October 23 2013

Active vs. passive income

Dmitriy Fomichenko Setup, Solo 401k Eligibility

What is the difference between active, or earned, income and passive income?

How can I determine if I have earned income?

Can I contribute my investment income to the Solo 401k?

Active, or earned, income is earned from your business activity. Passive income comes from investments that you hold.

Active/earned income

Your eligibility for the Solo 401k is based on having an active self-employment business
Contributions to your Solo 401k can only be made from your compensation from your active self-employment business
Compensation is active/earned income

Defining compensation

The IRS describes types of active/earned income below:

https://www.irs.gov/credits-deductions/individuals/earned-income-tax-credit/earned-income

Passive income

Passive income cannot be contributed to your Solo 401k
Some/all of your investment income can potentially be designated as earned income under the direction of your CPA. Please consult with your CPA to determine if your management or administrative work for your investments can be designated this way.