I intend to make some self-employment income within the next few
years, and I would like to go ahead and set up a self-employed 401(k).
I would take the money that is currently in a 401(k) that I
contributed to when I was at my last job, and put it in a (new)
self-employed 401(k).

My question is this:  I don't know when I will actually start making a
self-employed income. Will I have any tax (or other) problems from the
government if I have a self-employed 401(k) for a year or 2 before
actually showing any self employed income?

Thanks,

Jane

Hi Jane, 

Yes, there are penalties for over-funding IRAs, 401(k)s, etc.

You'll find information here about excess contributions that are not withdrawn.
You'll need to scroll down to about 2/3 of the page.
http://www.dol.gov/ebsa/publications/401kplans-supplement.html

So, the goal is, in the first year of the business, make sure that
you earn enough money so that you have a profit, of, let's say, 
$1,000. 

That will allow you to roll over your job 401(k) money into 
your solo 401(k) account - and to contribute up to $1,000.

If your business will show a loss, you have a a couple of choices - 

1) Open two businesses - 
a) one where you sell something at a profit - and no other expenses 
b) the other, your main business with its loss.

or

2) Don't write off everything you spend. Capitalize (treat as assets)
enough of your expenses, so you show a profit. You'll be able to 
depreciate or amortize those expenses over several years, once you
do show a profit. 

Work with a good,local tax professional to keep your overall tax plan on 
track.  It's cheaper than you think. 

Good luck in your new business. 

Best wishes,

Your TaxMama-ga

---

Request for Answer Clarification by madmouse-ga on 29 May 2006 10:20 PDT

I guess this means that I can't put more into my 401(k) than I make
from self-employment. But I already have the money in a 401(k); do I
have to just leave it with my former employer's pension plan unless I
make about $70,000.00 in one or two years, in self employment?

Thanks,

Jane

---

Clarification of Answer by taxmama-ga on 01 Jun 2006 17:06 PDT

Dear MadMouse-ga 

How odd, I've been checking this board daily to see if you 
requested clarification, and your query just appeared today.

Please re-read my original answer. 

It lays out exactly what to do. 

1) Knowing that you will have that profit, set up a solo-401(k)
this year. Discuss your plan with the custodian. Ask the custodian
how much profit they require you to have in the current year, so 
they will allow you to roll over your entire previously existing 401(k).

2) Make sure that your business earns the minimum profit 
spelled out by your custodian, in the current year. 

3) Make your contribution for the current year from your current profits. 

That's it. 

Pretty easy.

Best wishes,

Your TaxMama-ga

Both researchers have given me good information. I guess I need to
study the government publication recommended by TaxMama. Thanks, guys!

"If your salary falls roughly in the range of $75,000 to $230,000,
consider the individual 401(k). You'll enjoy some of the highest
contribution limits for the self-employed, with tax-deductible
contributions of up to 20% of self-employment income. An extra bonus:
As an employee of the company, you can contribute an additional
$15,000, which makes the solo 401(k) that much sweeter. The maximum
contribution is $44,000 in 2006. And it's flexible, so you can make
higher contributions and rack up big tax savings when business is
good, and cut back during lean years."
http://foxnews.smartmoney.com/smallbiz/askedandanswered/index.cfm?story=20060522

"Up to $11,000 can be contributed, although it can't exceed 100% of
pay. There is a total salary deferral and employer maximum of $40,000.
Employer contribution limits are up to 25% of pay or 20% for
self-employed. "
http://mutualfunds.about.com/cs/retirement/a/individual401k.htm

If your income is lower, you should consider maxing out a ROTH IRA
before contributing to a 401k.  The ROTH is not tax deductible, but
all withdrawals after you retire are tax free... so if you're in a low
tax bracket now and a higher bracket when you retire then the ROTH
will be very beneficial.

With either option, you cannot contribute more money than you earn for the year.

Thanks, "Jack", but my question is really whether or not the feds
would bother me for taking money from a pre-existing 401(k) and
putting it into a self-employed 401(k) a year or so before I had any
self-employment income (but I could incorporate, or whatever).

Jane

Sorry that I misread your question.  I just search everywhere I could
think and still have no answer.  I know that rollovers in general are
fine even if you don't have income (this is because you already
received the tax benefit from contributing the money in the first
place)... so I don't imagine the rollover to the individual 401k will
be an issue.

As long as setting up the individual 401k plan was legal than this
should go over well with the feds.  Wish I could be more help.

Jack-- I just saw your additional comments at the bottom. I think that
answers my question. Thanks a lot.

Jane