IRA to Solo 401k Rollover

[Zach Schmid]

Hey Guys! 

The BP Podcast with Amanda Han on taxes last month really got the gears turning in my head. For anyone who hasn't listed to it yet... it's a great one! Episode 162 

Now onto my question.. I have a traditional IRA which was rolled over from a 401(k) from a previous employer.

I currently hold a W-2 job, and own cash-flowing investment property on the side. I understand that the income from my rentals is reported on Schedule E, and that to contribute to a solo 401(k) you need Schedule C reported income. I currently do not have Schedule C income reported. 

So my question is two parts:

• Is there a schedule c income requirement for opening and rolling over an IRA into a solo 401k? Is owning a business enough to qualify?
• Is there a schedule c income requirement to maintain the solo 401k. Meaning that if there is no schedule c income in a particular year, the solo 401k must be rolled over into another type of retirement account? 

I also know that a self directed IRA is an option, but the potential benefits and flexibility of a solo 401k seem a lot more appealing (lending, no UBIT, etc) .

[Dmitriy Fomichenko]

Hi Zach,

a 401K is considered an 'employer' plan, where as an IRA is an individual retirement account. A legitimate business is needed in order to establish a 401k plan, which can be of any way, type or form: corporation, LLC, partnership or sole-proprietorship.

So to answer your questions:

• If you have a start up business, it may not have the income yet, but as long as it is a legitimate business it can adopt a 401k plan.
• The business must be legitimate activity with the intention of generating profits, not a hobby. And while contributions to the employer plan are not required to be made annually, occasional contributions should be made. A plan will not be considered qualified if it appears from surrounding facts and circumstances that it was established as a temporary program. It will also be considered temporary, if it is abandoned within a few years after it is established for reasons other than business necessity. A plan will be considered temporary if substantial and recurring contributions are not made.

Hope this helps and if you wish to discuss your particulars in details - feel free to give me a call to discuss.