Switching from W2 to Portfolio Income

[Larry S.]

I Started my 401k as a general contractor, which generated a W2. I have now shifted towards portfolio income / rents , loan interest , short term market gains , and do not generate a lot of w2 income. Do I ?

Convert my 401k into a Roth IRA / or Convert some of the 401k to a Roth IRA ?

How do I contribute if there is no or minimal w2 income? any ideas?

Larry S.

Contact

[George Blower]

Thank you for posting your questions.

1) In order to continue to maintain the Solo 401k, one needs to continue to be self-employed including reporting earned self-employment activity on your taxes (note: (i) investment income is not considered earned self-employment income; (ii) one’s ability to contribute to the solo 401k is a function of the earned self-employment income so if there is no self-employment income then one can’t make Solo 401k contributions (i.e. “you can’t save more than you earn”)). Whether one needs to terminate the Solo 401k depends on the facts and circumstances. For example, if the self-employed business has not been formally closed and one is still generally pursuing self-employment activity but has a year with little to no income, it would be generally acceptable to maintain the Solo 401k (see more here: Freeze My Solo 401k Plan – My Solo 401k Financial)

2) If the Solo 401k continues to be maintained, one generally can’t transfer pre-tax Solo 401k funds to a Roth IRA until they are at least 59.5 years of age (see distribution rules here).

3) If the Solo 401k plan is terminated (see more: https://www.mysolo401k.net/process-terminating-closing-solo-401k-solo-k-individual-401k-individual-k/) then one may transfer funds pre-tax solo 401k funds to a Roth IRA which will be a reportable event. See also: https://www.mysolo401k.net/items-to-consider-before-processing-a-conversion-of-pretax-self-directed-solo-401k-funds-to-a-roth-ira/

George Blower

My Solo 401k Financial

Contact

8004897571 mysolo401k.net

[Larry S.]

Thank you George for replying ,

1. So My company is still operational (but only generating portfolio income) .

Would that fall into the following IRS statment ;

“The business must be in existence, but there is no requirement for
“active” engagement in business. A legally constituted “dormant” entity may
sponsor a plan.” ?

Also on the transfere to a Roth IRA , could I transfere 25k and pay off the taxes with external funds?

Thanks again

Larry S.

Contact

[George Blower]

1) Yes but per the distribution rules linked above one may generally not transfer funds out of an existing Solo 401k (e.g. to a Roth IRA) until the participant is at least 59.5 years of age.

2) In the event that one is eligible to transfer funds from a pre-tax solo 401k to a Roth IRA, there is no withholding required such that the taxes due may all be paid with non-retirement funds.

George Blower

My Solo 401k Financial

Contact

8004897571 mysolo401k.net

[Larry S.]

Thank you for the reply.

If my LLC owns office space, and ( I as a daytrader, sole proprietorship by default) rent said office space from my LLC does that not turn the passive income to non passive?

Regs. Sec. 1.469-2T(f)(6) covers the treatment of self-rental transactions. It provides that an amount of the taxpayer’s gross rental activity income for the tax year from an item of property equal to the net rental activity income for the year from that item of property is treated as not from a passive activity if the property is:

1. Rented for use in a trade or business activity in which the taxpayer materially participates for the tax year; and

2. Is not described in Temp. Regs. Sec. 1.469-2T(f)(5), covering property rented incidental to a development activity.

What would ordinarily be considered income from a passive activity is treated as nonpassive income because the owner materially participates in the operating-lessee entity.

A business must issue a 1099-MISC if it has made payments to a limited liability company. The most common ones include:

Rent. You must report any rental payments of $600 or more paid to an LLC. Those payments might include rent for office space, machines or equipment. However, you do not need to report rent that you paid to a real estate agent.

Every U.S. taxpayer must pay Social Security and Medicare taxes on his or her income. For self-employed individuals, these taxes are called self-employment taxes. Self-employment taxes are calculated on the individual’s federal income tax return based on the net income from the business, including 1099 income.2



So If my LLC is Getting a 1099-Misc would that not be eligiable for Solo 401k contributions that based net- income from self-employment?

Thanks Larry

Larry S.

Contact

[George Blower]

Good question – ultimately the question of how to report one’s income (e.g. whether as passive or active income) is not a 401k question but rather a question for one’s tax advisor because of course one must know how to report such income regardless of whether one has a solo 401k plan.

George Blower

My Solo 401k Financial

Contact

8004897571 mysolo401k.net