. However, is the only reason you don’t cheat on your taxes is because you might get caught.

    “From everyone to whom much has been given, much will be required; and from the one to whom much has been entrusted, even more will be demanded”

    Call me naive, but physicians should hold themselves to a high standard of doing the right thing. My personal opinion is that physicians should not be lazy and trying to figure out how little self-employed earned income they can get away with to open a one-participant 401k just to use it as a rollover destination. Quite frankly my personal opinion is, if a physician can’t figure out how to generate enough self-employed earned income to pay SE taxes, they can’t be much of a physician.

    Stepping down from my soapbox.

    #235985 Reply
    Liked by Tim, Peds
    Avatar spiritrider 
    Participant
    Status: Small Business Owner
    Posts: 1905
    Joined: 02/01/2016

    So if I have had legitimate self employment income in the past, I can open a solo 401k?

    Click to expand…

    Yes, referencing 26 code 401(c)(1)(B)

    (i) an individual who would be a self-employed individual within the meaning of the preceding sentence but for the fact that the trade or business carried on by such individual did not have net profits for the taxable year, and

    (ii) an individual who has been a self-employed individual within the meaning of the preceding sentence for any prior taxable year.

    You need self-employed earned income to make current year contributions, but not to make rollover contributions.

     

    #235991 Reply
    Liked by Tim, Peds
    Avatar CFEonline 
    Participant
    Status: Physician
    Posts: 136
    Joined: 09/05/2018
    physicians should hold themselves to a high standard of doing the right thing

    Click to expand…

    Agreed, my interest in the consequences is to help determine by how far and for how long to overshoot the minimum necessary, rather than an intention to fly beneath the radar.

    #236034 Reply
    Avatar Uncle Scrooge 
    Participant
    Status: Spouse
    Posts: 32
    Joined: 07/24/2017

    Thanks Spiritrider. That’s an amazing loophole!

    I’m be setting on up for my wife to rollover her IRA.
    She had 1099 income 4 years ago.

    Now she can finally do a back door Roth conversion.

    #236035 Reply
    Liked by SLC OB
    Avatar SLC OB 
    Participant
    Status: Physician
    Posts: 565
    Joined: 06/23/2018

    My husband is primarily a W2 employee but has done some teaching and expert witness work, earning him $600 and $1K respectively, so we opened a i401K for him and rolled all the IRA stuff into it and then were able to do a backdoor Roth IRA. Worth it and I think enough $$ to be legit.

    (ii) an individual who has been a self-employed individual within the meaning of the preceding sentence for any prior taxable year. You need self-employed earned income to make current year contributions, but not to make rollover contributions.

    Click to expand…

    Very interesting @spiritrider

     

    #236068 Reply
    MPMD MPMD 
    Participant
    Status: Physician
    Posts: 2509
    Joined: 05/01/2017

    Remember, your one-participant 401k plan is sponsored by the business. Even in the case of a sole proprietorship, it is a separate tax entity for retirement plan compliance purposes. It is extremely rare for the IRS to audit one-participant 401k plans. It is even more rare for the IRS to audit a one-participant 401k that is not required to file Form 5500-EZ.

    Stepping on to my soapbox.

    The odds of you ever getting caught for not having a legitimate trade or business when you adopt a one-participant 401k for the sole purpose of rolling over pre-tax IRA assets is extremely small. However, is the only reason you don’t cheat on your taxes is because you might get caught.

    “From everyone to whom much has been given, much will be required; and from the one to whom much has been entrusted, even more will be demanded”

    Call me naive, but physicians should hold themselves to a high standard of doing the right thing. My personal opinion is that physicians should not be lazy and trying to figure out how little self-employed earned income they can get away with to open a one-participant 401k just to use it as a rollover destination. Quite frankly my personal opinion is, if a physician can’t figure out how to generate enough self-employed earned income to pay SE taxes, they can’t be much of a physician.

    Stepping down from my soapbox.

    Click to expand…

    This has been discussed so much but it’s a fascinating topic. @spiritrider inasmuch as I respect your obvious expertise on this I must say that I am baffled by your position.

    First of all, biblical quotes don’t really add much to the discussion, particularly for those of us who find them universally non-compelling. I try my hardest to be perfectly straight w/ taxes and it has less than nothing to do with any religious tradition.

    This is so not a professional ethics question and there’s no reason to suggest that physicians looking to open a solo 401k are somehow violating their role as physicians. Again, just bizarre.

    I’m doubly confused b/c I have so often noted and quote your position on the backdoor roth, namely that if congress wants to change the law they can. How this is any different is totally beyond me. As a matter of fact it’s probably a simpler case than the backdoor roth as long as the doc isn’t trying to do hobby deduction shenanigans.

    One thing that’s interesting is that when this discussion comes up periodically I note that you are challenged to show cases proving your point and unless I’m mistaken up to this point you have not.

    #236092 Reply
    Avatar spiritrider 
    Participant
    Status: Small Business Owner
    Posts: 1905
    Joined: 02/01/2016

    That quote has been paraphrased dozens of times in on-religious contexts. Such that it has become a common expression of doing the right thing in our society.

    Your analogy of the Backdoor Roth is another Red Herring. It is and has always be been the combination of two entirely legal and legitimate transactions. Mr. “Chicken Little” Michael Kitces claims of a step transaction violation were never justified in law, regulation or guidance.

    Unlike the unproven “theory” that the Backdoor Roth was not legitimate. The view I have presented on this issue is based on the Internal Revenue Code, SCOTUS and other court rulings, and IRS regulations/guidance. Whether there are or there are not any court cases specific to self-employment eligibility to adopt a one-participant 401k plans is irrelevant. Feel free to find something with substantial authority to dispute my view.

