I rent out the in-law unit in my backyard. I also have a full time W2 job. I want to roll over my former employer's 401K into a solo 401K so I can more flexibility wrt investments. I don't want to put my rental income into a solo 401k if I don't need to.
How can I setup a Solo 401k if I have only rental income? I read that you can setup solo 401K if you have only Schedule C income and not Schedule E income.
Rental income does not qualify to sponsor a Solo 401(k) plan. It is passive investment earnings, not self-employment income.
If you wish to take existing retirement savings and diversify into things like real estate and private lending, a self-directed checkbook IRA would provide flexibility similar to the Solo 401(k).
You can't contribute passive income from schedule E, but earned self-employment income from schedule C is eligible, so your understanding is correct.
Without self-employment activity, a self-directed IRA will be a better match for you. The Solo 401k requires earned income from self-employment. Passive income does not qualify.
To learn more about what qualifies as self-employment income in order to open a solo 401k plan, see the following:
Also, IRS Publication 560 (the publication for self-employed plans such as SEP and SIMPLE IRAs, ans solo 401k plans) has a section that gives examples of self-employment activity.
I have a similar situation and questions for the experts. I currently have a Roth IRA, a 401K at a previous employer, and 2 duplexes I self manage. My thought is to:
1. Create a property management company (PMC) to manage my rentals
2. Open a solo 401K for PMC
3. Rollover my previous 401K to my new PMC solo 401K
1. Do you see any issues with this?
2. Would I need to create an LLC for the PMC?
- My rentals are in my name...so it may look less "fishy," and be easier bookkeeping, for Angel Property Owner to pay PMC LLC for services, rather than Angel Property Owner making checks to Angel Property Manager
3. My thought is to pay the going rate of 10% of monthly rents to PMC. That would translate to roughly $5,000/yr, and I would then save that full amount into the solo 401K.
Thanks in advance!
Please discuss this matter with your CPA, who will likely tell you this is self-defeating.
Passive income from rentals is favorably taxed. To convert some of this income to self-employment income simply for the purpose of then making contributions to a retirement plan is generally non-beneficial. By the time you add up the self-employment tax and administrative cost of running a property management business and filing a separate tax return for that business, you will not likely come out ahead.
If you were providing property management services for other investors, that would be a different situation.
You are not required to have an LLC in order to establish Solo 401K plan, but you must have legitimate self employment activity with earned income to qualify. As Brian suggested you should discuss your strategy with your CPA.
@Brian Eastman@Dmitriy Fomichenko
Thank you both for chiming in. I will certainly run this by my CPA. Just to be clear, I'd be doing this not for the mere $5k yearly contributions. It is the roughly $165k rollover of my existing 401k that I'm after. The yearly contributions would just be a bonus.
Also, I know a SDIRA is the more obvious option. However, I would like the solo 401k, if possible, for (i) the $50k loan option & (ii) no taxes when using financing.
Free eBook from BiggerPockets!
Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!
- Actionable advice for getting started,
- Discover the 10 Most Lucrative Real Estate Niches,
- Learn how to get started with or without money,
- Explore Real-Life Strategies for Building Wealth,
- And a LOT more.
Sign up below to download the eBook for FREE today!
We hate spam just as much as you