Solo 401k for a Part-Time Pilot

July 25, 2019 | By Mark Nolan

QUESTION:

I have been considering opening a solo 401K as a real estate investment vehicle and funding it via a previous employer 401K.

I am currently employed full-time as a pilot but have the opportunity to do part-time contract work (1099) as a pilot with two separate companies; most likely under my own name / sole proprietor.

Would that 1099 contract employment qualify me for a solo 401K?

ANSWER:

The activity you described would certainly qualify for a solo 401(k) provided that you don’t have any full-time W-2 employees working for you. A solo 401k can be adopted even if the individual works for a full-time W-2 employer provided the individual also performs at minimum part-time self-employment activity under their own own-only business . Participating and contributing to multiple retirement plans such as a full-time employer 401k plan and an owner only 401k (solo 401k) is a good way to super charge your retirement savings which is attractive to those who got started late in saving for retirement.

Yes 1099 contract work qualifies as self-employment income which would need to be reported on Form Schedule C. A solo 401k can be sponsored by a sole proprietor, LLC, partnership, S-corp and C-corporation as long as the business owner is performing earned income activity.

Generally, the term “earned income” is defined to mean the individual’s net earnings from self-employment activities in a trade or business. (IRC 402(a)). In addition, the earned income must arise from the individual’s personal services and the personal services must be a material income-producing factor. (IRC. 401(c)(2)(A)(I); Reg. §1.401-10(c)(1). Income from the disposition of certain types of property is also deemed earned income. The purpose of the earned income rules from self-employment is to provide a solo 401k plan for the self-employed so that they can save for retirement, and to exclude inactive owners whose income is derived only from investments as investment income is not considered “earned income.”

Lastly, yes a previous employer 401k may be transferred to a solo 401k plan. In some cases some of the funds in an existing employer 401k plan can be also be transferred to a solo 401k plan.

All of the following types of tax-qualified retirement savings can be rolled or transferred into a Solo 401k plan.