Solo 401(k) purely to receive rollovers?

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lairdb
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Solo 401(k) purely to receive rollovers?

Post by lairdb » Thu Feb 02, 2017 2:56 pm

Something occurred to me recently, and I can't find a reason it's against the rules -- but if it's not, I can't figure out why it's doesn't come up more often.

Theory:

A solo 401(k) that can receive rollovers,
- can receive rollovers from a 401(k), and
- can receive rollovers from a tIRA.

A sole proprietor can open a solo 401(k), but is not required to make any contribution.

I think that means that an individual can open a solo 401(k) as an alternative to a tIRA to receive rollovers (e.g. from past 401(k)s with undesirable investment choices, or even from a tIRA), even if their actual SE income is 0. This gets them a self-directed tax-deferred account that isn't an IRA and therefore doesn't block a backdoor Roth.

Doesn't work? Disadvantages I'm not seeing?

ETA: Found a possible disadvantage, at least vs. a tIRA: At https://thefinancebuff.com/rollover-ira ... -401k.html the author points out that tIRA withdrawal rules are more liberal than 401(k) rules, and if the solo 401(k) doesn't allow loans, that's pretty locked up. Still may be worth it, but there's a disadvantage (even assuming the base theory is correct.)

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serbeer
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Re: Solo 401(k) purely to receive rollovers?

Post by serbeer » Thu Feb 02, 2017 5:18 pm

Nothing wrong with it. I pretty much did the same thing with Fidelity Solo401K, using the same thinking and did roth conversion from my NDIRA, as soon as I had a few dollars of self-employment income and got EIN from IRS. Now, in my case business actually took off and brings steady income, so I now regularly put 19-20% of it into the account as profit sharing as well. But that was not the original intention.

avalpert
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Re: Solo 401(k) purely to receive rollovers?

Post by avalpert » Thu Feb 02, 2017 6:09 pm

lairdb wrote: I think that means that an individual can open a solo 401(k) as an alternative to a tIRA to receive rollovers (e.g. from past 401(k)s with undesirable investment choices, or even from a tIRA), even if their actual SE income is 0.
No, they can't. A 401k can only be opened by a business - for an individual to open one a sole proprietor he must be operating a legitimate business which includes the intent of making profit. What's more, if the sole proprietorship goes away (that is the individual ceases to be operating a legitimate business) then the plan needs to go away too.

nyclon
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Re: Solo 401(k) purely to receive rollovers?

Post by nyclon » Thu Feb 02, 2017 6:12 pm

avalpert wrote:
lairdb wrote: I think that means that an individual can open a solo 401(k) as an alternative to a tIRA to receive rollovers (e.g. from past 401(k)s with undesirable investment choices, or even from a tIRA), even if their actual SE income is 0.
No, they can't. A 401k can only be opened by a business - for an individual to open one a sole proprietor he must be operating a legitimate business which includes the intent of making profit. What's more, if the sole proprietorship goes away (that is the individual ceases to be operating a legitimate business) then the plan needs to go away too.
Can you point to documentation stating this? I'd be interested to see the requirement to terminate the 401k plan if the business ceases to operate - after all, it is a retirement plan and businesses come and go well before a sole proprietor is ready to retire. Thanks

avalpert
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Re: Solo 401(k) purely to receive rollovers?

Post by avalpert » Thu Feb 02, 2017 6:32 pm

nyclon wrote:
avalpert wrote:
lairdb wrote: I think that means that an individual can open a solo 401(k) as an alternative to a tIRA to receive rollovers (e.g. from past 401(k)s with undesirable investment choices, or even from a tIRA), even if their actual SE income is 0.
No, they can't. A 401k can only be opened by a business - for an individual to open one a sole proprietor he must be operating a legitimate business which includes the intent of making profit. What's more, if the sole proprietorship goes away (that is the individual ceases to be operating a legitimate business) then the plan needs to go away too.
Can you point to documentation stating this? I'd be interested to see the requirement to terminate the 401k plan if the business ceases to operate - after all, it is a retirement plan and businesses come and go well before a sole proprietor is ready to retire. Thanks
The 401k is not a retirement plan owned by the individual - it is a deferred cash plan owned by the business. If the businesses ceases to exist the plan ceases to exist just as if the business you worked at shut down so would its 401k plan. This tends to get forgotten with solo 401k/individual 401k but it is still a business plan.

Here is one place where it is spelled out: http://www.pgiselfdirected.com/2014/04/ ... uirements/

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lairdb
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Re: Solo 401(k) purely to receive rollovers?

