Leaving job, not looking for another - 401k to solo 401k?

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Ricchan
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Leaving job, not looking for another - 401k to solo 401k?

Post by Ricchan »

Hello, I am in a bit of a weird situation. I'm leaving my job by the end of the year due to health and family issues and will probably not be looking to take on another job for a year or more (or less), depending on how things work out.

I have a 401k from work that I will have to move out of the company's plan. I am fortunate to be in a position where my side income places me above the modified AGI limit for standard Roth contributions. Therefore, I am looking for a way to manage my 401k after leaving my job that allows me to continue making backdoor Roth contributions. As I understand, this rules out the use of a traditional IRA due to the potential mixing of pre-tax and post-tax when attempting a backdoor Roth.

From my research, it looks like setting up a solo 401k may be the way to go here. However, first I'd like to get some feedback on this idea and also air out some thoughts in case I am overlooking some obvious pitfalls.

The benefits of moving my work 401k to a solo 401k are:
  1. Continue building up retirement assets in the solo 401k, with a higher yearly contribution limit compared to a tIRA.
  2. Allow yearly backdoor Roth contributions.
In order to perform (1), I would need self employment income. As my side income has been mostly passive up to this point, I have not been declaring it as self employment income. However, now that I will no longer be working a traditional job, I can take a more active role which would allow me to classify it as self employment income and allow me to contribute to the solo 401k.

Assuming I am taking in self employment income, the next question is whether to simply declare it as self employment income or to form an LLC. Additionally, the LLC could file to be taxed as an S Corp, which would limit FICA taxes to salaries and not the pass-through income. However, it looks LLCs that file for S Corp tax status will also have to file additional tax returns and pay additional commercial activity tax (at least in my state), so perhaps it may not be worth it in the end?

Please let me know any thoughts you may have about the solo 401k or LLC, or any other ideas related to this situation. Thank you.
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Tamarind
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Re: Leaving job, not looking for another - 401k to solo 401k?

Post by Tamarind »

If you're not looking to take on a full time self-employment job, and just need to do enough to reasonably open a solo 401k, then I feel an LLC would really be overthinking it.

Also there can be disadvantages to LLC structure beyond the ones you mentioned. Some states require an annual fee to maintain an LLC. And if you ever dissolve the LLC you'll have to terminate the 401k, where there's no such requirement for a sole proprietorship.

There is an even simpler choice, though. Just leave your 401k where it is. You are generally not required to roll it over when you leave your employer. Once you figure out your next act in a year or whenever, you can roll it into a new employer's 401k or set up a solo 401k later if you transition to self employment.
SuzBanyan
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Re: Leaving job, not looking for another - 401k to solo 401k?

Post by SuzBanyan »

Even if the Solo 401k is not something you are interested in pursuing after you leave your W-2 job, with a side income as high as you have, I would think you would want to legitimately classify it as business income to receive the QBI deduction.
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retiredjg
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Re: Leaving job, not looking for another - 401k to solo 401k?

Post by retiredjg »

Ricchan wrote: Wed Oct 27, 2021 9:45 pm I have a 401k from work that I will have to move out of the company's plan.
Why do you think this? It is common to leave the money there if you want.

If you prefer to move the money, but sure you open a Solo 401k that will accept the rollover. Not all do.
pizzy
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Re: Leaving job, not looking for another - 401k to solo 401k?

Post by pizzy »

Ricchan wrote: Wed Oct 27, 2021 9:45 pm As my side income has been mostly passive up to this point, I have not been declaring it as self employment income.
What have you been declaring it as?
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supalong52
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Re: Leaving job, not looking for another - 401k to solo 401k?

Post by supalong52 »

There are some ERISA protections that sponsored 401k plans enjoy that solo 401ks do not. I don't recall of the top of my head, but stuff like bankruptcy protection, etc. might not apply to Solo 401ks. You will also have 5500 reporting requirements to meet for a solo 401k above a certain threshold like 250k or something.
lostinjersey
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Re: Leaving job, not looking for another - 401k to solo 401k?

Post by lostinjersey »

I’m also confused as to why you have to take it out in f your current plan. Unless you have less than $5,000 or the plan is terminating, you should be able to leave it where it is.
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