IRA Financial’s Adam Bergman answers questions about foreign earned income and the Solo 401(k), the Series LLC and whether or not you can contribute to a Solo 401(k) and a SEP IRA at the same time.
Question 1 from Tyler J in Dubai, UAE: Can I contribute to a Solo 401(k) if I have foreign earned income?
Foreign earned income means that you are a US resident or citizen and you earn income outside of the United States. The IRS taxes your worldwide income. Therefore, most funds you earn living abroad will be treated as taxable income. Of course, those taxes must be paid on your income tax return.
However, if you can show that you’ve earned under $105,900 in a given year, you will not owe US taxes. Generally, you’ll be taxed in the country you are in, therefore, so long as you don’t exceed the amount, you will not owe Uncle Sam. For the most part, many countries tax your earnings at a much higher rate than here.
If you are earning self-employed income overseas, you are eligible to contribute to a Solo 401(k). However, since the whole benefit of a 401(k) plan is to defer taxes, you need to exceed $112,000 in self-employed income to make it worth it to contribute to a Solo 401(k). If you are not getting taxed in the US, there are no taxes to defer. In sum, yes, you can contribute to a Solo 401(k) with foreign earned income, however it only makes sense from a tax standpoint if you earn enough to defer taxes.
Related: Buying Foreign Real Estate with Retirement Funds
Question 2 from David M in Costa Mesa, CA: Can You set-up a Series LLC for a checkbook control IRA?
A Series LLC is defined as “a master or umbrella LLC and other LLCs which are separated from each other for liability purposes.” While you can set up a Series LLC for a Checkbook Control IRA, it’s not available in all states. Therefore, you need to check your state first to see if you can set one up there.
Why a Series LLC? Many real estate investors tend to set up a new single member LLC for each property they own. This could get very expensive depending on your state filing fees. A Series LLC can be set up where you have a master LLC and then set up subsidiaries for each of the properties. Mr. Bergman is not a big fan, especially for investors who invest in other states that don’t allow for Series LLCs. Unless you are investing in dozens of properties, it doesn’t save you a ton of money.
If you have a few properties and wish to invest in properties out of state, you have the freedom to do so. If it’s a non-series state, you would have to form a new LLC anyway. The operating agreement is quite a bit more complicated than setting up a new single-member LLC. Of course, you should speak with a financial planner to see if it may be worth it for you.
Question 3 from Leslie F in Grand Rapids, MI: Can I contribute to a SEP IRA & Solo 401(k) plan at the same time?
Interestingly enough is you use IRS Form 5305, you cannot set up both plans. However, if you set up your own SEP IRA with your own form, you could, though it doesn’t make much sense to have both. If you are self-employed with no full time employees, the Solo 401(k) is your best retirement plan option. A SEP IRA is a great option for small business owners that do employ other individuals (other than a spouse or partner).
The offer virtually the same advantages, however, with a SEP IRA, you have the three to five rule. This means you don’t have to offer benefits to those who have not worked for you in three of the previous five years.
In the end, it comes down to what type of business you have. Full time employees: SEP IRA. No full time employees: Solo 401(k). The SECURE Act has changed when Solo 401(k) contributions can be made. You now have until you file your tax return to set up and contribute to the previous year’s Solo 401(k).
AdMail – Keep it Coming
We hope you enjoyed the latest episode of AdMail. Mr. Bergman will continue to respond to questions each week so long there is a demand for them! If you have any questions for him, email him at [email protected].
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