Post by lairdb » Thu Feb 02, 2017 6:56 pm

nyclon wrote:Can you point to documentation stating this? I'd be interested to see the requirement to terminate the 401k plan if the business ceases to operate - after all, it is a retirement plan and businesses come and go well before a sole proprietor is ready to retire. Thanks
To nyclon's point, if I separate from my W-2 employer and engage in consulting for 6 months, piling money into my solo 401(k), then go back to a W-2 situation and cease consulting, I shouldn't have to unwind my 401(k).
Crossing posts. Good reference, but that does seem like an unduly burdensome interpretation. Consider our consultant, who does some consulting this year, none the next, some the following year, etc. Has he really wound up his business, or just suspended operations temporarily?

Having said that, I do see the definition of business in Pub. 560 includes "A business is an activity in which a profit motive is present and economic activity is involved." Granted that if a person had a vague intention of doing a side job, set up their solo 401(k), rolled over into it, and then never got around to actually making any side money, that would be pretty close to the line... but still.

avalpert
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Re: Solo 401(k) purely to receive rollovers?

Post by avalpert » Thu Feb 02, 2017 8:19 pm

lairdb wrote:
nyclon wrote:Can you point to documentation stating this? I'd be interested to see the requirement to terminate the 401k plan if the business ceases to operate - after all, it is a retirement plan and businesses come and go well before a sole proprietor is ready to retire. Thanks
To nyclon's point, if I separate from my W-2 employer and engage in consulting for 6 months, piling money into my solo 401(k), then go back to a W-2 situation and cease consulting, I shouldn't have to unwind my 401(k).
Crossing posts. Good reference, but that does seem like an unduly burdensome interpretation. Consider our consultant, who does some consulting this year, none the next, some the following year, etc. Has he really wound up his business, or just suspended operations temporarily?
As you can see from Pub. 560, that depends on whether he continues any economic activity or not. The question of what length of time of no economic activity constitutes a de facto termination of the business can be argued in court - but at the end of the day it does come down to intent and if you cannot honestly say that you intend to seek a profit again through the business it is clearly the case that the business doesn't exist.
Granted that if a person had a vague intention of doing a side job, set up their solo 401(k), rolled over into it, and then never got around to actually making any side money, that would be pretty close to the line... but still.
I think this is clearly over the line - a vague intention of doing a side job is not economic activity. I'm also fairly sure you have to actually have had net self employment income to even be eligible to open a 401k (thought that income may have been a previous year).
Last edited by avalpert on Thu Feb 02, 2017 9:17 pm, edited 1 time in total.

Spirit Rider
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Re: Solo 401(k) purely to receive rollovers?

Post by Spirit Rider » Thu Feb 02, 2017 9:04 pm

Under the IRC section 401c you are not even considered a self-employed individual and you are not eligible to adopt a solo 401k plan unless you actually have net profits for the year or had net profits for any prior year. This is very clear in the code.

There is no requirement to have net profits and contributions every year, but you can not keep the plan indefinitely without some activity.

nyclon
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Re: Solo 401(k) purely to receive rollovers?

Post by nyclon » Thu Feb 02, 2017 9:42 pm

Spirit Rider wrote:Under the IRC section 401c you are not even considered a self-employed individual and you are not eligible to adopt a solo 401k plan unless you actually have net profits for the year or had net profits for any prior year. This is very clear in the code.

There is no requirement to have net profits and contributions every year, but you can not keep the plan indefinitely without some activity.
Is there any specific language around terminating a solo 401k plan in the code?

And to be clear, here's the definition you referenced - it seems like a net profit is not required (you could run a business at a loss for example, which many do, and they are still self employed individuals)

(B) Self-employed individual

The term "self-employed individual" means, with respect to any taxable year, an individual who has earned income (as defined in paragraph (2)) for such taxable year. To the extent provided in regulations prescribed by the Secretary, such term also includes, for any taxable year--
(i) an individual who would be a self-employed individual within the meaning of the preceding sentence but for the fact that the trade or business carried on by such individual did not have net profits for the taxable year, and
(ii) an individual who has been a self-employed individual within the meaning of the preceding sentence for any prior taxable year.

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Re: Solo 401(k) purely to receive rollovers?

Post by Spirit Rider » Fri Feb 03, 2017 10:41 am

nyclon wrote:Is there any specific language around terminating a solo 401k plan in the code?
It is basic premise that a 401k is an employer plan. You must be an employer (business) to adopt and operate one. What is not clear, is at what point does an inactive business cease to exist. No business, no 401k.
And to be clear, here's the definition you referenced - it seems like a net profit is not required (you could run a business at a loss for example, which many do, and they are still self employed individuals)
Read it clearly. You are not required to have a net business profit in any given year. However, to be considered a self-employed individual, the business must have a net business profit in the current year or have had a net business profit in any prior year.

