In our situation, can my wife open a solo 401K?

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sunshine25
Posts: 16
Joined: Sat Aug 05, 2017 6:18 pm

In our situation, can my wife open a solo 401K?

Post by sunshine25 » Tue Oct 10, 2017 3:18 pm

Thanks again to all the Boglehead experts.

My question is can my wife open a solo 401K? One major reason to do this is to roll her rollover IRA into a 401K, so that we can do yearly back door Roths.

--We live in California.
--Our daughter (under 18 years old) is permanently disabled, and through a Medical waiver my wife is her In-Home Supportive Services (IHSS) provider.
--My wife gets a small amount of money every month to be our daughter's provider.
--The money my wife receives is not taxed.
--The IHSS program does not offer any type of retirement program/benefits.

In this case it seems that my daughter is the "employer" and my wife is the "employee," so it doesn't seem like my wife could do a solo 401K, but I wanted to check.

Thank you!

Katietsu
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Joined: Sun Sep 22, 2013 1:48 am

Re: In our situation, can my wife open a solo 401K?

Post by Katietsu » Tue Oct 10, 2017 3:55 pm

I do not believe so on the basis of her current situation. Since those payments have been exempted from federal taxes, your wife has no taxable income. However, your wife just needs to go make a minimal income from something else to open the 401k for the purpose you describe. Can she set up a neighbor's wifi and charge them $10 or bake cupcakes for a nephew's party for a small fee?

aristotelian
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Re: In our situation, can my wife open a solo 401K?

Post by aristotelian » Tue Oct 10, 2017 3:56 pm

When you say the money is not taxed, do you mean that taxes are not withheld, or that it does not count as taxable income? There would be no point in deferring money that is truly untaxed.

michaelj
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Joined: Wed Nov 09, 2016 4:41 pm

Re: In our situation, can my wife open a solo 401K?

Post by michaelj » Tue Oct 10, 2017 4:18 pm

A quick google search indicates that IHSS payments are exempt from Federal Tax so I don't think it would count as earned income which is needed to open the solo 401k. Neither Google or I are tax attorneys so YMMV.
Is Ihss taxable?
In Notice 2014-7, effective January 3, 2014, the IRS states that the income families receive from IHSS as a result of a Medicaid Waiver by providing in-home care to a disabled person is NOT federally taxable. Furthermore, according to Victoria Driscoll of the IRS, this is meant to be retroactive.Jul 23, 2014

sunshine25
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Joined: Sat Aug 05, 2017 6:18 pm

Re: In our situation, can my wife open a solo 401K?

Post by sunshine25 » Tue Oct 10, 2017 4:22 pm

Katietsu wrote:
Tue Oct 10, 2017 3:55 pm
I do not believe so on the basis of her current situation. Since those payments have been exempted from federal taxes, your wife has no taxable income. However, your wife just needs to go make a minimal income from something else to open the 401k for the purpose you describe. Can she set up a neighbor's wifi and charge them $10 or bake cupcakes for a nephew's party for a small fee?
Katietsu, that's hilarious! I can't tell if you are serious :D but if we could figure something out, it would save us $7000 in taxes from moving her rollover IRA to a Roth.

Any suggestions on something that wouldn't get the IRS too excited?
I'm just wondering if making a very minimal amount of money, and then getting a $17K rollover to the solo 401K would raise suspicion.

Thank you.

metrunt
Posts: 161
Joined: Thu Jul 16, 2015 9:36 am

Re: In our situation, can my wife open a solo 401K?

Post by metrunt » Tue Oct 10, 2017 4:42 pm

I believe all you need is a separate EIN number to open a solo 401K. That's pretty easy to get.

I'm a little confused about what you're trying to achieve.

It sounds like you're not actually interested in contributing income to a solo 401K, is that correct? You just want the option to roll over an existing traditional IRA into the solo 401K in order to do a backdoor Roth.

But why? What factors make this a sensible tactic? Is your income so high that your MFJ income prevents your wife from contributing to a Roth? And if that's the case, why would you want to pay taxes on the rollover?

