To open a Solo 401k, S-Corporation W2 Income Required

 

QUESTION:

We have a subchapter S corporation that we have had since 2001.  The corporation did operate convenience stores until we sold out last year.  The corporation is now used to own & manage residential rental properties which is our business now. We are in Kentucky.  As of now we likely won’t have any W-2 income from the corporation as the Sub S flows through to our 1040 return. Can we open a solo 401k plan for the S-corporation and make annual contributions?

ANSWER:

Unless you are performing services that would lead to earned income (W-2 income) through the S-corporation, any other income will be deemed passive income and therefore you will not qualify to participate in a solo 401k. See IRS publication 560 for more information surrounding passive income vs. earned income and how passive income does not qualify for solo 401k participation or contribution purposes. In the case of an S-Corporation or C-corporation, only W-2 income may be used to make annual solo 401k contributions.

About Mark Nolan

Each day I speak with energetic entrepreneurs looking to take the plunge into a new venture and small business owners eager to take control of their retirement savings. I am passionate about helping others find their financial independence. Having worked for over 20 years with some of the top retirement account custodian and insurance companies I have a deep and extensive knowledge of the complexities of self-directed 401ks and IRAs as well as retirement plan regulations. Learn more about Mark Nolan and My Solo 401k Financial >>

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