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  • solo 401k for spouse

    My wife used to work and accumulated a low six figure figure in a SEP at VG. I would like her to open a solo 401k account and roll the SEP money into it so I can start doing backdoor Roths for her. Applying for a EIN for her "side" business with the IRS can be done online but I have some questions:

    1. Income- does she even need to earn any income for the business? Looking online you can open a solo 401k at multiple vendors with a EIN.

    2. Let's say she does what WCI advises and earns a couple bucks doing online surveys. Looking online you need to earn at least $600 before you file a 1099 MISC. Does she need to file any income with the IRS to make the income "official" even if it's a trivial amount? Or just save a copy of what she earned if the IRS ever questions why she applied for the EIN?

    This feels like the machinations of the backdoor Roth when people used to advise waiting to do the conversion. Now everyone just does the conversion immediately.

  • #2
    Was the SEP from her own business? Or from another employer?
    1. I’m not comfortable advising on whether she is eligible to open a solo-k solely to r/o the SEP (assuming she owned her own business) but spiritrider should be. And I believe those answers would make a difference. Of course, any custodian will let you open a solo-k. It is up to HER (and her CPA) to determine whether she is qualified to do so. The custodian is merely the facilitator. Kind of like they don’t ask how much you earn when you contribute to a Roth IRA.
    2. I hope WCI is not still advising this. If he is, I wouldn’t take it as gospel for enabling opening a solo-k under the regs. Certainly not for a “couple of bucks”. He wouldn’t have to defend you before the IRS if it were ever questioned. Of course she needs to report any income she earns - reporting it doesn’t make it official, it just means you are complying with the law. Assuming you file a joint return, she would report it on a schedule C and the profits would be included with with your income, adjustments, deductions, etc.
    Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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    • #3
      As alluded to by jfoxcpacfp, were these SEP IRA contributions made by her W-2 employer or from her own business. Only the latter would enable the adoption of a one-participant 401k without current income from a trade or business.

      In the final QBI regulations, the IRS affirmed that the seminal ruling on being engaged in a trade or business is SCOTUS Higgins v. Commissioner.

      ​​​​​​​In that ruling they established that the individual must have a good faith intention to make a profit or with the belief that a profit can be made from the activity and there is considerable, regular, and continuous activity.

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      • #4
        Originally posted by spiritrider View Post
        As alluded to by jfoxcpacfp, were these SEP IRA contributions made by her W-2 employer or from her own business. Only the latter would enable the adoption of a one-participant 401k without current income from a trade or business.

        In the final QBI regulations, the IRS affirmed that the seminal ruling on being engaged in a trade or business is SCOTUS Higgins v. Commissioner.

        In that ruling they established that the individual must have a good faith intention to make a profit or with the belief that a profit can be made from the activity and there is considerable, regular, and continuous activity.
        She was an optometrist who worked as an independent contractor at a Lasik center. So the money was from her own business but that has been 15+ years. There is a $150k in the SEP account.

        I have been nudging her to work a part-time gig just so she could open a 401k and/or have an employer 401k to roll the money out of the SEP for years. No luck.

        Appreciate the advice from the both of you.

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        • #5
          Read the last sentence in my first paragraph above again. To put it another way.

          Under 401(c), a individual is a self-employed individual eligible to adopt, maintain and contribute to a one-participant 401k, if they have self-employed earned income in the current or any prior year.

          Since your wife had self-employed earned income in a prior year, she can adopt a one-participant 401k without any current income. Unless she took demonstrative steps to terminate her sole proprietorship. Normally, a sole proprietorship exists from inception until death.

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          • #6
            Originally posted by spiritrider View Post
            Read the last sentence in my first paragraph above again. To put it another way.

            Under 401(c), a individual is a self-employed individual eligible to adopt, maintain and contribute to a one-participant 401k, if they have self-employed earned income in the current or any prior year.

            Since your wife had self-employed earned income in a prior year, she can adopt a one-participant 401k without any current income. Unless she took demonstrative steps to terminate her sole proprietorship. Normally, a sole proprietorship exists from inception until death.
            She never formally shutdown her independent contractor status. She just stopped working since having kids.

            I was able to find her TIN on her VG statement and I will use it to open up a solo 401k at VG.

            Much thanks. Only regret was I wish I pursued this earlier.

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