Has anyone created a business just to be able to have a Solo 401k?

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ParlayBogle
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Has anyone created a business just to be able to have a Solo 401k?

Post by ParlayBogle »

Upfront disclaimer: I am not interested in or implying doing anything dishonest or fraudulent.

I believe in 2021, we will be over the income limit for direct Roth contributions. On my side, I have already figured out that I can do a reverse rollover (IRA->401k) in order to do the backdoor Roth. My wife on the other hand, is only employed part-time and does not have access to a retirement plan. She has pre-tax IRAs, so this would seem to make the backdoor Roth option not viable.

It is my understanding that if she had a business, she could create a solo 401k and roll the money into there. So my question (generally), is whether it is fraudulent to stand up a business primarily for the purpose of creating a solo 401k? The business would simply have zero expenses and zero revenue indefinitely. What are the guidelines or legal tests that govern this?
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arcticpineapplecorp.
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Re: Has anyone created a business just to be able to have a Solo 401k?

Post by arcticpineapplecorp. »

ParlayBogle wrote: Thu Aug 27, 2020 10:17 am Upfront disclaimer: I am not interested in or implying doing anything dishonest or fraudulent.

I believe in 2021, we will be over the income limit for direct Roth contributions. On my side, I have already figured out that I can do a reverse rollover (IRA->401k) in order to do the backdoor Roth. My wife on the other hand, is only employed part-time and does not have access to a retirement plan. She has pre-tax IRAs, so this would seem to make the backdoor Roth option not viable.

It is my understanding that if she had a business, she could create a solo 401k and roll the money into there. So my question (generally), is whether it is fraudulent to stand up a business primarily for the purpose of creating a solo 401k? The business would simply have zero expenses and zero revenue indefinitely. What are the guidelines or legal tests that govern this?
not sure how you'd be operating a business without any revenue or expenses indefinitely. First few months or year, perhaps, but not "indefinitely":
Getting a business off the ground takes time, and the IRS recognizes this. In your first few months or year of operation you may not bring in any income. Even without income, you may be able to deduct your expenses, as long as you meet certain IRS guidelines. Your business loss can offset other income on your tax return and lower your overall tax bill. The test for being able to deduct your expenses is whether you are operating a true business and not practicing a hobby.

Business vs. Hobby

The IRS presumes you are conducting a business, rather than a hobby, if you report a profit in three out of the previous five years. So you could operate your first two years without a profit, though no income at all in two years might cause auditors to take a closer look. But even if you show no profit for several years in a row, the IRS may allow your deductions if you can show other evidence that you are conducting a business. For instance, if you conduct your affairs in a business-like manner and devote time and effort toward making the business profitable, if you’ve made a profit in similar activities in the past, if you are trying to make a living and support yourself with the business, or if your failure to bring in income is due to circumstances beyond your control, the IRS may acknowledge that you are conducting a true business and allow your business expense deductions.
source: https://finance.zacks.com/can-claim-bus ... -3279.html
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retiredjg
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Re: Has anyone created a business just to be able to have a Solo 401k?

Post by retiredjg »

Spirit Rider has spoken on this several times. There is an expectation for the business to be real, having shown a profit in the past or in the current year. I do not know where that information comes from, but you might pm him if an answer does not appear.
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unclescrooge
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Re: Has anyone created a business just to be able to have a Solo 401k?

Post by unclescrooge »

arcticpineapplecorp. wrote: Thu Aug 27, 2020 10:25 am
ParlayBogle wrote: Thu Aug 27, 2020 10:17 am Upfront disclaimer: I am not interested in or implying doing anything dishonest or fraudulent.

I believe in 2021, we will be over the income limit for direct Roth contributions. On my side, I have already figured out that I can do a reverse rollover (IRA->401k) in order to do the backdoor Roth. My wife on the other hand, is only employed part-time and does not have access to a retirement plan. She has pre-tax IRAs, so this would seem to make the backdoor Roth option not viable.

It is my understanding that if she had a business, she could create a solo 401k and roll the money into there. So my question (generally), is whether it is fraudulent to stand up a business primarily for the purpose of creating a solo 401k? The business would simply have zero expenses and zero revenue indefinitely. What are the guidelines or legal tests that govern this?
not sure how you'd be operating a business without any revenue or expenses indefinitely. First few months or year, perhaps, but not "indefinitely":
Isn't the test for being self-employed the fact that you've been self employed in the past and expect to be so in the future, even if you're not right now?
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BolderBoy
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Re: Has anyone created a business just to be able to have a Solo 401k?

