The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: Billionaire Beard on October 31, 2014, 08:38:43 PM
-
If I wanted additional tax sheltered retirement savings in addition to my work 401(k) and my Roth IRA, is it possible to open a SEP IRA or solo 401(k)?
I no you have to own a business to have one of those, but my understanding is that it doesn't have to be your full-time job. So why can I just create some sole proprietorship, which may be a dog walking company or selling something on eBay or writing a blog, anything to just call itself a business and produce a few dollars of revenue per year. Couldn't die then start a solo 401(k) or SEP IRA?
The only problem I see is does the money that I would contribute to the sep IRA or solo 401(k) need to be from revenue from the actual business or is it just some separate account and I can put any money into it?
Anyone ever heard of doing this?
-
I can't find anything in the rules that states you can't, but I always assumed the income would have to come from the business. Anyone else?
-
It can only come from profit of the business entity. 25% upto 260,000 per employee.
http://www.irs.gov/Retirement-Plans/One-Participant-401(k)-Plans
http://www.irs.gov/Retirement-Plans/Operating-a-SEP
http://www.moneycrashers.com/what-is-a-sep-ira-account-retirement-plan-rules-contribution-limits/
I would guess the only realistic ways to earn that much are multi level marketing, blog, used car dealer or a corp to corp consultant.
-
Keep in mind that the IRS has an annual additions limit, I believe it is 51000 in 2014. All of your 401k and employer profit sharing contributions will count toward this limit, whether they are in your workplace plan or in your Solok/ SEP IRA. Also, you're 401k deferrals are still limited to 17,500 in 2014 (plus catch up if you are over 50), this will include all plans you have access to. My point is, if you already have a 401k through work, adding on the side may not increase your ability to defer money. If anything, it may allow you to make an employer profit sharing contribution for yourself from your side business
As for the source of the money, only the IRA allows you to defer money from any source. The 401k and other retirement plans require you to use payroll or profits from the company that sponsors the plan.