Individual 401K For ER

[ExFlyBoy5]

I looked around but couldn't come up with a general consensus or answer. As some of you know, I will be retiring in a few months at the age of 40. I don't intend to w*rk at all, however I am curious if there is anyway I can establish an individual 401K in this situation. I assume I would need to be the sole proprietor of a company to set this up...but is this feasible? I would like to be able to invest rental income and dividend income (if not reinvested). I hadn't really put much thought into this idea until the ER doc posted about starting the clinic and doing contract work with the hospital. Seems like a pretty good way to reduce my taxable income in the near future. Thoughts/ideas?

 

[eridanus]

It needs to be earned income. Rental and dividend income won't work for a solo 401k.

You can fund an HSA though.

 

[ExFlyBoy5]

It needs to be earned income. Rental and dividend income won't work for a solo 401k.

You can fund an HSA though.

HSA would be great except the having to have a high deductible health care plan. Since I will have Tricare...well, this is just a no go.

Alternatively, I think I could create a company and deed the rental property to it. Then it will be a business, and I would then pay myself an income...but at that point I don't think it would be worth it since I would have to pay self employment tax. Oye...the pitfalls of ER!

 

[samclem]

You need to have earned income from a business, so I don't think the dividends could be used for a solo 401K (unless there's some sneaky-Pete way to say that you have an investment business, and this is the income. I'm fairly sure the IRS doesn't allow that). But, on the face of it, it would seem that you could establish a business to manage your rental properties and that this would be earned income for the purposes of the Solo 401K.
The business does not need to be an LLC or incorporated to have a Solo 401K, a simple sole proprietorship will work fine (though there could be good liability-limitation reasons to run your rentals as an LLC, etc). I'm not sure how your business's legal structure might impact the depreciation deductions and other unique aspects of owning RE. You'd have to pay self employment tax (though a small silver liningis that it might bump up your SS monthly checks a tiny amount, depending on what your earnings history has been).
With a Solo 401K, the first $17,500 ($23K if age 50 or older) could be tax deferred, plus about 1/4th of the amounts earned above that (until reaching the cap).
Another plus for a SOlo 401K vs an IRA: If the Solo 401K plan document allows, you can start withdrawing the money in the year you reach 55, rather than waiting to 59 1/2, if you terminate employment in that year. It can allow you to use up more of that tax-deferred money a bit earlier and lower the possible hit from RMDs+ SS at age 70. While this could also be accomplished by transfers to a Roth IRA, this other method is a bit simpler. More here.

 

[ExFlyBoy5]

You need to have earned income from a business, so I don't think the dividends could be used for a solo 401K (unless there's some sneaky-Pete way to say that you have an investment business, and this is the income. I'm fairly sure the IRS doesn't allow that). But, on the face of it, it would seem that you could establish a business to manage your rental properties and that this would be earned income for the purposes of the Solo 401K.
The business does not need to be an LLC or incorporated to have a Solo 401K, a simple sole proprietorship will work fine (though there could be good liability-limitation reasons to run your rentals as an LLC, etc). I'm not sure how your business's legal structure might impact the depreciation deductions and other unique aspects of owning RE. You'd have to pay self employment tax (though a small silver liningis that it might bump up your SS monthly checks a tiny amount, depending on what your earnings history has been).
With a Solo 401K, the first $17,500 ($23K if age 50 or older) could be tax deferred, plus about 1/4th of the amounts earned above that (until reaching the cap).
Another plus for a SOlo 401K vs an IRA: If the Solo 401K plan document allows, you can start withdrawing the money in the year you reach 55, rather than waiting to 59 1/2, if you terminate employment in that year. It can allow you to use up more of that tax-deferred money a bit earlier and lower the possible hit from RMDs+ SS at age 70. While this could also be accomplished by transfers to a Roth IRA, this other method is a bit simpler. More here.

This is the road I am thinking...and as the *employer*, it appears that I could contribute $52,000 a year to it. Lots to digest here obviously, but thanks for the information...I appreciate it!

 

[someguy]

This is the road I am thinking...and as the *employer*, it appears that I could contribute $52,000 a year to it. Lots to digest here obviously, but thanks for the information...I appreciate it!

The total cap is approx. $52K/year, inclusive of the $17.5K "employee" contribution. But if you have a spouse who can contribute to the business, then he/she could also contribute up to $52K/year, assuming there is enough net profit.

 

[Senator]

Your income from rentals and dividends is already exempt from SE and SS taxes, so you do not want to trade taxes now for tax deferred growth.

You could do what I am considering, but I still need to check with an accountant. Pay yourself a salary of $816 per month, the 90% SS tax bracket. That’s only ~$9,800 per year. You will pay ~$1,500 in FICA, which will increase the number of years you have working, and will add to the 35 year average. At 40, you may need more years to average anyway.

Contribute $5,500 to a Roth and the rest to a 401K. With the standard deduction, income taxes will be minimal.

Advantage: You get more SS when you are eligible. You get tax-free growth with the ROTH, you need earned income to do a Roth. You do not pay FICA for income that is not subject to FICA. If you pay yourself $52K, you have to pay FICA on the $52K in wages.