Spirit Rider
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Re: In our situation, can my wife open a solo 401K?

Post by Spirit Rider » Tue Oct 10, 2017 4:43 pm

I am going to have to disagree with katietsu. What she describes is not self-employment income, but rather "other income"

The spirit of the thought is correct, but I do not believe that making $10 from a single event meets the definition of a self-employed individual to be able to open a one-participant 401k. Under 401(c)(1), someone is defined as a self-employed individual when they have earned income from a trade or business. It doesn't have to be a large enterprise, but I think a minimum of $500 on Form 1040 Schedules C/SE is far more defensible than some incidental income that the IRS has consistently considered other income filed on Form 1040 Line 21.

metrunt: If they have a one-participant 401k, they can rollover all pre-tax IRA balances tax-free, facilitating a little to no tax Backdoor Roth.

sunshine25
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Joined: Sat Aug 05, 2017 6:18 pm

Re: In our situation, can my wife open a solo 401K?

Post by sunshine25 » Tue Oct 10, 2017 4:56 pm

metrunt wrote:
Tue Oct 10, 2017 4:42 pm
I believe all you need is a separate EIN number to open a solo 401K. That's pretty easy to get.

I'm a little confused about what you're trying to achieve.

It sounds like you're not actually interested in contributing income to a solo 401K, is that correct? You just want the option to roll over an existing traditional IRA into the solo 401K in order to do a backdoor Roth.

But why? What factors make this a sensible tactic? Is your income so high that your MFJ income prevents your wife from contributing to a Roth? And if that's the case, why would you want to pay taxes on the rollover?
Hi metrunt,

That's correct. I really only want to create the solo 401k to avoid the taxes on conversion to a Roth IRA. Our income is too high to contribute to a Roth. I want to be able to do back door Roth for my wife every year, and I'm trying to avoid paying the roughly $7,000 ($17,000 in rollover IRA, taxed at 33% marginal federal and 9.3% marginal state) in taxes to convert her rollover IRA to Roth.

sunshine25
Posts: 16
Joined: Sat Aug 05, 2017 6:18 pm

Re: In our situation, can my wife open a solo 401K?

Post by sunshine25 » Tue Oct 10, 2017 4:58 pm

Spirit Rider wrote:
Tue Oct 10, 2017 4:43 pm
I am going to have to disagree with katietsu. What she describes is not self-employment income, but rather "other income"

The spirit of the thought is correct, but I do not believe that making $10 from a single event meets the definition of a self-employed individual to be able to open a one-participant 401k. Under 401(c)(1), someone is defined as a self-employed individual when they have earned income from a trade or business. It doesn't have to be a large enterprise, but I think a minimum of $500 on Form 1040 Schedules C/SE is far more defensible than some incidental income that the IRS has consistently considered other income filed on Form 1040 Line 21.

metrunt: If they have a one-participant 401k, they can rollover all pre-tax IRA balances tax-free, facilitating a little to no tax Backdoor Roth.
Thanks Spirit Rider. That's very helpful.

metrunt
Posts: 161
Joined: Thu Jul 16, 2015 9:36 am

Re: In our situation, can my wife open a solo 401K?

Post by metrunt » Thu Oct 12, 2017 11:13 am

sunshine25 wrote:
Tue Oct 10, 2017 4:56 pm
I'm trying to avoid paying the roughly $7,000 ($17,000 in rollover IRA, taxed at 33% marginal federal and 9.3% marginal state) in taxes to convert her rollover IRA to Roth.
If I'm wrong, I'm happy to be corrected, but I didn't think that's how the backdoor Roth works. I don't think you can roll pre-tax contributions in a traditional IRA to a Roth 401k and not pay tax on it. Is there somewhere I can find out more?

My understanding is that the 'backdoor Roth' means you make post-tax contributions to a 401K and roll those into a Roth. But you should have no pre-tax contributions in your 401K due to the pro-rata rule (that you can't selectively roll over contributions, but have to roll over pre and post in proportionate amounts). So you roll your pre-tax IRA into the pre-tax "traditional" 401K first.

