Author Topic: Investing into self-employment 401k Tax-free despite NOT working  (Read 325 times)

mikepat2015

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Investing into self-employment 401k Tax-free despite NOT working
« on: September 09, 2019, 01:18:45 AM »
First time poster.. just retired at 43

Hello Everyone..
Im 43 and have retired with a good bank balance and IRA funds. I am planning to live outside USA next 10 years. While I am out, I would still be earning around 50k yearly rental + capital gains income.

My question is how can I utilize self-employment 401k that is suggested online in a few blogs? I do not have any company registered or am not employed. I will be filing annual tax returns and paying required taxes.

I would appreciate any pointers. My goal is to keep investing 10-15k every year into 401k taxfree despite on sabbatical.

Thanks much in advance.

RWTL

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Re: Investing into self-employment 401k Tax-free despite NOT working
« Reply #1 on: September 09, 2019, 03:48:02 AM »
I'm interested to hear responses.  My thought is that you would need to setup a business structure, but would like to hear others feedback.

mikepat2015

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Re: Investing into self-employment 401k Tax-free despite NOT working
« Reply #2 on: September 09, 2019, 05:09:22 AM »
Yes, anxiously waiting :)

Here's the blog where I understood it's possibility:
https://www.mymoneyblog.com/self-employed-solo-401k-vs-sep-ira-basics.html

terran

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Re: Investing into self-employment 401k Tax-free despite NOT working
« Reply #3 on: September 09, 2019, 05:27:22 AM »
All retirement plans, including self employed retirement plans require earned income in order to contribute. It sounds like you won't have that.

You might be able to get the real estate income reclassified as Schedule C income instead of Schedule E income if you meet certain requirements, but that's usually something people very much want to avoid as you lose many of the tax advantages of real estate investing. You'd also then have to pay self employment tax on that income which is an instant ~14% tax all of the income (a flat tax, not a progressive tax like the normal tax brackets).

Also, even if you earn income, if you meet the requirements for the Foreign Earned Income Exclusion, you won't owe tax on that money (except self employment tax if applicable), and therefore won't be eligible to contribute that income to a retirement plan.
« Last Edit: September 09, 2019, 05:29:41 AM by terran »

mikepat2015

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Re: Investing into self-employment 401k Tax-free despite NOT working
« Reply #4 on: September 09, 2019, 05:35:57 AM »
Thanks much for the detailed reply.

A followup question to understand the definition of earned-income.

If someone (an individual) pays me against consulting hours (say, $1000 in total in whole year), and I report it as self-employment income, would that qualify me to be eligible?


mikepat2015

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Re: Investing into self-employment 401k Tax-free despite NOT working
« Reply #5 on: September 09, 2019, 05:39:05 AM »
I referred following two links to understand the Earned Income inclusion/exclusion but the one I am thinking of (consulting ad-hoc income) is not addressed here:

https://www.irs.gov/credits-deductions/individuals/earned-income-tax-credit/earned-income

https://www.irs.gov/government-entities/indian-tribal-governments/itg-faq-2-answer-what-income-is-considered-earned-income

Thanks again for input.

terran

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Re: Investing into self-employment 401k Tax-free despite NOT working
« Reply #6 on: September 09, 2019, 05:59:46 AM »
Consulting, which I take to mean working for a company as an independent contractor (?) would fall under "You own or run a business or farm" from your first link. You'll file schedule C with your taxes to pay tax on your this self employment income, as well as Schedule SE to pay self employment tax (both employee and employer parts of the FICA taxes).

Since you plan to be out of the country, you might qualify for the Foreign Earned Income Exclusion, which would mean the first ~$100k of your earned income would not be subject to income tax (but would be subject to self employment tax), but also wouldn't be eligible for contribution to a retirement plan.

mikepat2015

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Re: Investing into self-employment 401k Tax-free despite NOT working
« Reply #7 on: September 09, 2019, 06:05:09 AM »
Got it. Thank you! I am assuming I would be still eligible to put some monies into Trad/Roth IRA.

401k is really a good tax-saving retirement investment benefit which I wanted to take advantage. Trad IRA/Roth IRA cap limits are very low compared to 401k. Hence, started this thread.

terran

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Re: Investing into self-employment 401k Tax-free despite NOT working
« Reply #8 on: September 09, 2019, 06:08:35 AM »
Got it. Thank you! I am assuming I would be still eligible to put some monies into Trad/Roth IRA.

401k is really a good tax-saving retirement investment benefit which I wanted to take advantage. Trad IRA/Roth IRA cap limits are very low compared to 401k. Hence, started this thread.

If you have earned income that does not qualify for the Foreign Earned Income Exclusion, yes you would be eligible to make IRA contributions, and if it's self employed income you would also be able to open and fund a self employed retirement plan. However if you don't have earned income or all of your earned income is eligible for the Foreign Earned Income Exclusion then no, you would not be eligible to make IRA contributions.