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Opening solo401k with K1 income

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  • Opening solo401k with K1 income

    I joined a small private practice that is setup as a LLC. The income I get from the LLC is in the form of Guaranteed payments, which show up on line 4 of the K-1 and is considered self-employment income for me.

    My CPA told me is OK to open either SEP IRA or solo401k, but I do not trust the guy anymore plus when I called Fifelity, their advisor gave me a long answer how in order to have the solo 401k setup the LLC practice would have to match some of my contribution (which of course they won't).

    Anybody knows more? Thank you

  • #2
    An LLC is a state chartered business entity. It is not a tax status. From your other descriptions I am assuming it is a default multi-member LLC that has not elected to be treated as an sub chapter S corporation. This means it is treated by the IRS as a partnership.

    It was wise for you to not trust your CPA. He was incorrect. A partner is an employee and can not adopt an employer retirement plan. The partnership is the employer who must adopt the employer retirement plan. Then the employee (partner) can make deferrals (401k) out of their guaranteed payments and/or the employer can make non-elective employer contributions (401k, SEP IRA).

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    • #3
      Spiritrider is correct AFAIK.

      Does the practice have a retirement plan already?  Are there employees?

      I know a doc who did just what your CPA suggested, inappropriately as he should have been contributing to the partnership plan and is now having to fix that.

       

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      • #4




        I joined a small private practice that is setup as a LLC. The income I get from the LLC is in the form of Guaranteed payments, which show up on line 4 of the K-1 and is considered self-employment income for me.

        My CPA told me is OK to open either SEP IRA or solo401k, but I do not trust the guy anymore plus when I called Fifelity, their advisor gave me a long answer how in order to have the solo 401k setup the LLC practice would have to match some of my contribution (which of course they won’t).

        Anybody knows more? Thank you
        Click to expand...


        So basically, this is not a solo 401k plan at all, it is a group practice plan, you need to find out whether the group has a retirement plan already.  If they don't, they have to set one up before you can open your own account.  The TPA has to draft the plan document, and then every doc can open their own brokerage account, OR if there is any non-owner staff, the plan should have a record-keeper.  I would also recommend having a low cost record-keeper even if there isn't any staff, depending on how many partners are participating in the plan as that makes the administration and compliance much easier, especially if the group will be growing going forward.  I see way too many messed up plans because this is exactly how they started out - trying to save a few pennies by going 'brokerage account only'.

         
        Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

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