Creating a solo 401k to roll-in an IRA to avoid aggregation

Submitted by Dan Lohmar on Mon, 2020-01-20 00:36

What are the income requirements for creating a solo 401k? Does the the “self-employed” person actually have to make money in order to qualify for a solo 401k. If they don’t make money, do they have to actively pursue business?

It was recently proposed to me that a non-working spouse with an IRA could create a “business” in order to set up a solo 401k. The spouse could then role the IRA into the solo 401k in order to avoid the aggregation rule when doing back door Roth IRAs.

It looks like the only qualifying criteria the brokerage firms look for on the solo 401k application is an EIN.

Is this legit, or is it a disqualification in the making?



Submitted by Alan - IRA critic on Mon, 2020-01-20 01:57

It could trigger a real risk of disqualification if the IRS or DOL became concerned about potential abuses. To qualify as a self employed individual under Sec 401k, you must either report a profit in the current or some prior year, and if you don’t meet this definition of a SE individual, you cannot adopt a solo 401k. You cannot adopt such a plan just to harbor an IRA rollover. 

Submitted by William Tuttle on Mon, 2020-01-20 15:21

  • First, to be considered engaged in a trade or business, you must have a good faith intention to make a profit or with the belief that a profit can be made from considerable, regular, and continuous activity.
  • Then as pointed out by Alan, in order to be considered a self-employed individual under Section 401(c) to be eligible to adopt a one-participant 401k. You must further have self-employed earned income from a trade or business in the current or any prior year.
  • Finally:
  • An IRA custodian is not responsible for verifying you have sufficient compensation and a MAGI <= the applicable limit.
  • An HSA custodian is not responsible for verifying you are covered by an HDHP and have no disqualifying “other coverage”.
  • Just like a one-participant 401k provider is not responsible for verifying you are a “self-employed individual” as defined in Section 401(c) eligible to adopt the plan.
  • In all these cases. The eligibility to open accounts and make contributions is between you, the tax code and the IRS.
  • While I have not heard of this happening. Keep in mind that in the worst case disqualification scenario. The IRS could force you to distribute all one-participant 401k account balances including any rollovers. They would not be rollover eligible, subject to ordinary income taxes and if applicable, the 10% early withdrawal penalty.
  • If you are going to do this. Find yourselves some legitimate self-employment. Drive an Uber, do some independent contractor work, make something and sell it on Etsy, etc…

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