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K1 vs 1099

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  • K1 vs 1099

    Does a K-1 have the same solo 401k limits (54k for 2017) as a 1099?

  • #2
    K-1 income can not be used for retirement plan contributions. The limit is $0.


    • #3
      What about K-1 income originating from a two member LLC where both participants participate materially in the business and the income generated is active income (not passive)?  I was under the impression that that form of K-1 income could most certainly be used to determine and fund a wide swath of retirement plans.


      • #4
        The income can be used for a retirement plan, but the retirement plan has to be created at the LLC level instead of at the individual level. Both you and the other participant would need to agree on a plan for the business.


        • #5
          To clarify my and cgossage's posts. Only an employer can adopt a business retirement plan. The partnership is the employer and the partners are employees. If this is what you are doing skip to the last paragraph and please accept my apology for my curt and insufficient original response.

          An individual partner cannot not use K-1 distributions as the basis for adopting their own individual one-participant 401k. If the partnership has no eligible employees other than partners and optionally their spouses, the partnership can adopt a one-participant 401k and each partner can open an account. Each partner can elect to make employee deferrals. The partnership can make employer contributions, but the contribution rate must be the same for all partners.The partnership must make both the employee and employer contributions.

          The partnership one-participant 401k would have had to be adopted no later than 12/31/2017 in order to make contributions for the 2017 tax year. The same 401k contribution rules apply to all 401k plans. Both the $18K 2017 employee deferral limit and $54K 2017 annual addition limits would apply, provided you had the necessary K-1 Box 14 Self-employment earnings - 1/2 SE tax.


          • #6
            If I may tag onto @spiritrider, if you did not set up your solo-k by 12/31/17, you still have time (until the due date of your partnership return, including extension) to set up a SEP (Self-Employed Pension) plan. You can then set up a solo-k for 2018 and roll the SEP into the solo-k and continue apace.

            Note that the partnership extended due date, 9/15, is one month earlier than the LLC and corporation due date of 10/15.
            Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087


            • #7
              I think this applies to me.  I just want to confirm.  I'm a partner of a PLLC in Texas and only 5 other partners and several other 1099 employees.  The PLLC does not have any retirement plans and pays me with K1.  My salary appears in box 4 (guaranteed payments) and box 14 (self-employment earnings (loss)) on my K1.  I currently contribute to a SEP but want to roll this into a solo-401k for this year's earnings and years going forward.  My group has never had retirement plans through the PLLC and doesn't plan to so my only option is an individual type of account.  Just want to confirm that these K1 earnings can go into a solo401k.  I think they should since they are considered "self-employment" and the income is "active" not "passive" like real-estate K1 earnings, etc.  The other partners do SEP iras.  Also, if I can do this, the IRS says plans have to be "equivalent".  Would the other partners' SEP-IRAs be "equivalent" to my  solo-401k if anyone cared to ask in the future???  I would say they are.  Any thoughts?


              • #8
                I already answered this above. Neither you nor the other partners were, are or will be eligible to adopt, maintain or contribute to a SEP IRA let alone a one-participant 401k.

                If you don't believe me, here is the specific IRS regulation.

                26 CFR 1.401-10 - Definitions relating to plans covering self-employed individuals, (e) Definition of employer.

                (1) For purposes of section 401, a sole proprietor is considered to be his own employer, and the partnership is considered to be the employer of each of the partners. Thus, an individual partner is not an employer who may establish a qualified plan with respect to his services to the partnership.

                You all have serious qualified plan errors as you were never eligible to adopt the SEP IRAs in the first place. All the contributions were excess contributions, were not deductible and were/are subject to excise taxes.

                The deductions resulted in under payments of personal income taxes, penalties and interest. If this is for more than tax year 2017, You collectively have a real mess on your hands.