J295
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Re: Solo 401(k) purely to receive rollovers?

Post by J295 » Fri Feb 03, 2017 9:17 pm

FYI my recollection is that from an asset protection standpoint the typical employer 401k has asset protections that are greater than the solo 401k. You could likely confirm on wiki or Google.

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Re: Solo 401(k) purely to receive rollovers?

Post by freebeer » Sat Feb 04, 2017 8:25 am

avalpert wrote:
lairdb wrote: I think that means that an individual can open a solo 401(k) as an alternative to a tIRA to receive rollovers (e.g. from past 401(k)s with undesirable investment choices, or even from a tIRA), even if their actual SE income is 0.
No, they can't. A 401k can only be opened by a business - for an individual to open one a sole proprietor he must be operating a legitimate business which includes the intent of making profit. What's more, if the sole proprietorship goes away (that is the individual ceases to be operating a legitimate business) then the plan needs to go away too.
But, in my understanding, the "intent of making profit" doesn't mean you have to pass the test of a single-owner LLC not being required to be taxed as if a sole proprietorship. In other words if you make consulting income paid via 1099, that's good enough, even though the IRS wouldn't allow you to pay yourself a small salary and declare the rest "profit" and have it taxed at lower than income tax rates and exempt from FICA. This is a case where the IRS insists you have zero "profit" (only imputed income) but Solo 401K should be fine. Right?

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Re: Solo 401(k) purely to receive rollovers?

Post by plannerman » Sat Feb 04, 2017 9:09 am

avalpert wrote:
lairdb wrote: ...What's more, if the sole proprietorship goes away (that is the individual ceases to be operating a legitimate business) then the plan needs to go away too.
Does this mean if a sole proprietor decides to shut down his or her business and retire at say age 50, they have to terminate their retirement plan???
Doesn't sound right to me.

plannerman

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Re: Solo 401(k) purely to receive rollovers?

Post by DTSC » Sat Feb 04, 2017 9:21 am

I don't know about the legal nuances, but here's what I did:

1. I sold some old stuff on Ebay and made some money (~$100) from it
2. I opened a solo 401K with Fidelity (they actually call it a Keogh plan)
3. I rolled over all of my old IRA's into the plan which Fidelity (but not Vanguard) allows
4. I contributed money to a Vanguard Traditional IRA
5. I did a Roth conversion a week later

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Re: Solo 401(k) purely to receive rollovers?

Post by Spirit Rider » Sat Feb 04, 2017 11:35 am

J295: You are correct, a retirement plan of an employer that does not have any employees other than the owner and optionally their spouse, does not receive the ERISA anti-alienation asset protections.

freebeer: I'm not exactly sure what you are trying to say. A sole proprietor does not get paid a salary. They have a net self-employment income (net business profit - 1/2 SE tax). If it is an S-Corp, only your W-2 compensation qualifies you for a solo 401k. Distributions are exempt from FICA, but they are subject to the same marginal income tax rates as your W-2 compensation, not a lower rate. Finally, I have no idea how you came up with any "imputed income.

Plannerman: Yes, it is very clear. If you close the business of the employer of the plan, you should withdraw or rollover the retirement plan assets and terminate the plan. Whether the business can just have no net business activity and distribute RMDs is not clear. A solo 401k requires RMDs for >= 5% owners at 70 1/2 even if not separated. So, I intend to find out.

DISC: Old stuff implies that there would be no net profit after accounting for cost of goods sold. Even if you sold "some old stuff" for $100 more than it cost, this has much more the appearance of a hobby, than a trade or business with the intent to make a profit. I highly doubt the black helicopters are coming for you, but this fact pattern is definitely up to the line if not over it.

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Re: Solo 401(k) purely to receive rollovers?

Post by avalpert » Sat Feb 04, 2017 8:23 pm

plannerman wrote:
avalpert wrote:
lairdb wrote: ...What's more, if the sole proprietorship goes away (that is the individual ceases to be operating a legitimate business) then the plan needs to go away too.
Does this mean if a sole proprietor decides to shut down his or her business and retire at say age 50, they have to terminate their retirement plan???
Doesn't sound right to me.

plannerman
If he owned an incorporated hardware store and decided to shut down the corporation would it sound right that the corporation could still sponsor a 401k plan?

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Re: Solo 401(k) purely to receive rollovers?

