Solo 401k Eligibility
I have a physician client that has large W2, $250k in IRAs/RO IRAs (outside of 403b), has $200k in passive K1 (real estate) income. He usually does lectures and gets a small amount of 1099 income, but did not in 2020 and 2021 because of covid. My question is this. Can he as an individual open a Solo 401k plan with the hopes/not guarantee of being able to contribute in the 2022 tax year? Our main reason for doing this would be to roll all IRAs (he has some REIT/BDC positions that a prior advisor sold him that are underwater and can’t be rolled into his 403b) and make he and his wife back door Roth eligible. So basically do we have to have qualifying Solo contribution income to open one or can we do it based on potential 1099 earnings?
Another thought is he is also a 60% owner in an SCorp (fitness gym), he receives a K1 from this. Could the gym 1099 him for a lecture that he gives about sports medicine to create active income in 2021?
Thanks.
Permalink Submitted by William Tuttle on Thu, 2021-10-21 14:01
Yes, if the previous 1099 income met the requirements of being engaged in a trade or businesess*.
401(c) defines a self-employed individual eligible to adopt a 401k as someone with self-employed earned income in the current or any prior year.
*From the seminal SCOTUS ruling: “enter into and carry on the activity with a good faith intention to make a profit or with the belief that a profit can be made from the activity with a considerable, regular, and continuous activity.”
As noted by 401(c) explicitly allowing years without a net profit. The latter phrase is subjective. I consider non-trivial as better metric. Taking a few surveys is not reasonable, but in my opinion ongoing non-trivial activity is. In fact, receiving a 1099-MISC Box 7 (1099-NEC 2020+) is almost by definition engaged in a trade or business.
Based on other IRS tax guidance a sole proprietorship once established, exists until the death of the sole proprietor unless active steps are taken to terminate the business.
Permalink Submitted by Ryan Smith on Thu, 2021-10-21 14:36
Interesting so the interpretation would be if he had ACTIVE 1099 in prior years with the intent in future years to have this, then he would qualify even though he had a two year break with no active 1099 (covid related). If this is the case he would not need the 1099 from the SCorp gym for a talk.