Solo 401k Trust Questions

I found you through a Google search, and am investigating Self-Directed Solo 401k as a possible strategy for asset protection of my Traditional IRA before assuming Trusteeship of a relative's Trust, which would expose me to Unlimited liability, so far as I can determine. I was thinking of incorporating several side activities that I now pursue as a hobby, for profit, which, under the Corporate form,  which would allow me to establish a Solo 401(k). Always trying to think "What could possibly go wrong with this picture?", I wondered if the Solo 401(k) can out live the Company it is established under, (It  IS a separate trust, right?), or if things did not go as planned for my new Company, and I had to discontinue and unwind it, would the 401(k) ALSO have to be dissolved and transferred back into a Traditional IRA or (???) or could the Solo 401(k) continue with existing assets and management(Me), just not any contributions from the ( now dissolved) Company? I don't know who better to ask, since most of my existing advisors were unaware of Solo 401(k)'s! 

Thanks. J. Kersch

First, to qualify for Self-Directed Solo 401k (a/k/a Solo 401k, Individual 401k, Individual k, etc.), you must be self-employed with no full-time employees. Self-employment income consists of income generated from services performed not passive income. 

You can learn more about qualifying for Solo 401k by reading following blog:

http://www.mysolo401k.net/Self-employment-Compensation-for-Self-Directed-Solo-401k-or-Self-Directed-401k.html

Second, the IRS rules do not currently allow the IRA non-spouse beneficiary to transfer his or her beneficiary IRA to a Solo 401k. Further, while Solo 401k falls under the trust umbrella, it is still quite different from other trust types such as family or living trusts. Therefore, you cannot commingle the Solo 401k trust funds with other forms of trusts.  

Third, once you cease self-employment through the company for which the Solo 401k was established for, the rules currently require that the Self-Directed Solo 401k be either transferred to an IRA or another qualified plan such as a 401k or the funds distributed from the Solo 401k, with the ladder leading to tax consequences.

You can learn more about Solo 401k by reading IRS Publication 560; here's the link:

http://www.irs.gov/pub/irs-pdf/p560.pdf

Self-Directed Solo 401k Setup Questions

I have questions regarding the setup and ongoing use of a Self-Directed Solo 401K to purchase and flip residential real estate.

If the Self-Directed Solo 401k plan is set up under a single member LLC that I already own ( e.g., ABC LLC),

1.)  can both my wife and I participate in the Self-Directed Solo 401k plan?

2.)  If we both can participate, do we need one checking account or two?

3.)  Does my wife need to become a member of the LLC?

4.)  If the main goal or idea is to make money for the plan through buying/rehabbing/selling of residential real estate, can I as trustee of the plan also participate in transactions and be compensated as a Real Estate Broker?

Thank you, T. Acuff 

Answer to Q 1: You can participate and make Solo 401k contributions on behalf of yourself only if you have net earnings (compensation) from self-employment in the trade or business for which the Solo 401k Plan was set up. Your net earnings must be from your personal services, not from your investments. If you have a net loss from self-employment, you cannot make contributions for yourself for the year. Same rules apply to your spouse.

Answer to Q 2: A checking account would be required for each Solo 401k participant for tracking each participants contributions, investment gains, etc. For example, if the name of the Solo 401k is ABC Solo 401k, the two checking accounts would be titled as follows:

Checking Account 1: ABC Solo 401k f/b/o Jane Doe

Checking Account 2: ABC Solo 401k f/b/o John Doe

You can read more about multiple checking accounts for Solo 401k at:

http://www.mysolo401k.blogspot.com/2012/03/solo-4o1k-or-individual-401k-is-for.html

Answer to Q 3: See answer to Q 1 above. Simply put, your wife will need to generate income from the business in order to participate and contribute to Solo 401k.

Anser to Q 4: You can invest in real estate alongside your Solo 401k through tenancy-in-common arrangement; however, you cannot receive compensation (e.g., commission) from the transaction as it would be deemed a prohibited transaction. what's more you nor your Solo 401k may incorporate debt financing when investing in real estate alongside your Solo 401k. Lastly, the real estate purchase would need to happen simultaneously. 

You can find out more about tenancy-in-common by reading following link:

http://www.mysolo401k.net/Blog-for-MySolo401k.html?entry=purchase-property-with-solo-401k

http://www.mysolo401k.net/Blog-for-MySolo401k.html?entry=purchasing-buying-real-estate-with

Transfer Schwab Solo 401k to Self-Directed Solo 401k

My wife and I own a S-Corp with no employee. We are the only employee for this company. We also set up a solo 401K under this company. My wifeand I each has a solo 401K account and is under Charles Schwab. Thecurrent acct with Schwab has very limited investment option and I want to invest in real estate instead. If I set up a Self-Directed Solo 401K, can I transfer all the money from Schwab to the new account? If we can, after we set up and transfer the money to the new acct, can we write checks to purchase properties by ourselves instead of involving the custodian for each transaction? After that, can we still make the 401K contribution and do the company match to the new solo every year 

thereafter?

