solo 401K and LLC

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
liuruyu
Posts: 32
Joined: Thu Jul 26, 2012 1:20 pm

solo 401K and LLC

Post by liuruyu »

I had a post a while back regarding how to set up solo 401K for my husband's new business. Things just got a little bit more complicated.

My husband just informed me that he and a friend of his were actually both working on the project and formed a LLC in 2012(only two of them). The business actually turned slight profit towards of the end of 2012. And I would like to my husband to be able to open a solo 401K and roll his IRA into it, which open space for his Roth IRA backdoor. Now my question is:

Can a two-member LLC still open a solo 401K plan? If so, if the other person decides not to make any "employee" contribution, can my husband still allow to make the contribution? (I read somewhere about the ADP/ACP testing thingy?)

Thank YOU so much for your help!
SteveKL
Posts: 500
Joined: Mon Sep 03, 2012 8:13 pm

Re: solo 401K and LLC

Post by SteveKL »

Snipped from IRS web site. Link at the bottom.

The one-participant 401(k) plan is not a new type of 401(k) plan. It is a traditional 401(k) plan covering a business owner with no employees, or that person and his or her spouse. These plans have the same rules and requirements as any other 401(k) plan.

The business owner wears two hats in a 401(k) plan: employee and employer. Contributions can be made to the plan in both capacities. The owner can contribute both:

Elective deferrals up to 100% of compensation (“earned income” in the case of a self-employed individual) up to the annual contribution limit:
2013: $17,500 or $23,000 if age 50 or over; and

Employer nonelective contributions up to
25% of compensation as defined by the plan, or
for self-employed individuals, see discussion below

A business owner with no common-law employees does not need to perform nondiscrimination testing for the plan, since there are no employees who could have received disparate benefits.

The no-testing advantage vanishes if the employer hires employees. No matter what the 401(k) plan is called by a plan provider, it must meet the rules of the Internal Revenue Code. If employees are hired and they meet the eligibility requirements of the plan and the Code, they must be included in the plan and their elective deferrals will be subject to nondiscrimination testing (unless the 401(k) plan is a safe harbor plan or other plan exempt from testing).

http://www.irs.gov/Retirement-Plans/One ... k%29-Plans
Spirit Rider
Posts: 13977
Joined: Fri Mar 02, 2007 1:39 pm

Re: solo 401K and LLC

Post by Spirit Rider »

The first thing to keep in mind is that an LLC is a state chartered business entity. While inter-related, IRS issues are separate and you should not confuse the two.

For IRS purposes a single member LLC is by default treated as a "dis-regarded entity" which means the IRS considers the income to be a sole proprietorship of the individual. For IRS purposes a multi-member LLC is by default treated as a partnership. Either a sole proprietorship income or partnership income are eligable for a solo 401k contributions.

If your husband and his friend elected to treat the LLC as a corporation, then they cannot use the corporations income for solo 401k contributions. This would be because they would either receive W-2 salaries or dividends. Only the corporation could then create a 401k

However, if they did not elect to treat the LLC as a corporation, each of them could use their partnership income for solo 401k contributions. Note the same rules would apply that they could not have employees of the partnership (except for their wives).
SteveKL
Posts: 500
Joined: Mon Sep 03, 2012 8:13 pm

Re: solo 401K and LLC

Post by SteveKL »

The OP's husband's LLC is not a single-member LLC, and therefore is not a disregarded entity. Two people can be considered a "single owner" by the IRS only if they are married.

Also, I respectfully question your statement that the OP's husband and husband's business partner could base 401(k) contributions on their partnership income. I believe that your first example would be correct in this instance (i.e. 401(k) contributions based on W-2 earnings only).
Saving$
Posts: 2510
Joined: Sat Nov 05, 2011 8:33 pm

Re: solo 401K and LLC

Post by Saving$ »

One other issue - it is my understanding you must establish the 401k by the end of the first calendar year (tax year) in which you want to make contributions. This means that although solo 401k contributions for 2012 can be made up until the tax filing deadline for the sole participant (4/15/13), the plan itself must be established by 12/31/12. This means you would have needed to do the paperwork by 12/31/12 in order to be able to contribute 2012 earnings to the Solo 401k.
Topic Author
liuruyu
Posts: 32
Joined: Thu Jul 26, 2012 1:20 pm

Re: solo 401K and LLC

Post by liuruyu »

thank you guys for the response! So I checked with husband and they are filing as partnership. So basically, income/loss will be flowing through 1040 schedule E to our joint tax return 1040 (line 17).

http://www.trustetc.com/new/types-of-re ... -401k.html

based on the above links, looks like partnerships (as long as the only full-time employees are the self-employed partners), each of the partners can set up his own solo 401K. I am not interested in having a solo 401K as a spouse of the partner.

Agree with PP, that the deadline for setting up the plan will be Dec 31. 2012 (above link stated that as well). That is ok, as we can set up the solo 401K plan now for 2013, and roll his roll-over IRA into it. As long as we do this plan set up before 2012 tax filing deadline. I still have time to do the 2012 Roth back door for him.

Let me know if anyone reads something different or contradicts what I have read in the above link.
jared
Posts: 554
Joined: Sun Jul 06, 2008 11:57 pm

Re: solo 401K and LLC

Post by jared »

Vanguard and Fidelity both indicate that owner-only partnerships are eligibile. I assume they've done the proper research.

Vanguard: https://investor.vanguard.com/what-we-o ... idual-401k
Vanguard wrote: Participants

Sole proprietors or partners who have no common-law employees.
Fidelity: https://www.fidelity.com/retirement-ira ... loyed-401k
Fidelity wrote: Eligibility Self-employed individuals and owner-only businesses and partnerships are eligible.

Owners’ spouses may also participate.
Topic Author
liuruyu
Posts: 32
Joined: Thu Jul 26, 2012 1:20 pm

Re: solo 401K and LLC

Post by liuruyu »

thx ! We will go ahead and open the solo 401K at fidelity for him!

This forum has been truly helpful!
Saving$
Posts: 2510
Joined: Sat Nov 05, 2011 8:33 pm

Re: solo 401K and LLC

Post by Saving$ »

Fidelity is the correct choice. Vanguard won't let you roll IRA's into Solo 401k's, which prevents the backdoor Roth strategy.
Post Reply