Understand the Self-Directed Solo 401k

The best way to understand the Self-Directed Solo 401k (a/k/a Solo 401k, Solo k, Individual 401k, Single K, Individual k) is to first start reading about it through IRS publications and websites, which believe it or not are written in layman’s terms.

IRS publication 960- Retirement Plans for Small Business: while this publication also contains information surrounding other types of retirement plans such as SIMPLE IRA and SEP IRA, all for the self-employed, it also has a section dedicated to Qualified Plans which is the term often used by the IRS to refer to Self-Directed Solo 401k. The section on qualified plans begins on page 12 by listing the kinds of qualified plans. Pay close attention to section titled “setting up a qualified plan” as it confirms that in order to have a valid  plan, including a self-directed Solo 401k, the plan must be in writing and under an IRS approved format. In other words, one can’t simply adopt a Solo 401k through a verbal agreement nor through a written agreement that has not been approved by the IRS.  The section titled “contributions” is also relevant, especially for those looking to open solo 401k for the first time. This section states that in order to make contributions to a Solo 401k the self-employed individual has to have net earnings (compensation) from self-employment in the trade or business for which the plan (Solo 401k) was established. Another relevant section discussed in IRS Publication 960 is Solo 401k prohibited transactions. This section covers the basics regarding Solo 401k prohibited transactions and also discusses the tax consequences.

The Most Important Language Applicable to Self-Directed Solo 401k Straight from the Source (the IRS)

The following language is hands down the most important language published by the IRS because it not only confirms but opens up the eyes to Solo 401k providers, real estate title companies, banks, auditors and all those who have been led to believe that the only way to open a Solo 401k plan is through big-box financial institutions such Fidelity, Charles Schwab, ETRADE, Vanguard, Ameritrade, Citi Bank, Bank of America, etc., which as you probably know by now generally restrict you to only investing your Solo 401k in mutual funds or stocks when you use their Solo 401k plan document.

  

Language Straight From IRS Website

Trusts and trustees. 401(k) plans are funded through a trust established to hold and invest the plan’s assets. At least one trustee is appointed to have responsibility for the activities of the trust and its assets. This is a serious responsibility with considerable potential for liability. Trustees might include the business owner, an employee, or a financial or trust institution. Visit following link which lists IRS link to this IRS language section. http://www.mysolo401k.net/Blog-for-MySolo401k.html?entry=reason-why-solo-401k-or

Understanding the Different Types of Self-Directed Solo 401k Providers

After gaining a solid foundation regarding Self-Directed Solo 401k, the next step is to understand the various types of Self-Directed Solo 401k providers.  Basically there are 3 types of Solo 401k providers, which are:

Solo 401k Brokerage Firms

Brokerage firms such as Fidelity, Charles Schwab, TD Ameritrade and Vanguard offer Solo 401k but their plan restricts you to only investing in stocks and mutual funds. However, you can open brokerage account at one of these firms for Solo 401k provided you use the Solo 401k plan documents of an outside Solo 401k provider. In other words, the mentioned brokerage firms will provide a brokerage platform and you as the solo 401k trustee and administrator will administer the plan not the brokerage firm.

Passive Solo 401k Custodians

Custodians such as Pensco Trust and Equity Trust offer self-directed Solo 401k but they ultimately hold the investment documents as the custodian. Their fees are generally the highest of the 3 Solo 401k provider types because they charge fees for each transaction. Lastly, investments usually take longer to process because the investment documents have to be submitted to them for final review and funding.

Solo 401k Facilitators/Directed-Administrators

These types of Solo 401k providers provide Solo 401k document that has not oly been approved by the IRS, but names you as trustee of the Solo 401k. They also assist you I opening checking account at your local bank for the Solo 401k. Some will also assist you in administering the Solo 401k by filing annual form 5500-EZ with the IRS once the Solo 401k value reaches $250,000. By using a Solo 401k administrator, you end-up processing all alternative investment (real estate, precious metals, trust deeds, tax liens, etc.) purchases by simply writing a check from your Solo 401k checking account.