We may be saying the same thing, but since it can be a confusing point, I just want to clarify.

michaelj
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Joined: Wed Nov 09, 2016 4:41 pm

Re: In our situation, can my wife open a solo 401K?

Post by michaelj » Thu Oct 12, 2017 11:32 am

metrunt wrote:
Thu Oct 12, 2017 11:13 am
sunshine25 wrote:
Tue Oct 10, 2017 4:56 pm
I'm trying to avoid paying the roughly $7,000 ($17,000 in rollover IRA, taxed at 33% marginal federal and 9.3% marginal state) in taxes to convert her rollover IRA to Roth.
If I'm wrong, I'm happy to be corrected, but I didn't think that's how the backdoor Roth works. I don't think you can roll pre-tax contributions in a traditional IRA to a Roth 401k and not pay tax on it. Is there somewhere I can find out more?

My understanding is that the 'backdoor Roth' means you make post-tax contributions to a 401K and roll those into a Roth. But you should have no pre-tax contributions in your 401K due to the pro-rata rule (that you can't selectively roll over contributions, but have to roll over pre and post in proportionate amounts). So you roll your pre-tax IRA into the pre-tax "traditional" 401K first.

We may be saying the same thing, but since it can be a confusing point, I just want to clarify.
I don't think you are aligned yet. You might want to read https://www.bogleheads.org/wiki/Backdoor_Roth_IRA and https://www.whitecoatinvestor.com/backd ... -tutorial/. The backdoor roth is a two-step process of making a roth IRA contribution when you are over the income limits. First step is to contribute to a tIRA and then shortly after (some do it the next day), convert the tIRA to a Roth. Because the tIRA has had no time to grow, no taxes are owed unless there is existing $ in some other IRA. That's where the pro-rate rule comes into play here.

The OP wants to open a solo 401K so that his DW can roll her existing rollover IRA into it. This would enable her to do the backdoor roth without having to worry about the pro-rata rule.

metrunt
Posts: 161
Joined: Thu Jul 16, 2015 9:36 am

Re: In our situation, can my wife open a solo 401K?

Post by metrunt » Thu Oct 12, 2017 11:36 am

michaelj wrote:
Thu Oct 12, 2017 11:32 am
The backdoor roth is a two-step process of making a roth IRA contribution when you are over the income limits. First step is to contribute to a tIRA and then shortly after (some do it the next day), convert the tIRA to a Roth. Because the tIRA has had no time to grow, no taxes are owed unless there is existing $ in some other IRA. That's where the pro-rate rule comes into play here.
What you've posted is what I understand as well.

The way I was reading the OP is that he may think he can convert 17K from a trad IRA into a Roth without tax consequences. Which I'm pretty sure can't be done. That $17K in the tIRA will sit in the Solo 401K ('traditional pre-tax').

sunshine25
Posts: 16
Joined: Sat Aug 05, 2017 6:18 pm

Re: In our situation, can my wife open a solo 401K?

Post by sunshine25 » Thu Oct 12, 2017 12:04 pm

michaelj wrote:
Thu Oct 12, 2017 11:32 am
metrunt wrote:
Thu Oct 12, 2017 11:13 am
sunshine25 wrote:
Tue Oct 10, 2017 4:56 pm
I'm trying to avoid paying the roughly $7,000 ($17,000 in rollover IRA, taxed at 33% marginal federal and 9.3% marginal state) in taxes to convert her rollover IRA to Roth.
If I'm wrong, I'm happy to be corrected, but I didn't think that's how the backdoor Roth works. I don't think you can roll pre-tax contributions in a traditional IRA to a Roth 401k and not pay tax on it. Is there somewhere I can find out more?

My understanding is that the 'backdoor Roth' means you make post-tax contributions to a 401K and roll those into a Roth. But you should have no pre-tax contributions in your 401K due to the pro-rata rule (that you can't selectively roll over contributions, but have to roll over pre and post in proportionate amounts). So you roll your pre-tax IRA into the pre-tax "traditional" 401K first.

