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Sidedoor 401k: Can I Contribute the Required Minimum Distributions (RMD) from an Inherited IRA into my Solo 401k?
The short answer is no, you cannot directly roll over or contribute distributions that you have to take from an inherited IRA into your solo 401(k) plan. However, if you have enough self-employment income to justify making contributions to the solo 401(k) plan, then you could use the money from the inherited IRA distributions to help free up additional cashflow that then allows you to make higher contributions to the solo 401(k), subject to the limits.
What is an Inherited IRA?
An inherited IRA is an account that is opened when an individual inherits a retirement account or IRA after the original owner passes away. The individual inheriting the Individual Retirement Account (IRA) becomes the beneficiary of that inherited IRA account. The beneficiary must transfer the funds into an inherited IRA in their own name (note: in the case of a spousal beneficiary, the surviving spouse can simply transfer the proceeds of the inherited retirement account into the surviving spouse’s own IRA).
Additional contributions cannot be made to an inherited IRA.
In the case of a non-spouse beneficiary of an Inherited IRA, the beneficiary must take certain required minimum distributions from the Inherited IRA account.
Sidedoor Solo 401k:
For a self-employed individual who has a Solo 401k and also must take required minimum distributions from an Inherited IRA, the “sidedoor 401k” strategy can help minimize the tax burden for this individual and/or maximize Solo 401k contributions.
The strategy is to withdraw money from the inherited IRA (at least enough to satisfy the RMD) and use those funds to pay living expenses. This frees up more cash to allow for higher Solo 401k contributions (Pre-tax, Roth and/or Mega Backdoor Roth) – essentially shifting money from the taxable inherited IRA to tax-advantaged accounts. The funds are fungible, so it does not matter if living expenses are paid from the inherited IRA money or the self-employment income. This strategy may thus allow the individual to maximize Solo 401k contributions.
