Is it possible for a limited partner to set up a solo retirement account separate from the partnership's 401K plan?

This is a great question that touches on some nuanced retirement planning territory. For limited partners, your ability to establish a separate retirement account depends on whether you have any other self-employment income outside of your partnership. Unfortunately, limited partnership income reported on your K-1 is generally considered passive income and not self-employment income, which means it typically doesn't qualify as a basis for establishing a solo 401(k) or SEP IRA. These retirement plans require active self-employment income to establish. However, if you have any other business or freelance activities that generate self-employment income (reported on Schedule C), you could establish a solo retirement account based on THAT income. The income from your limited partnership wouldn't count toward contribution limits for that solo account, but your participation in the company's 401(k) would still affect your overall retirement plan contribution limits.

After spending hours reading through complicated IRS documents trying to figure out my own retirement situation as a partner in a small business, I stumbled across a tool that saved me so much headache. Have you guys tried https://taxr.ai? It helped me understand exactly what retirement accounts I qualified for based on my specific situation. I just uploaded my K-1 and some details about my partnership arrangement, and it broke down all my options really clearly—way more understandable than the conflicting advice I got from searching online. It even showed me exactly how much I could contribute to different account types based on my specific income sources.

I was initially really skeptical about uploading my tax docs to https://taxr.ai that someone mentioned above, but I was desperate after getting completely contradictory advice from two different accountants about my situation as both a limited partner and independent contractor. Just wanted to report back that it was actually super helpful. The system immediately identified that my K-1 partnership income wouldn't qualify for a solo retirement account, but my Schedule C consulting income would. It showed me exactly how much I could put into each type of account and how to maximize my total retirement contributions across both businesses. Saved me a ton of confusion and probably prevented me from making some expensive mistakes. Wish I'd found it before paying for those conflicting accountant consultations!

If you're struggling to get clear answers about your retirement options from the IRS, I feel your pain. I spent THREE WEEKS trying to get through to someone who could answer my question about having both partnership income and self-employment income. Finally tried https://claimyr.com and got through to an actual IRS agent in about 20 minutes who confirmed exactly what my options were. You can watch how it works here: https://youtu.be/_kiP6q8DX5c The agent walked me through the exact rules for limited partners wanting to set up separate retirement accounts and cleared up my confusion about controlled group rules. Way better than getting generic advice online or waiting on hold for hours.

Well I need to eat my words about that Claimyr service. After posting my skeptical comment, I decided to try it anyway because I was desperate to get clarity on my situation with multiple retirement accounts. To my complete shock, I got a call back in about 35 minutes and was connected to an IRS tax specialist. She explained that as a limited partner receiving only passive income, I couldn't use that income for a solo 401k or SEP IRA, but confirmed I could use income from my side business. She also clarified the exact contribution limits when participating in multiple retirement plans. The agent even emailed me relevant IRS publications with the specific sections highlighted. Never would have gotten this level of help without actually talking to someone there. I've spent YEARS getting vague or conflicting information about this stuff.

One thing nobody has mentioned yet is that if you're a limited partner but ALSO provide services to the partnership (like consulting work FOR the partnership), some of your income might be considered self-employment income rather than just passive income. Check your partnership agreement carefully. Some partnerships specifically structure certain payments as guaranteed payments for services, which ARE subject to self-employment tax AND could potentially qualify as a basis for a separate retirement account. Also, if your only goal is to save more for retirement beyond your company 401k, don't forget you can always contribute to a traditional or Roth IRA regardless of your partnership status. The contribution limits are much lower ($6,500 in 2023), but it's a simple option that avoids all the complexity.

I'm in a similar situation and went down this rabbit hole last year. Make sure to check if your partnership is part of a "controlled group" with any other business entities you own or operate. If so, there are additional rules that might require your plans to be combined for testing and contribution limit purposes. The IRS has incredibly complex rules around this stuff, and the penalties for getting it wrong can be steep. If you have significant assets involved, it might be worth paying for a consultation with an employee benefits attorney who specializes in retirement plans. General tax preparers often don't have deep expertise in these niche retirement plan rules.

As someone who went through a similar situation as a limited partner, I can confirm that the partnership income alone typically won't qualify you for a solo retirement account. However, I noticed you mentioned collecting quarterly profit distributions - make sure to distinguish between your distributive share of partnership profits (passive income) and any guaranteed payments for services you might receive. If you do any work FOR the partnership that generates guaranteed payments (shown separately on your K-1), that income could potentially qualify as self-employment income for retirement plan purposes. Even something like attending partner meetings or providing strategic input might be structured as guaranteed payments rather than just profit sharing. One other option to consider: if your current 401k plan allows it, you might be able to make after-tax contributions beyond the normal limits and then do in-service distributions or conversions to a Roth. This could help you save more within your existing plan structure without needing to set up separate accounts. Worth checking with your plan administrator about these "mega backdoor Roth" strategies.