No, you cannot use capital gains from your business to make Solo 401(k) contributions. Only earned income, which is compensation for performing a service, is considered eligible for Solo 401(k) contributions. Capital gains are considered passive income and do not qualify.
Capital gains income is considered passive income, in that you do not work for those funds. Other types of income that are not eligible for Solo 401(k) contributions include welfare, unemployment, stock dividends and rental income.
To make Solo 401(k) contributions, you must have self-employment income that is subject to self-employment tax. Capital gains alone cannot be used to fund a Solo 401(k). You must have earned income from your business to make valid contributions to the plan.
The following IS NOT considered compensation for solo 401k contributions purposes:
- Unemployment compensation
- Interest income does not count, nor do dividends on stocks, bonds or other investments
- Capital gains from the sale of property does not count, nor does rental income
- Deferred compensation
- Pension, profit sharing, or IRA distributions do not count
- Life insurance proceeds
- Disability insurance income
- Child support
- Social Security
