Self IRA aka Solo 401k Questions and Anwers

As mentioned in our phone conversation, I am interested in a self IRA.  Here are my details....

I have an Roll over IRA with UBS....about $88,000

I am an independent contractor and have set up my own corporation.

I sell product for a produce company.

My desire to set up a self IRA is two fold.  I have a customer that owes the company money and can use the funds to bridge the gap.  Once everything is fulfilled, I would like to be able to contribute to my own IRA.

Questions.....

1. Can the total funds from this one acct be transferred?

2. How much can I pull out on a promissory note?

3. Would I have to make interest payments?

4. Would there be any tax penalties?
5. How long does it take to set up an acct

6. I bank with B of A....can I set up a trust acct with them?

7. What are the drawbacks of a self IRA?

8. Am I forgetting any important questions?

Thank you, 

FG

ANSWERS:  Based on our conversation, it’s my understanding that you might be interested in opening a Solo 401k plan since you are self-employed, which you are referring to as a “Self IRA,” a term sometimes used to refer to a Solo 401k plan.  That said, here are the answers to each of your respective questions:

1. Yes the Solo 401k rules allow for the rollover of all IRA funds (except or Roth IRA funds) to Solo 401k.  As part of the Solo 401k establishment process, we will prepare the IRA transfer form to ensure the IRA funds are transferred to Solo 401k without incurring taxes.

2. Referred to as a Solo 401k loan, because you are borrowing from your own Solo 401k, the Solo 401k rules allow the participant to borrow 50% of their Solo 401k balance not to exceed to $50,000.  Therefore, after your rollover the $88,000 in your IRA to your new Solo 401k, the maximum amount that you may borrow is $44,000. 

3. Yes you are required to make principal and interest payments on the Solo 401k loan amount. Visit Solo 401k loan  learn more, but basically, the maximum loan term is 5 years, payments are fixed and  you have the option to choose at the time of the Solo 401k loan to make either monthly or quarterly payments. Lastly, the current interest rate on Solo 401k loans is 4.25 percent, made up of the Wall Street Journal prime rate plus one percent.

4. Because you are borrowing from your own Solo 401k funds, there is no penalty provided you timely make the loan payments and therefore do not default on the Solo 401k loan. If you do default on the Solo 401k loan, the entire outstanding loan is treated as a taxable distribution and you may have to pay a 10% penalty if you are under age 59 ½.

5. It generally takes 24 hours to setup a Solo 401k plan. However, it may take 3 or more 5 days for your current IRA custodian to process the IRA transfer to the new Solo 401k.

6. You can setup the checking account for the Solo 401k at any bank of your choice including Bank of America.  Note that Bank of American would only be providing a checking account for your Solo 401k and we would be your Solo 401k provider, not Bank of America.

7. I can’t think of any drawbacks to opening a Solo 401k plan. We are always available to answer your Solo 401k questions, even on Saturday. So if you think of any more questions please let us know and/or continue reading our blog.