401k Permanency

Hello-

Can an individual who had self-employment income during the first part of 2021 (but started a W2 job mid-way through) setup a Solo 401k now for 2021 even though self-employment income has stopped?

Thank you!



The solo K for 2021 can be adopted up through the due date plus extensions for 2021 returns, enabling the employer contribution for 2021, but since the employee deferral election had to be made by 12/31/2021, no employee contribution will be allowed.

Since self-employment has stopped can they still establish the 401k or would this violate any permanency requirement? They do plan to continue to work on self-employment projects but may not have income for a couple of years. They do not intend to make a 401k contribution for 2021 or the next couple of years but want to roll over their old 401k into this new Solo 401k. Do you see an issue with this?

Under 401(c), a self-employed individual eligible to adopt, maintain and contribute to a 401k is defined as someone with self-employed earned income in the current or any prior tax year.
There is no requirement to make contributions in any given year, but contributions should really be made in the first year. This will establish the intent for it to be an employer retirement plan. and not just a destination for rollovers.
While a 401k must be terminated within one year of a plan sponsor ceasing to exist. The absence of self-employed business activity in and of itself does not.
The IRS has generally held that a sole proprietorship continues to exist until death of the sole proprietor or if/when proactive steps are taken to close the business.

Add new comment

Log in or register to post comments