Post by avalpert » Sat Feb 04, 2017 8:28 pm

freebeer wrote:
avalpert wrote:
lairdb wrote: I think that means that an individual can open a solo 401(k) as an alternative to a tIRA to receive rollovers (e.g. from past 401(k)s with undesirable investment choices, or even from a tIRA), even if their actual SE income is 0.
No, they can't. A 401k can only be opened by a business - for an individual to open one a sole proprietor he must be operating a legitimate business which includes the intent of making profit. What's more, if the sole proprietorship goes away (that is the individual ceases to be operating a legitimate business) then the plan needs to go away too.
But, in my understanding, the "intent of making profit" doesn't mean you have to pass the test of a single-owner LLC not being required to be taxed as if a sole proprietorship. In other words if you make consulting income paid via 1099, that's good enough, even though the IRS wouldn't allow you to pay yourself a small salary and declare the rest "profit" and have it taxed at lower than income tax rates and exempt from FICA. This is a case where the IRS insists you have zero "profit" (only imputed income) but Solo 401K should be fine. Right?
I honestly don't know what you are trying to say. There is no 'single-owner LLC' test of any kind - a single-owner LLC may choose to be taxed as a corporation if it wants (and elect to be taxed as an s-corp) - but that isn't relevant to anything here. The questions of what is a 'reasonable' salary for an s-corp is likewise irrelevant.

If your statement is that having 1099 income as a consultant is enough to demonstrate economic activity and intent to make a profit then the answer is likely yes (you still may have a question of if its truly a business or just a hobby depending on the specifics of the 'consulting').

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Re: Solo 401(k) purely to receive rollovers?

Post by avalpert » Sat Feb 04, 2017 8:30 pm

DTSC wrote:I don't know about the legal nuances, but here's what I did:

1. I sold some old stuff on Ebay and made some money (~$100) from it
2. I opened a solo 401K with Fidelity (they actually call it a Keogh plan)
3. I rolled over all of my old IRA's into the plan which Fidelity (but not Vanguard) allows
4. I contributed money to a Vanguard Traditional IRA
5. I did a Roth conversion a week later
As Spirit Rider said, this likely wouldn't pass muster with the IRS - while it may be unlikely that they would come after you for it, I would look into what the penalty may be if they did (say in the course of auditing something else) including whether it would invalidate the plan retroactively making that rollover a distribution on which you owe back taxes+penalties+interest.

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lairdb
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Re: Solo 401(k) purely to receive rollovers?

Post by lairdb » Sun Feb 12, 2017 8:43 pm

Stumbled across this (http://whitecoatinvestor.com/pennies-an ... -roth-ira/) today -- the middle portion of the article ("Opening A “Business” To Get An Individual 401(k) For A Rollover") essentially captures this idea.

The author declares "Step 2: Make some money. Doesn’t have to be much. $10 is fine[...]" in order to trigger C and SE filing, and then goes on to open a Solo 401(k).

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Re: Solo 401(k) purely to receive rollovers?

Post by Spirit Rider » Sun Feb 12, 2017 11:25 pm

If you want to rationalize something there are ample opportunities on the internet. Especially, when you cherry pick a quote out of context and neglect to provide the full text as in your particular disingenuous case.

"Doesn’t have to be much. $10 is fine, but even better if it is enough money that someone gives you a 1099 ($600+)."

You asked a question here on this forum and received the specific IRS requirements regarding a business and reasonably well-informed opinions. Yet it is clear you have already decided before you came here. You will do what you will do.

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lairdb
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Re: Solo 401(k) purely to receive rollovers?

Post by lairdb » Sun Feb 12, 2017 11:50 pm

Spirit Rider wrote:If you want to rationalize something there are ample opportunities on the internet. Especially, when you cherry pick a quote out of context and neglect to provide the full text as in your particular disingenuous case.

"Doesn’t have to be much. $10 is fine, but even better if it is enough money that someone gives you a 1099 ($600+)."

You asked a question here on this forum and received the specific IRS requirements regarding a business and reasonably well-informed opinions. Yet it is clear you have already decided before you came here. You will do what you will do.
Yes, I will -- though probably not this. I find it interesting to explore the ruleset, though.

I did omit the rest of the quote, but out of brevity, not out of disingenuousness; $600 once is negligibly more material than $10 once; same fact pattern regardless of reaching the 1099 threshold once. (I also find it interesting that section 401(c) is perfectly clear that once a self-employed individual, forever a self-employed individual: "any prior taxable year". That would seem to read on the otherwise perverse outcome that the individual be required to terminate their 401(k) once they retire.)

As to well-informed opinions, yes, I agree, and they're informative -- and they differ. Jim Dahle (White Coat Investor) is sometimes cited here and has his own page in the Bogleheads wiki; I find his opinion interesting as well, and it clearly differs from other "reasonably well-informed opinions".

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Re: Solo 401(k) purely to receive rollovers?

Post by whodidntante » Mon Feb 13, 2017 1:22 am

I started a similar thread on January 1st.
viewtopic.php?t=206956

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