Post by BolderBoy »

ParlayBogle wrote: Thu Aug 27, 2020 10:17 amSo my question (generally), is whether it is fraudulent to stand up a business primarily for the purpose of creating a solo 401k? The business would simply have zero expenses and zero revenue indefinitely. What are the guidelines or legal tests that govern this?
Without "net earnings from self-employment" how are you proposing that she make i401k contributions?
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MP123
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Re: Has anyone created a business just to be able to have a Solo 401k?

Post by MP123 »

BolderBoy wrote: Thu Aug 27, 2020 10:41 am
ParlayBogle wrote: Thu Aug 27, 2020 10:17 amSo my question (generally), is whether it is fraudulent to stand up a business primarily for the purpose of creating a solo 401k? The business would simply have zero expenses and zero revenue indefinitely. What are the guidelines or legal tests that govern this?
Without "net earnings from self-employment" how are you proposing that she make i401k contributions?
I don't think OP is planning contributions, rather opening the i401k to roll an IRA into it in order to facilitate a Backdoor Roth move. As you point out contributions can't be made without profits, but rollovers can be made regardless.

It would be easy enough to create a legitimate business (selling on ebay, dog walking, whatever) that would allow you to open the i401k. I think creating a business for the sole purpose of opening an i401k would be over the line.
Lee_WSP
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Re: Has anyone created a business just to be able to have a Solo 401k?

Post by Lee_WSP »

I'm pretty sure you just need 1099 income from say taking surveys or driving for a rideshare or some sort of disconnected economy"job".
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Re: Has anyone created a business just to be able to have a Solo 401k?

Post by Flyer24 »

Topic is locked. Discussion of fraudulent activity is not allowed on this forum.

[Update: See below --admin LadyGeek]
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Re: Has anyone created a business just to be able to have a Solo 401k?

Post by LadyGeek »

Upon further review, this thread is unlocked to continue the discussion.

For the record, discussions of dishonest behavior or bypassing the law are totally unacceptable.

The intent is to understand how to do this within the existing legal framework; in which case this discussion can continue.

Everything is a matter of degree. The choice of using a tax deferred account, e.g. IRA, to avoid taxes during some period of time is one extreme, managing assets to qualify for Medicaid is the other. Gifting assets to avoid taxes is somewhere in the middle. The bottom line is to work within the legal framework. Ethics is the ever present elephant in the room.

The approach is to educate members on how to do things legally. State your points in a factual manner. If the intent strays from this objective, please report the post and we'll investigate.
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000
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Re: Has anyone created a business just to be able to have a Solo 401k?

Post by 000 »

No expenses.
No revenue.
A post online about the sole purpose being to open a Solo 401k.

Conclusion: any reasonable person knows it is not a legitimate business.

Why not start a real business, i.e. where you actually try to make money? You might even -- gasp -- succeed.
Spooky
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Re: Has anyone created a business just to be able to have a Solo 401k?

Post by Spooky »

Get a few things at a thrift store that you can flip on eBay. Voila! You’ve got a business.
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Re: Has anyone created a business just to be able to have a Solo 401k?

Post by LadyGeek »

ParlayBogle wrote: Thu Aug 27, 2020 10:17 am The business would simply have zero expenses and zero revenue indefinitely.
A member (not the OP) has explained to the moderators that the above statement is fraudulent intent.

- No revenues means no work being done for a fee and no customers.
- No expenses means no attempt to create a business or business presence.
- Indefinitely means the total lack of intent ever to create a viable entity.

As noted in the previous replies, one must have a viable business to have a Solo 401(k) plan. The OP does not intend to have a business.

The question has been answered. This thread has run its course and is locked.
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Re: Has anyone created a business just to be able to have a Solo 401k?

Post by LadyGeek »

I have received additional information from a different member.
Here is a brief authoritative direction of what is the minimum necessary to legitimately adopt a one-participant 401k.

Under 26 U.S. Code Sections 401(c)(1)(B)(i & ii), 1402(a) 162(a) and SCOTUS rulings.

An individual must be engaged in a trade or business with considerable, regular, and continuous activity with the intent and belief a profit can be made and must have self-employed earned income in the current or any prior year to adopt a 401k plan.

While there is no specific requirement for a sole proprietorship to have earned income in any subsequent year. A sole proprietorship must still be open and available for future activity to maintain the 401k plan. Once the 401k plan sponsor (business) ceases to exist, the 401k must be terminated.
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