Individual 401(k)Plan
I am a sole poprietor operating a very small sideline business engaged in leasing a very small piece of commercial property to a coeporation. It has recently been brought to my attention that I can establish an individual 401(k) plan, allowing me to make deductable contributons of large part of the net income from this activity to the plan. This would require paying Self Employment taxes on all net income and reporting the income and expenses on Scedule C instead of Scheule E. Can any of you experts tell me if I can do this? I will really appreciate any advice you can give me. Thank you in advance………..Dave Allison
Permalink Submitted by mk foss on Sat, 2009-02-28 21:17
Real estate rentals are not considered business income for purposes of establishing a retirement plan. Property management is that kind of business – because SE tax is required for the personal services.
If it were a personal service business rather than real estate rentals, you would need to establish a 401k plan before the end of the year in which you claim a deduction. That would mean 2009 would be the first year possible. The 401k plan has rigid rules and requires separate tax returns once the asssets reach a certain level. For a sideline business (assuming it is personal services), a SEP is an easier choice. The SEP can be opened by the due date of the tax return in which you are claiming a deduction – SEPs are still available for 2008 businesses. In either case the “employer” contribution is limited to 20% of the profit after SE tax but no more than $46,000 for 2008 or $49,000 for 2009.
Permalink Submitted by David Allison on Sun, 2009-03-01 18:15
Hi- Thank you for responding to my question. While your answer was not what I was hoping for, you may have saved me from causing monumental grief with the feds and I appreciate that a lot………………Dave Allison