Unearned income and single person DB or 401k
An individual lives off his real estate investments rental income and receives a K1 each year from these investments. On his own he set up a small 401k for himself and his wife and both have been putting away $54k each year to this plan.
He would like to put more money away pre tax and wonders acbout a Define Benefit plan.
Since his income is unearned, is he eligible for a DB plan, or for that matter, is he allowed to contribute to the 401k he established? Would he be able to create an IRA?
Permalink Submitted by Peter Lingane on Tue, 2011-07-19 14:48
Your customer appears to have a problem since income from real estate is generally considered investment income and is therefore not compensation for pension purposes.
If your customer and his wife are not entitled to contribute to a pension, no deduction is allowed for contributions – meaning that your customer has been understating his taxable income by about $100K a year. The statute is probably six years but an aggressive examiner might try to go back further.
The excess pension contributions and earnings must be withdrawn, meaning that they will be taxed a second time.
I suggest talking to a tax professional.