Solo 401k for Unemployeed/Stay at Home Mom?

Tax Liens & Mortgage Notes
8yFollow

Solo 401k for Unemployeed/Stay at Home Mom?

Adam Goldberg
Natick, MA · Member since 2018 · 21 posts · 3 votes
Hi All, My wife and I are about to have our first child and she may not be going back to work. Simultaneously, we are about to start the search for our first home and either flip or rent after 2 years. We were going to go the traditional mortgage route, but I recently listened to an early podcast that explained Self-Directed IRAs and it sounded like something to look into further. In searching the BP forums, it looks like there are these Solo 401k's that people suggest too, but need to be self-employees in order to qualify. While I plan to stay a W2 employee, my wife would a stay at home mom. Curious what are the legal requirements to be considered "self-employed" if we wanted to pursue the Solo 401k for a Real Estate investment. Thanks in advance! -Adam
1Reply
58 views

Most Popular Reply

Brian EastmanPro Member
Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes
8y

@Adam Goldberg

Self employment means that you have a for-profit business activity that generates earned income. It does not sound like something within your current situation. A self-directed IRA may be an option for you.

Also, as I read your post, it looks as if you are considering a home for your personal residence. A self-directed IRA or Solo 401(k) may not be used in that fashion. Such plans are purely for diversifying your tax sheltered retirement savings into alternative assets such as real estate, but all activities must be exclusively for the benefit of the plan and you may not personally use the plan funds in any way.

5Reply
See this reply in the discussion

10 Replies

Jump to latestLatest
  • Mike Taravella
    Rental Property Investor · Knoxville, TN · Member since 2017 · 160 posts · 107 votes
    8y

    Hello @Adam Goldberg

    All self directed IRA or solo 401k questions I would go to @Dmitriy Fomichenko

    He provides you with an intro video on all basic questions and took time to set up a call and direct all my questions.

    Incredible resource!

    1Reply
  • Brian EastmanPro Member
    Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes
    8y

    @Adam Goldberg

    Self employment means that you have a for-profit business activity that generates earned income. It does not sound like something within your current situation. A self-directed IRA may be an option for you.

    Also, as I read your post, it looks as if you are considering a home for your personal residence. A self-directed IRA or Solo 401(k) may not be used in that fashion. Such plans are purely for diversifying your tax sheltered retirement savings into alternative assets such as real estate, but all activities must be exclusively for the benefit of the plan and you may not personally use the plan funds in any way.

    5Reply
  • Bob Malecki
    Investor · Kingston, WA · Member since 2008 · 1k+ posts · 1k+ votes
    8y

    Hi hi Adam, as Brian mentions, earned income in a self-employed business is the key. You could start by creating an LLC and then setting up a business that creates earned income. This could be house flipping, reselling products on eBay or Amazon, consulting, etc.

    Once she has some earned income for the tax year, she can set up a solo 401k and put part of that income into a Roth component. Once the Roth component is funded then she can take the capital from the solo 401k for investing in passive income projects like rentals or notes and the income is tax free. 

    So, once she has capital available in the Roth solo 401K she can grow that tax free in tandem with her earned income from the LLC, and continue to make contributions from the LLC into the Roth on an annualized basis.

    1Reply
  • Bob Malecki
    Investor · Kingston, WA · Member since 2008 · 1k+ posts · 1k+ votes
    8y

    Also also if she works from home you can set up a home office and have some home based business tax deductions as well off of your personal income. 

    1Reply
  • Bob E.
    Queen Creek, AZ · Member since 2014 · 2k+ posts · 1k+ votes
    8y

    We set up a self directed IRA a few years ago and have been happy with how the process works. Feel free to reach out if you have any questions.

    1Reply
  • Marco Bario
    Specialist · Frederick, MD · Member since 2017 · 475 posts · 454 votes
    8y

    I have a Solo 401(k) which I love, and was able to establish it after launching an e-commerce business much like @Bob Malecki suggests. There are benefits over a standard self-directed IRA including the ability to take non-recourse loans (meaning you don't personally guarantee) in order to leverage when buying property, higher contribution limits, and the ability to loan yourself money from the retirement account. My 401(k) is structured as a trust, and that trust owns an LLC which I use for investments as well. Mat Sorensen has a great book you can purchase on Amazon: "The Self Directed IRA Handbook." After reading the book, I used Mat to set up my Solo 401(k) and the associated LLC.

    One of my best financial decisions overall.

    Happy to answer any questions.

    1Reply
  • George Blower
    Retirement Accounts Attorney · Southfield, MI · Member since 2017 · 3k+ posts · 1k+ votes
    8y

    @Adam Goldberg

    The following IRS sites are also good resources for solo 401k information. 

    https://www.irs.gov/retirement-plans/one-participa...

    https://www.irs.gov/pub/irs-tege/forum08_401k.pdf

    https://www.irs.gov/forms-pubs/about-publication-5...

    2Reply
  • Logan AllecBusiness Member
    Accountant · Los Angeles, CA · Member since 2014 · 1k+ posts · 980 votes
    8y

    @Adam Goldberg Not sure what her skill set is, but these days there are plenty of work-from-home opportunities that stay-at-home moms are doing well at.  Blogging is one of them.  We launched a blog last year on the side, and it's been an excellent source of passive income for us.

    But that's not the only thing.  As others have mentioned, e-commerce / Amazon reselling is a great side hustle.

    Clarita CPA Group516 Reviews
    WebsiteView Page
    2Reply
  • Dmitriy Fomichenko
    Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
    8y

    Adam, congratulations on your first child! Your life will never be the same! I also commend you for allowing your wife to stay home to raise your child, it's one of the most difficult 'jobs' but it is also the most rewarding, no one can replace child his mom, especially during those early years.

    Truly self-directed Solo 401k plan is great wealth building vehicle, but it is not for everyone. To be eligible for it you not only must have legitimate business or self-employment activity, but you must also maintain it in order to maintain the 401k, it is considered to be employer-sponsored plan and it can't exist without the plan sponsor. 

    Here is how IRS defines self-employment:

    https://www.irs.gov/businesses/small-businesses-se...

    I agree with Logan, there are many ways for your wife to utilize her talents and gifts while staying at home, keep exploring and I'm sure you will find the right fit soon enough. 

    3Reply
  • Adam Goldberg
    OP
    Natick, MA · Member since 2018 · 21 posts · 3 votes
    8y

    Wow, thanks everyone for the great responses!

    @Brian Eastman Thanks for confirming the part about personal residence. Will be looking to purchase first investment property soon as well, so that's good to know. 

    @Bob Malecki Thanks for the suggestions regarding creating an at home business that creates earned income, there are several option we could pursue to get her set up with that. 

    This seems like a great option for us, and I'll definitely dig deeper into the resources many of you provided. Thanks!

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free