Switch Unit K to Solo 401k Account | Buy real estate using Solo 401k

SCENARIO: I am interested in setting up a  solo 401k and am working on the application online.  I currently have a Uni-K retirement account with Pioneer Investments but I am interested in investing in real estate which is the reason I would switch to a new Solo 401k provider.  I would plan on rolling the assets of the Uni-K account into the Solo 401k.

QUESTION: I see that I need an EIN to apply.  My company (S-Corp.) which sponsors the Pioneer Uni-K plan does have an EIN.  My question is should I use the EIN for my company or should I apply for a new EIN for this new Solo 401k account?

I appreciate your assistance.

Tim P. from Tennessee

ANSWER:  While technically you can continue using your S-Corp business EIN for the solo 401k plan, it is highly recommended that you establish a separate employer identification (EIN) for your solo 401k plan. Reason being, when you go to setup the solo 401k bank account the bank will ask for it, so if you provide your business EIN instead, they will perform all informational reporting to the IRS using the S-corporation's EIN instead of the Solo 401k plan’s, which in turn may cause confusion at the IRS level.  

What’s more, when you commence investing the solo 401k in real estate, a W-9 will need to be filled out and one of the items asked on the form is the EIN for the party to the transaction. Well, the solo 401k is the buyer of the property, not your S-corporation; therefore, if you use your S-corps EIN instead of the Solo 401k plan’s EIN, the IRS may think that your S-Corp was the one that purchased the property, not your Solo 401k plan.

Solo 401k Real Estate Roth Conversion | Roth 401k IRS Reporting

I spoke with you a few minutes ago about what paperwork is needed to deal with the Roth Solo 401k conversion. The Solo 401k was set up in 2012, around August.

A bank account was set up & most of the money was used to buy a duplex (to generate rents and appreciation). In December 2012 we decided to convert the 1 and only piece of real estate that is owned by the Solo 401k to Roth.

QUESTION: What paperwork is needed to report the Solo 401k Roth conversion on my tax return?

ANSWER: Since you already got the property appraised prior to the Solo 401k plan in-plan Roth conversion, an important step required by the IRS, and documented the conversion in writing by completing an in-plan Roth conversion form, make sure that you quit claimed the real estate deed from your Solo 401k to the Roth Solo 401k by simply adding the word “ROTH” to end of the Solo 401k name. While deeding the Solo 401k owned property in the name of the Solo 401k Roth might seem like a hassle and trivial now, you will be happy that you did 15 years from now when you go to sell the property or in the event of an IRS Solo 401k audit. By recording the deed in the name of the Roth Solo 401k, this will further confirm the conversion of the Solo 401k owned real estate to the Roth Solo 401k.

To report the in-plan Roth conversion, a Form 1099-R will need to be filed by us as your solo 401k provider by the end of February. You will also receive a copy in the mail for filing with your personal tax return. 

Here is how you will report the Solo 401k Roth conversion on your tax return:

If tax payer files Form 1040, report Roth Solo 401k conversion amount on line 16a and 16b.

If tax payer files Form 1040A, report Roth Solo 401k conversion amount on line 12a and 12b.

If tax payer files Form 1040RN, report Roth Solo 401k conversion amount on line 17a and 17b.

Lastly, if you haven’t already, make sure to setup a separate solo 401k bank account for holding the Solo 401k Roth income (e.g, rental income, gains from the sale of the real estate property down the road, as well as for paying ongoing expenses associated with the real property )

Thanks,

RP from Florida

Solo 401k Loan Corporation | Rollover Business Startup | IRS ROBS

 QUESTION 1: I am interested in making a loan to a corporation from my solo 401k; and besides getting
the loan repaid, I would be getting 75% of the company stock.  Is that allowed?

ANSWER:  While the Solo 401k investment rules allow for loans (commonly referred to as a Solo 401k promissory note), the following solo 401k prohibited transaction restrictions apply if the solo 401k owner/trustee is a highly compensated employee (defined as earning 10% or more of the annual wages of an employer), officer, director (or has powers responsible to those of officers or directors), or own 10% or more of the corporation’s stock.  These same rules apply to other certain family members such as your spouse, your natural parents, your natural grandparents, your natural children, your solo 401k provider, anyone providing services to your solo 401k plan (e.g., your broker, accountant, attorney, etc. ), because they fall under the solo 401k disqualified person umbrella.  

QUESTION 2: Can the Solo 401k trust own 75% of the shares of a company?  

ANSWER: Provided the C-corporation has not previously issued shares and is thus issuing shares for the first time, you will not be receiving any personal form of benefit or compensation, a solo 401k may own up to 100% of the C-corporation or LLC, for example.

Put simply, you cannot personally benefit from the Solo 401k plan’s investment in the entity, nor can any disqualified parties as described above.  A common transaction where a solo 401k plan owns 100% of a C-corporation or LLC is one that will be investing in real estate. This is especially popular with an IRA and is referred to as a self-directed IRA LLC. This is usually done to greatly minimize IRA custodian transaction fees and involvement.

Possible Solution

Lastly, if you are looking to invest in your own operating business, but don’t have the necessary business funding funds, that will allow you to draw a salary and it will be setup as a C-corporation, you might be interested in pursuing a rollover as business startup (ROBS). This type of arrangement allows you to invest your solo 401k funds in a C-corporation. To learn more visit 401k small business financing.

Thank you,
Jason P. from Illinois

Roth Solo 401k Distributions | Excise Tax

QUESTION: I’m thinking of converting my Solo 401k to a Roth Solo 401k, but first want to know if the excise taxes apply to Roth Solo 401k distributions?

ANSWER: Yes the 10 percent early distribution penalty applies to Roth Solo 401k distributions.  For instance, if a distribution from a Roth Solo 401k account is taken before you turn age 591/2 and none of the exceptions (e.g., a disability, hardship, and death) to the 10 percent premature distribution penalty applies, the full or partial distribution (both contributions and earnings) will be subject to the 10 percent penalty.