Canadian self-employment and full year 1040 - solo 401k?

[Naveg]

My wife moved to the US in June 2013. Prior to the move she was self-employed in Canada, and is now an employee in the US. We will be fiing a joint full year 1040, with form 1116 as appropriate for the self-employment income.

I'm wondering if my wife can establish and contribute to a solo 401(k) before the end of 2013 based on her foreign self-employment income? Seems unlikely because she was a non-resident at the time, and the income is not US-sourced, but I can't find anything that suggests she can't. Does her election to be treated as full year resident allow her to have a solo 401(k)? She had no self-employment earnings in US after moving.

[Naveg]

I should add that we are both Canadian citizens, and that I filed US dual status/Canadian departure in 2012.

[nelsona]

Before I answer could you clarify the time line? You said you left Canada in 2012, and your wife left in 2013?

So, she did not file in US in 2012? And you took the aggressive position (correct in my opinion) that despite this you were Cdn emigrant in 2012?

And, just so you knw your options, you could have filed jointly in US in 2012, just like you are intending to do this year, and in either year you are not limited to using 1116 for your foreign sourced income. Earned income (both wages and self-employed) can also be exempted using 2555, for the preiod before becoming a US tax resident.

[nelsona]

As to the solo 40(K), I don't believe there is anything preventing it. However consider this: Given that by 1116 or 2555, little or no US tax will be owed on this money, there will be little no tax benefit to doing this.

Plus, you will have to find a trustee, and there are costs to setting uop and admin.

Better for her to load up her RRSP one last time to reduce Cdn tax than the other way 'round. in my opinion.

[Naveg]

Thanks nelsona - you're correct on all clarifications.

The main motive here is not this year's deduction (2555 is an option as you mention), but more cap room for a roth rollover during future low-income years, which we anticipate.

[nelsona]

Then, why not simply create a solo Roth401(K) and bypass having to transfer later altogether..