Hope to hear from you soon
Thanks
J. Ng

Yes you can transfer your current Solo 401k with Charles Schwab to Self-Directed Solo 401k that allows for investing in alternative investments such as real estate, promissory notes, precious metals, private placements etc, as well as Solo 401k loan (borrow from Solo 401k). The key is to use the services of a Solo 401k provider whose Solo 401k document allow for investing in alternative investments. 

The process of converting from a Charles Schwab Solo 401k to a Self-Directed Solo 401k with checkbook control (a/k/a Solo 401k checkbook control) is painless. Basically, you just need to restate your current Solo 401k. This is a fancy way of saying switching Solo 401k plan documents. Therefore, you will not be terminating your Solo 401k but rather switching Solo 401k provider. 

To learn more about the process of updating from a Schwab Solo 401k to a Self-Directed Solo 401k read following blog posts.

http://mysolo401k.blogspot.com/2012/06/switch-solo-401k-providers-real-estate.html

http://www.mysolo401k.net/Blog-for-MySolo401k.html?entry=consider-self-directed-solo-401k

Yes Self-Directed Solo 401k comes with checkbook control. This means that, as the trustee(s) of the Solo 401k, you will have complete control over the administration of the Solo 401k including processing investments by writing check from the Solo 401k checking account. Therefore, you will not need to use the services of a Solo 401k custodian as you will be the one responsible for assets of the Solo 401k. You will also be able to continue to make your annual Solo 401k contributions to the Solo 401k by depositing the contributions in the Solo 401k checking account at your local bank.

Loan My Self-Directed Solo 401k to my brother

I recently opened a Self-Directed Solo 401k with your company and have a question about a possible investment. Would it be permissible under the rules of Self-Directed Solo 401k to make an unsecured or secured loan to my brother? Based on my research, I believe it is, if so, what guidelines does the IRS impose relative to interest rate, payment schedule and term of the loan?  What are my responsibilities for reporting this type of loan to the IRS? If you could recommend a website for further information it would much appreciated. Thanks for your help.

T. Burns

Yes a loan investment (a/k/a promissory note), whether secured or unsecured, by your Self-Directed Solo 401k to your brother is permissible under the IRS regulations as a brother or for that matter a sister is not a disqualified party.

You can learn more regarding prohibited transactions by visiting following links.

http://www.irs.gov/irm/part4/irm_04-072-011.html

http://www.mysolo401k.net/Self-Directed-401k-Prohibited-Transaction-Under-4975.html

http://www.mysolo401k.net/Self-Directed-Solo-401k-Self-Directed-401k-SoloK.html

http://mysolo401k.blogspot.com/2012/06/who-is-disqualified-from-making.html

Regarding the process of documenting the promissory note investment, it should be documented through a formal promissory note document to list the loan terms. For example, list the borrower, the lender (obviously the Self-Directed Solo 401k), if note is secured or unsecured, payment amount (e.g., interest payments with final balloon payment due at maturity, or principal and interest payments, etc), length of loan, etc.

You can learn more about promissory note investments by visiting following blogs:

http://www.mysolo401k.net/Secured-Notes.html

http://mysolo401k.net/Blog-for-MySolo401k.html?entry=investing-buying-promissory-notes-trust

Investments made by a Self-Directed Solo 401k such as a promissory note is not directly reportable to the IRS.  Generally, the only reporting required for a Self-Directed Solo 401k comes into play once the the account value exceeds $250,000--that is, you are required to report the total value of the Self-Directed Solo 401k, not the value of each individual investment. This reporting is processed using Form 5500-EZ and for calendar year plan requires filing by July 31 of each year.

You can learn more about Form 5500-EZ by visiting following link.

http://www.mysolo401k.net/Blog-for-MySolo401k.html?entry=form-5500-ez-annual-return

Transfer Defined Benefit Plan to Solo 401k

I would appreciate it if you clarify the following for us.

Thanks,
S. Zendehrouh

1. Please let us know what we need to do to switch from an existing funded defined benefit pension plan (for one participant and spouse) to a Self-Directed Solo 401k plan.

Question: Could we amend our existing defined benefit plan and switch, or do we need to first terminate our existing defined benefit plan and start a new Self-Directed Solo 401k plan?