    The right thing to do is the always the right thing to do. Are you advocating otherwise.

    #236111 Reply
    Avatar Tim 
    Participant
    Status: Accountant
    Posts: 3067
    Joined: 09/18/2018
    standard of doing the right thing

    Click to expand…
    it’s a fascinating topic

    Click to expand…

    Ethics is a very personal choice whether in the context of anyone’s business, personal, or well just life. I firmly have the impression both of you are ethical individuals. I know I tell “little white lies” probably everyday. I know both of you believe in structuring you personal and business affairs in an ethical and legal way. The question is “Was miscellaneous income properly labelled as a business venture for tax purposes?”

    I suggest if you really were attempting to run a business (even for a short duration), call it that. White lies on taxes is not a line I choose to cross. To me that is not a gray area being aggressive. It’s just the right way to live your life.

    Both of you have much more intelligence and debating skills than I. I appreciate both of your contributions and respect your points of view. I would be telling a “white lie” if I told you I agreed with everything. So be it. It’s just a forum.

    #236115 Reply
    MPMD MPMD 
    Participant
    Status: Physician
    Posts: 2509
    Joined: 05/01/2017

    That quote has been paraphrased dozens of times in on-religious contexts. Such that it has become a common expression of doing the right thing in our society.

    Your analogy of the Backdoor Roth is another Red Herring. It is and has always be been the combination of two entirely legal and legitimate transactions. Mr. “Chicken Little” Michael Kitces claims of a step transaction violation were never justified in law, regulation or guidance.

    Unlike the unproven “theory” that the Backdoor Roth was not legitimate. The view I have presented on this issue is based on the Internal Revenue Code, SCOTUS and other court rulings, and IRS regulations/guidance. Whether there are or there are not any court cases specific to self-employment eligibility to adopt a one-participant 401k plans is irrelevant. Feel free to find something with substantial authority to dispute my view.

    The right thing to do is the always the right thing to do. Are you advocating otherwise.

    Click to expand…

    It’s not my analogy, I’m going off your guidance on this forum. You have said repeatedly that the backdoor roth was legit. In doing so you were arguing with people who made the same arguments you are now making about solo 401ks — it’s not the intent, it’s shady, it’s not the spirit of the law etc.

    I am not going to get much farther into this. On this and other threads I fail to see why you are making this such a moral issue. Again, if it was so important the IRS could put out a simple one page guide saying that solo 401ks are for people who earn X% of their AGI through SE income. In the absence of that I fail to see how this even touches on morality.

    I don’t think you’re going to be able to get me to see how you view this differently than all of the confusion about the Backdoor Roth that existed when I first started reading WCI. I remain genuinely baffled as to why this issue seems to bother you so much. You just assert with very little evidence that a) this is totally different than the backdoor Roth and b) the IRS has been very clear on this. It would help especially if you could provide a detailed explanation of (B) but you have always declined to do so or immediately taken the conversation towards deductions and hobby rules where we all agree with you.

    #236130 Reply
    Liked by Lithium
    Avatar spiritrider 
    Participant
    Status: Small Business Owner
    Posts: 1905
    Joined: 02/01/2016

    As I stated in my previous post. I see absolutely no inconsistency in my position on the Backdoor Roth and this issue.

    The Backdoor Roth was and is entirely supported in law, was supported indirectly in Summa Holdings v. Commissioner and was never subject to any IRS regulations or guidance to the contrary. It was the naysayers who had no substantial authority to justify there claims.

    In a previous thread, I referenced the IRS final section 199A regulations. They reiterated their long standing position on what constitutes being engaged in a trade or business and referenced supporting court rulings.

    My position on both the Backdoor Roth and this issue is fully substantiated by concrete substantial authority. Yours is the one with no evidence

    #236135 Reply
    Avatar ZZZ 
    Participant
    Status: Spouse
    Posts: 702
    Joined: 06/18/2018

    Funny that arcane, nonsensical tax rules turn into an ethics debate. If the tax code wasn’t ridiculous, none of this would matter. Let’s step back:

    An IRA is an account which can be funded with pretax $ deducted from current income, grow tax deferred, and is taxed at normal income rates upon withdrawal.

    A solo 401k is an account which can be funded with pretax $ deducted from current income, grow tax deferred, and is taxed at normal income rates upon withdrawal.

    They’re the same thing (yes, I understand there are differences, but in terms of the tax reality of each for someone, they’re the same).

    Yet, with one I can do a backdoor Roth, and the other I can’t. That’s nonsensical. All the more nonsensical because the only reason anyone needs to do a backdoor Roth is because the rules arbitrarily state that beyond a certain income threshold, instead of directly making $6k after tax dollars tax free forever, you have to add an additional step to make $6k tax free forever. Same result, just extra paperwork.

    Instead if having multiple names with slightly different rules for essentially the same thing, countless hours could be saved by harmonizing the arbitrary rules.
    – ‘Don’t be dumb, save some money account’ — every taxpayer can put in up to $56k (inflation indexed) tax deferred annually, any combination of employee or employer contribution. Tax as income when withdrawn
    – ‘Don’t be dumb, save more money account’ — everyone can put $6k (inflation indexed) post-tax dollars annually. Never taxed again.

    No intent dilemmas.

    #236136 Reply

Reply To: Opening a Solo 401k Without Income

In case of a glitch or error, please save your text elsewhere, clear browser cache, close browser, open browser and refresh the page.

Notifications Mark all as read  |  Clear