If you have a passion or skill as a hobby, consider turning that hobby into a business to qualify for the self-directed Solo 401k. You’ve heard the suggestion to get a retirement hobby to keep you active and mentally fit as you age. You’ve also heard that hobbies can earn money. With time on your hands, combining these two possibilities has real income potential.
The Difference Between Hobby Income and Your Solo 401k
Retirement is a great time to start or expand a hobby for income. You can do this at any time. However, having time available after retirement makes this particularly appealing. But, understand the differences.
One is a hobby you turn into a business you manage. The other is a hobby of doing something you enjoy in your retirement plan. Doing something in your retirement plan limits to how active you can be. That’s because your retirement account is not a business, it’s passive.
There is no limit to you working in a hobby business or actively managing the business. What is important is that being self-employed (even in retirement) is a key qualification for opening your Solo 401k account. You must own a business to open a Solo 401k. It can be a very small and very simple business. This is why retirement can be a good time to start a hobby business.
Hobby Business Qualification for a Solo 401k
There are a few basic qualifications your business must meet. One requirement is that your business has zero full-time employees other than yourself and your spouse. Full-time employees are those who work for you more than 1000 hours per year and receive W2 wages. But that does mean you can’t hire independent contractors to do work for your business. Importantly, your business can be a great source of contributions to your Solo 401k along with the tremendous tax benefits that your Solo 401k comes with. You can continue making contributions to your Solo 401k as long as you want to.
Once your retirement funds are in your control, you have a lot of options on how you can invest. But, be aware of the rules of what you can and cannot do. For instance, you can decide to invest in any rental house you want but you can’t personally do work such as painting. These are called prohibited transactions.
But there are important aspects of your Solo 401k that you want to actively manage. This includes researching investment opportunities and making decisions about when to buy and sell your investment holdings. Real estate has always been a favorite among Solo 401k investors but other options worth exploring include:
- Bitcoin and other cryptocurrencies.
- Tax lien certificates.
- Private mortgages.
- Private lending.
- Precious metals.
- Brokerage accounts.
What’s important here is that you have many investing options. Both within your Solo 401k and as hobby income opportunities. What you want to keep in mind is the difference between managing an active business versus managing the investments within your Solo 401k.
Hobby Business Ideas
Your imagination is the only limit to the type of hobby you can transform into a business. The IRS definition of a business is very broad to accommodate almost anything that produces an income (it doesn’t have to be profitable). Possibilities include:
- Becoming a Lyft or Uber driver and get to know your city better.
- Photography can be sold to stock photo websites.
- Catering if cooking is your thing.
- Woodwork handcrafts to sell on eBay, your own website, or a local consignment store.
- Classic car restoration and repair.
- Music instrument tutoring.
- Travel blogging.
- A drone service for aerial photography.
That’s a quick list of a dozen out of what are certainly hundreds of possibilities. The best hobbies for making money are the ones having a large audience of people willing to spend money. If you are serious about taking a hobby business as far as it can go, stay away from hobbies that are a fad and consider what will be required to scale up the business.
An Example of Converting a Hobby Into a Solo 401k Account
It doesn’t take much to start a business selling DVDs. DVDs have an almost unlimited audience of people willing to spend money. Think about the bins of DVDs set out in stores as impulse buys. But you don’t want to complete with the B rated movies in those bins. When you sell used DVDs, you can sell the most popular and classic movies for dimes on the dollar. As a hobby, you get to watch all the movies in your inventory.
You will need sources of used DVDs. Local garage sales and estate sales are very good sources. At estate sales, you can purchase large collections for a few dollars. Bonus – hitting garage and estate sales keeps you physically fit and out doing some socializing. Then you need somewhere to sort and store your inventory. Your garage, a spare room, or an outbuilding is all that is needed. You sort the movies by genre and keep a spreadsheet of your inventory. All of this is very inexpensive and none of it requires any special skills.
Open Up Shop (online!)
All that remains to do is opening your own eBay store. You scan the DVD covers to create graphics of the DVDs you have for sale. The eBay store builds in all of the financial transactions. The only thing remaining for you to do is purchase a supply of packaging materials to ship the purchases as they come in. Making this an IRS approved business does require some bookkeeping that is easily done with bookkeeping software.
Done! You’ve created a legitimate hobby-based business with serious income-producing capability. Your business benefits go well beyond having an unlimited supply of movies to watch in your retirement. You now have a business that qualifies you for a Solo 401k. You’re generating income at a national and global level. Income that you can spend now and income to contribute to your Solo 401k for more financial security later in retirement. You may even have a business that becomes a legacy for your heirs.
Nabers Group understands that you want to maximize income while minimizing taxes. When you have questions, we have answers. There are several ways you can open your Solo 401k. We work with you to meet your financial strategy and needs.