 Answer:

You have following options:

Option 1. Keep current defined benefit plan (DBP) open and Open Solo 401k as the regulations allow for multiple plans, you just can't exceed the annual contributions limits between both plans. See IRS Pub. 560 for more information regarding multiple plans.
http://www.irs.gov/pub/irs-pdf/p560.pdf

Option 2. Close the DBP and transfer the assets to Solo 401k. Your new Solo 401k provider will generally prepare the transfer forms to ensure the movement of the Defined Benefit Plan to Solo 401k is not a taxable event, or the current DBP provider will have you complete their transfer-out forms.

Funding a new Self-Directed Solo 401K from my current Roth IRA

 I have a question about funding a new Self-Directed Solo 401K (a/k/a Solo 401k, Solo K, Individual 401k) from my current Roth IRA. I read on your website that you cannot roll Roth funds into a Self-Directed Solo 401K. Is this also true if I contributed to the Roth on an after-tax basis? If so, is there any way to "restate" the Roth to a traditional IRA in order to allow it to be rolled into a Solo 401K, or are these funds simply off limits?

Thanks for any information.

K. Wagner

Correct the 401k regulations do not currently allow for the rollover of Roth IRA funds to a Self-Directed Solo 401k; however, the regulations do allow for Roth Solo 401k contributions, up to $17,000 for tax year 2012, plus an additional catch-up amount of $5,500 for those age 50 or older in 2012. Of course, just like Roth IRA contributions, Roth Solo 401k contributions are not tax deductible bu the contributions and earnings grow tax free. It's my understanding that all contributions to Roth IRAs are made up of after-tax contributions--that is,  contributions consist of post-tax funds. Therefore, they are restricted from being transferred to Solo 401k.

If you processed a Roth IRA conversion--a reportable and taxable movement of assets from a Traditional IRA to a Roth IRA, you can recharacterize back to a Traditional IRA but only if processed by October of the year following the date that the Roth conversion was processed, provided you filed for tax return extension.

On the other hand, if you made a Roth IRA annual contribution, the deadline to recharacterize the contribution for a tax year is your tax return due date, plus extensions. The IRS provides a six-month extension of the recharacterization deadline for taxpayers who timely file their federal income tax returns. 

Lastly, keep in mind that you can only Open Solo 401k if you are self-employed with no full-time employees, and in order to make a Solo 401k contribution, you must have compensation from self-employment in the trade or business for which the Solo 401k was opened.

Processing Change in Entity Type for Self-Directed Solo 401k

I have a CPA firm that is currently structured as an LLC that wants to open up a
Self-Directed Solo 401k.
 

In approximately a year, they will be setting up another entity—a Corporation,
which will be a new legal entity in addition to their LLC. Note that the CPA firm only has two owners (husband and wife) and no full-time employees.
 

If they want to fund (make Solo 401k contributions from self-employment compensation) their solo 401k in 2013  from their new Corporation, do we have to terminate their old Self-Directed Solo plan and open a new Solo 401k or do we amend the old Self-Directed Solo 401k plan with the new company name, and establish a new EIN for the Solo 401k.

No elaborate change is required. Your Solo 401k provider will simply need to update the Solo 401k plan document to reflect the new entity (the Corporation) and submit letter to the IRS to communicate to them the new company associated with the Self-Directed Solo 401k.  

Therefore, the EIN will remain the same and the same Solo 401k account tile remains the same. Solo 401k providers generally don’t charge a fee for processing this type of Solo 401k administrative update nor does the filing of a final Form 5500-EZ apply since you are not terminating the Solo 401k plan, but just simply updating the entity type associated with with it.

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.

Can I Transfer Current Employer 401k to Self-Directed Solo 401k?

Can I Transfer Current Employer 401k to Self-Directed Solo 401k?

I'm working full time, and our company has a self administered 401k plan (the employer is the trustee) , of which I have an account. I haven't made a contribution to the account for over a year, and neither has my employer.
 

If I start my own company, and a Self-Directed Solo 401k to go with that, do you think there would be any problems transferring the funds from my current 401k employers plan to my new self-employed Self-Directed Solo 401k  plan, trustee to trustee, while still employed with my current employer? Or is the only way to move those funds is if I "officially" quit from the company?

The regulations allow the employee/participant to transfer contributions made to his 401k with his or her current employer. However, employer contributions generally cannot be transferred out until you leave the employer.

I suggest asking your current employer for copy of the Plan Document so that we can try to identify language in the plan that allows for the transfer of employee contributions even while still employed.

Lastly, the rules allow for multiple 401ks; you just can't contribute over the annual limit between them all.

