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Sole Proprietorship for Solo 401k for clean Backdoor Roth

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  • Sole Proprietorship for Solo 401k for clean Backdoor Roth

    Goal: Be able to do a clean yearly Backdoor Roths by zeroing out old roll-over IRAs into a Solo 401k

    So got inspired by recent posts about bad 401k options and researching low-cost solo 401ks like Firdelity that allow reverse roll-overs into the solo 401ks.

    Question:

    Currently salaried with W2 income. Don't want to do any moonlighting and become an IC (work/life balance choice). I do however do some honorarium work occasionally, mainly answering surveys. Sometimes enough to generate a 1099 but generally less than $500 per year.

    Is this enough to declare as a sole propertieship and get an EIN to open a solo 401k at Fidelity?

    I does seem I'll be opening a can of worms as right now the 1099-misc get listed as "other income" taxed at marginal and if I move them as "non-employee" it gets hit with self-employment tax of 15% on TOP of the marginal -- ouch! But as I understand if it's less than $400 then it doesn't get taxed but you still need the schedule C so I'll still be adding additional work on-going each year.

    Also on-going would I just need to take at least one survey every year to keep the sole propertieship "alive"? At this small amount I'm not planing to contribute in any meaningful way, it's mainly to hold my previous rollover IRAs.

    I remember from the post that getting a solo 401k at some point is always a good idea and that you only need to earn as little as a dollar or just the "intention" to make money.

    Right now just trying to understand the mechanics on how to execute.

    Thanks!

  • #2
    I think your biggest problem is finding a company to set up a solo-401k for a few hundred dollars. Granted, you'll be beefing it up, but SOP may not allow for it. However, if Fidelity will cooperate, I know of no minimum limit. After all, employees in company 401k's often start with only a few dollars per pay period.

    You are correct that you do not have to pay SE tax if your sch C income is below $400 - but you do have to pay income tax fyi.

    I'm not sure you have to continue the sole proprietorship after you've accomplished your purpose of rolling over. We've had that discussion on another thread on this forum and don't believe we had any conclusive agreement. But, seriously, the only option for you to earn income on the side is to take surveys?
    Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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    • #3
      Fidelity would allow incoming rollovers as far as I know, so that would work.  You won't need to do a 5500 form until your balance is over $250k.  A couple of hundred bucks is plenty enough to justify opening a solo 401k.
      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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      • #4
        What if I never contribute and just do a massive reverse roll-in? Seems Fidelity would still want the business even if I never ended up contributing. I would max my contribution in my regularly salary which only leaves the 20% employER profit sharing available in the solo 402k side. But at 20% on $400 earned income (net) would not even seem to be worth the trouble but guess any amount saved for retirement ($80 in this case) is still better then nothing.

        Does Fidelity need to know how much I report on my schedule C each year? Do they really care? Or do they ask when opening if you have any self generated income but a lot businesses don't generate money for years.

        My understanding is I just need an EIN which I can get from IRS, but pretty sure at that point I don't need to prove income since I can register any business in "pre-revenue" stage.

        I guess the issue is in the case of an IRS audit and if the business looks "legit". But then again if it's so small and not taking any wacky deductions (if any) like writing off cars and boats seems should be good.

        Yeah, guess I can make some more money like selling stuff in eBay or driving Uber but then again the main goal is to do the minimum threshold to make the sole proprietorship a "going concern" so it can sponsor a 401k so everything is on the up and up.

        Thanks!

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        • #5
          You can contribute an amount = your profits as long as you don't exceed $53k total in all accounts. I don't know the requirements at Fidelity, so check with them. I don't think there will be a problem with the business looking legit - your 1099 income will suffice. You can get your EIN online here.
          Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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