Is an Entity Necessary to Set Up a 401(k)?

[HotTip]

According to the Green Trader Tax (www.greencompany.com), an entity (e.g., SMLLC) is necessary in order to establish a 401(k) for myself. Can anyone confirm that this is in fact true?

I'm not sure if this is necessarily the case. As a sole proprietor with trader tax status, I can transfer a portion of my gains to my Schedule C to offset business expenses. In prior years I stated in the footnotes that since I'm a trader I don't have to pay SE taxes on the Schedule C profits, but that prevented me from setting up a 401(k). So, by that logic, can't I just remove that statement from my footnotes and pay the SE taxes on my Schedule C profits, which would then open the door for me to set up a 401(k) for myself? Seems like a much simpler solution than having to set up an actual entity.

Any accounting experts know the answer? Thanks!

 

[gnome]

Quote from HotTip:

According to the Green Trader Tax (www.greencompany.com), an entity (e.g., SMLLC) is necessary in order to establish a 401(k) for myself. Can anyone confirm that this is in fact true?

I'm not sure if this is necessarily the case. As a sole proprietor with trader tax status, I can transfer a portion of my gains to my Schedule C to offset business expenses. In prior years I stated in the footnotes that since I'm a trader I don't have to pay SE taxes on the Schedule C profits, but that prevented me from setting up a 401(k). So, by that logic, can't I just remove that statement from my footnotes and pay the SE taxes on my Schedule C profits, which would then open the door for me to set up a 401(k) for myself? Seems like a much simpler solution than having to set up an actual entity.

Any accounting experts know the answer? Thanks!

To have a 401(k) account, you must be the employee of a corporation.

Look into IRA, SEP IRA if you file a Schedule C.

 

[HotTip]

Quote from gnome:

To have a 401(k) account, you must be the employee of a corporation.

Look into IRA, SEP IRA if you file a Schedule C.

Thanks gnome. According to the Fidelity website (regarding their solo-401(k) offering) -- "The Self-Employed 401(k) is designed specifically for self-employed individuals and owner-only businesses....Eligible business owners include sole proprietors, partnerships, corporations, and S corporations." So, it appears that any sole proprietor can create a solo-401(k). I think what Green Trader is saying, however, is that traders specifically cannot create 401(k)s without first creating an entity because the capital gains are not considered earned income, which is what I think they're saying is necessary to make a 401(k) contribution. Can anyone confirm or disprove this? Also, am I correct in also thinking that I can go ahead and contribute to a SEP-IRA without creating an entity, and that all I have to do is transfer the amount necessary to my Schedule C to fulfill the maximum contribution limit (and pay SE taxes on the amount)?

 

[Joetrader]

The IRS is vague about a lot of things when it comes to trading, but one thing they are not vague about is that any and all income derived from trading is not earned income and therefore if you decide to simply pay employment taxes and open an SEP, etc you will be using unearned income to fund the account which is illegal. I don't know how they audit this or what your chances of being caught would be, but if the IRS ever found out they would disqualify your entire SEP and then charge you penalties and fines, etc. So if you are trading successfully then picture yourself down the road a few years and the IRS disqualifies your 1M SEP IRA and you have to pay back taxes for years going back along with fines and penalties and interest. Then if there is anything left it will be withdrawn and you will pay a 10% withdrawl penalty too boot. By the time they are finished with you, you would be lucky to have anything left and would have been better off just paying taxes anyhow. So if you are profitable then pay to set up an entity. Paying a w-2 salary through the entity converts the income to earned and you can do a pension of some sort. Good Luck!