Following blogs will shed more light on multiple 401ks:

http://www.mysolo401k.net/Blog-for-MySolo401k.html?entry=can-i-adopt-a-solo

http://www.mysolo401k.net/Blog-for-MySolo401k.html?entry=contribute-to-401k-and-solo

http://www.mysolo401k.net/Blog-for-MySolo401k.html?entry=consolidating-retirement-plans-using-a

http://www.mysolo401k.net/Blog-for-MySolo401k.html?entry=solo-401k-eligibility

I want to Open Self-Directed Solo 401k

Assuming I want to proceed to open Solo 401k, who would be my contact person? This is dependent on the Solo 401k provider. Some Solo 401k providers assign an account executive to each client while others have a contact center full of account executives, with access to compliance personnel upon request.

 Can I open Self-Directed Solo 401k by email, or do I need to go through the website? This again depends on the Solo 401k provider. Some start the Solo 401k sign-up process through their website and finish the process through e-mail and phone call.

 How long do you estimate it takes to open a Solo 401k, and roll over my existing SEP IRA to Solo 401k?  Some Solo 401k providers establish the Solo 401k in 24 hours including opening the Solo 401k checking account, and the SEP IRA is typically transferred to Solo 401k bank account in 2 to 3 days assuming the releasing custodian doesn’t drag their feed.  

What obstacles, if any, do you anticipate? Two obstacles may arise, which are: the local banker may not have experience opening checking account for Solo 401k (a/k/a Checkbook Control Solo 401k) and thus may need to be educated; therefore, make sure to use the services of a Solo 401k provider that can extend a hand in educating your local banker on the Solo 401k bank account process. Common mishaps are: the local bank branch opens Solo 401k offered by the bank that restricts you from investing in real estate, precious metals, etc., or the Solo 401k is opened in your name, which is a major no, no. The Solo 401k checking account is to be opened in the name of the Solo 401k using its dedicated EIN (employer identification number), not your social security number, in order to ensure proper annual reporting by the bank. 

Who drafts and approves the self-directed Solo 401k document, and has it ever been challenged by the IRS? All Solo 401k plans are reviewed by the IRS. The self-directed Solo 401k document is drafted by a third party actuary firm and approved by the IRS through the issuance of a determination letter. 

Are Solo 401k plan documents ever challenged by the IRS? When the IRS reviews a Solo 401k plan document during an examination, they generally approach it from an operational angle as well as making sure that the Solo 401k plan document is up to date and that the IRS determination letter is readily available.

The 10% early 401k withdrawal penalty and the age-55 exception

Generally distributions from 401k plans are subject to the 10% early distribution penalty if you make the distribution before turning age 59 ½.  However, unlike IRAs, an exception to the 10% early distribution penalty applies to withdraws form company 401k plans. Basically, if  you’ve reached age 55 and have separated from service (left the employer), you can make a withdraw and escape the 10% early distribution penalty but, unfortunately, you will still be subject to payment of federal and possibly state taxes on the amount distributed. 

Therefore, it may be best to transfer you former employer 401k to a Self-Directed Solo 401k and subsequently borrow from it through a Solo 401k loan. The use of a Solo 401k loan will alleviate you from having to pay federal or state taxes since you will ultimately pay the Solo 401k loan back, either monthly or quarterly. To learn more about Self-Directed Solo 401k loan visit:  

http://www.mysolo401k.net/Blog-for-MySolo401k.html?entry=solo-401k-participant-loan-facts

Invest Solo 401k in Commodities

 

Solo 401k for commodities | 401k commodities | Invest Solo 401k in commodities

 Yes Self-Directed Solo 401k can be invested in commodities such as oil, gas, steel, etc. as well as mining companies. However, don't put all your eggs in one basket, especially in commodities or the companies that mine them.

The run-up in commodity prices in the last 10 years can be traced back to China's roaring economy and appetite for raw materials such as industrial metals and bulk commodities--coal and iron ore. While many analysts have talked about a "super cycle", long term rise in prices lasting for decades resulting from China demand, investing your Self-Directed Solo 401k solely in commodities in not a good idea, especially since Solo 401k may be invested in a variety of investment types such as real estate, private companies, trust deeds, tax liens, promissory notes, equities, etc. In short, diversification is the name of the game.

More reasons for not solely investing Solo 401k in commodities 

Even though China's steel production consistently rose by 16% per year from 2000 to 2011 and nearly half the raw materials produced worldwide and over two-fifths of copper and aluminum is consumed by China, a slowdown is apparent. Academics studying supercyles reckon that expansions last from 15 to 20 years. The recent commodities cycle started in 2000. However, analysts think the current cycle has already peaked.

Lastly, not all Solo 401k providers Solo 401k plan documents allow for investing in commodities or private mining companies. Therefore, be sure to ask the Solo 401k provider before you open Solo 401k if their Solo401k plan document allows for commodity investments. 


While China's