I want a solo 401k, can I pay myself as an LLC to renovate my own house?

[phwadsworth]

  This is probably a very stupid question.  I'm trying to think of self-employment businesses I could possibly start so that I can set up a solo 401K to save more.  I just finished fixing up one house over 5 years.  We're likely to move on to another soon.  Could I start an LLC renovation company, have my wife hire me to fix our house and use "profits" from this business to fund the LLC's 401k?
  If yes, I assume I would be limited in the amount I can save by how much money this LLC takes in, so I'd have to "pay myself" quite a bit to make a decent improvement over other savings vehicles.
  how stupid/illegal is this idea?

[banjarian]

I can't advise on legality, but it sounds pretty shady to me. I assume you want to contribute more than an IRA will allow you to in a year, otherwise you wouldn't be looking into 401ks, right?

If I were you, I'd just max out an IRA and put the rest in a taxable account.

[forummm]

It sounds like you're trying to do this: If you are paying yourself with after-tax money, in order to create pre-tax money, you are just paying *more* taxes.

What you want to do is this: If your LLC were bringing in money from someone else because you were doing actual work, then you do have a self-employment situation and could fund a solo 401k.

[zephyr911]

Let's put it this way.

This concept is extremely far from the intent and purpose of the legal framework you want to use for it.
The IRS frowns on such machinations. There may be a way to do it so it's not technically illegal, but it's probably well beyond the scale of your typical tax preparer and probably most accountants too.

Talk to a good lawyer or spend a LOT of time reading up. Don't fuck it up.

[sol]

There was a post on this forum, years ago, from an accountant with a wealthy client who did something similar to pay himself to be his own family's investment manager, apparently legally.

There were some complications, like having to pay oasdi taxes, that made it profitable only if there were substantial sums changing hands within the family.  I suspect you need a (fairly experienced) accountant to pull off a maneuver like this while staying right with the law.

On the other hand, the IRS has been absolutely savaged by budget cuts.  This is probably the best time in American history to attempt to commit tax fraud.  Not that I would ever recommend such a thing, I'm just saying that the odds of being audited for questionable tax deductions are probably lower now than they were a few years ago.

[zephyr911]

It sounds like you're trying to do this: If you are paying yourself with after-tax money, in order to create pre-tax money, you are just paying *more* taxes.

What you want to do is this: If your LLC were bringing in money from someone else because you were doing actual work, then you do have a self-employment situation and could fund a solo 401k.

That and I'm not sure you can even call it income if you pay your own LLC money. Your LLC income goes on the same 1040 as your personal income and you are treated (in some ways) as one and the same. This is true in even more ways if you're the only member.

Just my $.02 as a sometime tax guy with a few years working with small businesses and the occasional audit: there are safer and less complicated ways to save money. I wouldn't try it.

[Mirwen]

I can't say about legality, but when you pay yourself from the LLC you are going to be taxed on that money.  Any LLC profits are going to be taxed too.  I think you'd just be better off with using a taxable account.  The marginal rate on long term gains is very low.

[forummm]

OP, maybe you can explain in more detail what you mean. It's a little unclear. As an example, how would all the dollars flow? And how would your taxes be reduced by your intended operation?

[Mississippi Mudstache]

..There were some complications, like having to pay oasdi taxes, that made it profitable only if there were substantial sums changing hands within the family...

Sol brought up a critical point here. If you want to start a "business" for the express purpose of starting a solo 401k, then you will never be able to contribute more than 84.7% of your "profits" to the 401k, because 15.3% will go straight to the government in the form of OASDI taxes. Since you're basically just moving the money around in your own accounts, you're essentially taking a 15.3% haircut up front, plus whatever taxes you may owe when you withdraw the money later on. If your marginal tax rate isn't well above 15.3% (and it might be, I don't know), then don't even think about it. But it's going to be an accounting headache no matter what.

[phwadsworth]

OP, maybe you can explain in more detail what you mean. It's a little unclear.

it's unclear for me too, ha!!!  Basically, my wife is about to become a surgeon and we will be in the highest tax bracket and unable to contribute to ROTH and get no tax benefit for Traditional IRAs.  I'm trying to find any way I can to plug more money into tax advantaged savings instead of after-tax accounts.  This was a hair brained idea I had while walking the dog this morning and looking at the run down houses in our neighborhood.
The more I think about it, it seems we would still be paying me in her after-tax money, so there's no benefit (knew it was too good to be true)....unless I was working on not-our-primary-residence and then was trying to establish a higher cost basis on a house we might flip, But, have a day job that I should focus on, its risk/reward ratio is much better, even with taxes.

thanks all.

[forummm]

Look up Backdoor Roth. You can max out for both of you.

If you wanted to make a real business of it and buy properties, fix them up, and then rent out or flip them, you could totally do a solo 401k. But there are other tax advantages to those approaches as well.

[phwadsworth]

Look up Backdoor Roth. You can max out for both of you.

  Yeah, I did. This will be tricky (though not impossible) for us because of existing traditional IRAs in place.

[Bourbon]

Look up Backdoor Roth. You can max out for both of you.

  Yeah, I did. This will be tricky (though not impossible) for us because of existing traditional IRAs in place.

We had that situation as well, but were able to roll the existing tIRA's back into the current 401k.

[forummm]

Look up Backdoor Roth. You can max out for both of you.

  Yeah, I did. This will be tricky (though not impossible) for us because of existing traditional IRAs in place.

We had that situation as well, but were able to roll the existing tIRA's back into the current 401k.

Yes, this is the solution people use.

[brooklynguy]

On the other hand, the IRS has been absolutely savaged by budget cuts.  This is probably the best time in American history to attempt to commit tax fraud.  Not that I would ever recommend such a thing, I'm just saying that the odds of being audited for questionable tax deductions are probably lower now than they were a few years ago.

Generally speaking, this is probably true, but in the face of budget cuts the IRS has concentrated its attention on deeper pockets.  Last year, the average taxpayer had a lower chance of being audited than the previous year, but taxpayers earning more than $200k had a higher chance.

http://blogs.wsj.com/totalreturn/2015/02/25/fewer-taxpayers-are-audited-amid-irs-budget-cuts/

[forummm]

I recommend against tax fraud. But I absolutely positively recommend against tax fraud when the scheme, as designed, will cause your tax burden to actually increase, even if the IRS doesn't find out about what you're up to.

[phwadsworth]

I recommend against tax fraud. But I absolutely positively recommend against tax fraud when the scheme, as designed, will cause your tax burden to actually increase, even if the IRS doesn't find out about what you're up to.

Hmmmmm, probably good advice.  I'll look into this ;)