We may be saying the same thing, but since it can be a confusing point, I just want to clarify.
I don't think you are aligned yet. You might want to read https://www.bogleheads.org/wiki/Backdoor_Roth_IRA and https://www.whitecoatinvestor.com/backd ... -tutorial/. The backdoor roth is a two-step process of making a roth IRA contribution when you are over the income limits. First step is to contribute to a tIRA and then shortly after (some do it the next day), convert the tIRA to a Roth. Because the tIRA has had no time to grow, no taxes are owed unless there is existing $ in some other IRA. That's where the pro-rate rule comes into play here.

The OP wants to open a solo 401K so that his DW can roll her existing rollover IRA into it. This would enable her to do the backdoor roth without having to worry about the pro-rata rule.

michalej,

You are correct. Thank you for succinctly describing what I want to do. Sorry for the confusion.
I talked with my wife further and I think I'm out of luck--I could not convince her to do a little work on the side. :(

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Earl Lemongrab
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Re: In our situation, can my wife open a solo 401K?

Post by Earl Lemongrab » Thu Oct 12, 2017 2:26 pm

metrunt wrote:
Thu Oct 12, 2017 11:13 am
sunshine25 wrote:
Tue Oct 10, 2017 4:56 pm
I'm trying to avoid paying the roughly $7,000 ($17,000 in rollover IRA, taxed at 33% marginal federal and 9.3% marginal state) in taxes to convert her rollover IRA to Roth.
If I'm wrong, I'm happy to be corrected, but I didn't think that's how the backdoor Roth works. I don't think you can roll pre-tax contributions in a traditional IRA to a Roth 401k and not pay tax on it. Is there somewhere I can find out more?
The OP didn't say that. You can't selectively convert non-deductible amounts in an IRA, so when you have pretax amounts, one way to facilitate the process is to roll those funds into a 401(k). Nothing was said about a Roth 401(k).
This week's fortune cookie: "The stock market may be your ticket to success." I sure hope so!

michaelj
Posts: 19
Joined: Wed Nov 09, 2016 4:41 pm

Re: In our situation, can my wife open a solo 401K?

Post by michaelj » Thu Oct 12, 2017 4:19 pm

Earl Lemongrab wrote:
Thu Oct 12, 2017 2:26 pm
metrunt wrote:
Thu Oct 12, 2017 11:13 am
sunshine25 wrote:
Tue Oct 10, 2017 4:56 pm
I'm trying to avoid paying the roughly $7,000 ($17,000 in rollover IRA, taxed at 33% marginal federal and 9.3% marginal state) in taxes to convert her rollover IRA to Roth.
If I'm wrong, I'm happy to be corrected, but I didn't think that's how the backdoor Roth works. I don't think you can roll pre-tax contributions in a traditional IRA to a Roth 401k and not pay tax on it. Is there somewhere I can find out more?
The OP didn't say that. You can't selectively convert non-deductible amounts in an IRA, so when you have pretax amounts, one way to facilitate the process is to roll those funds into a 401(k). Nothing was said about a Roth 401(k).
I think this comment in one of the OP's post is what caused the confusion:
That's correct. I really only want to create the solo 401k to avoid the taxes on conversion to a Roth IRA.
I think what was really meant here was to avoid the tax because of the pro-rata rule when doing a backdoor Roth conversion.

metrunt
Posts: 161
Joined: Thu Jul 16, 2015 9:36 am

Re: In our situation, can my wife open a solo 401K?

Post by metrunt » Fri Oct 13, 2017 9:26 am

michaelj wrote:
Thu Oct 12, 2017 4:19 pm
I think this comment in one of the OP's post is what caused the confusion:
That's correct. I really only want to create the solo 401k to avoid the taxes on conversion to a Roth IRA.
Thanks michaelj. Yes, that's part of it...also
sunshine25 wrote: I'm trying to avoid paying the roughly $7,000 ($17,000 in rollover IRA, taxed at 33% marginal federal and 9.3% marginal state) in taxes to convert her rollover IRA to Roth.
Earl Lemongrab wrote:
Thu Oct 12, 2017 2:26 pm
Nothing was said about a Roth 401(k).
Yes, I misspoke and meant post-tax contributions to a 401K.

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