Creating an entity to contribute to a 401(k)

[Michael Kambic]

Hello,

I do real estate flips currently under my own name (I know lots of liability risk), but the up side is I pay capital gains tax at a lower rate then a pass through LLC.

Can I create an LLC that has no income, so that I can contribute to a 401(k)? I would personally fund it to make these contributions.

The reason is that I will setup an LLC with a partner per "flip", so the entity will only last a few months, but I would like to protect retirement funds in the meantime.

Thanks,

-Mike

[Linda Weygant]

@Michael Kambic - there are many ways to accomplish your goals, but my first concern is that you're reporting your flips as capital gains.  They aren't.  They are ordinary income and you've likely got a bit of a struggle on your hands to work this through.

You can absolutely set up retirement plans based on your flipping income, even if you're flipping with partners, but you're in a situation where you're trying to have your cake and eat it too.

If you are really going to insist that your flipping is capital gains (it's not, but let's say it is), then no - no retirement contributions because retirement contributions are based on EARNED income and capital gains is PASSIVE/INVESTMENT income.  So low taxes, but no retirement contributions.

But, if you report this correctly as ordinary income, you'll pay some higher taxes.  And you'll also be reporting your income and paying tax correctly.  AND you get to contribute to retirement.

Get with a competent CPA quickly so they can unwind the mess you've got and get you flying straight and true going forward.