Buy house with Solo 401k

QUESTION: Wanted to ask you if there was any paperwork involved if I took money out of my self-directed Solo 401k account to purchase a house in Seattle Washington, or do I just make check out to the title company?

Thanks,

AH

ANSWER: The answer depends on the following 3 options:

Option 1:  If your plan is to invest the Solo 401k plan in a Seattle Washington house, then the Solo 401k will own the house and you cannot use it or live in it as it would run afoul with the Solo 401k prohibited transaction rules. 

Basically the Solo 401k purchase of a house or other real estate will need to be documented using purchase contract, settlement agreement, escrow instructions, preliminary deed and recorded deed.  You can learn what steps to follow when investing Solo 401k in real estate by visiting following links and use real estate purchase form to further document the solo 401k plan’s purchase of real estate.

http://www.mysolo401k.net/SelfDirected401k.html

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

http://www.mysolo401k.net/Free-Solo-401k-Investment-Forms.html

Option 2: If your intention is to use Solo 401k to buy a house that you will be personally using or living in, then it would not be considered a Solo 401k investment in real estate. Instead, you will need to process a Solo 401k distribution and pay the applicable taxes before using the Solo 401k funds to purchase a personal home. Please visit Solo 401k distributions as the Solo 401k distribution would need to first be documented in writing and mandatory federal taxes paid, if you qualify for Solo 401k distribution.  As a result, you would own the house personally outside of your Solo 401k trust.

Option 3: If your plan is to process Solo 401k loan and use the proceeds to purchase a house for use as your primary residence, then the Solo 401k loan rules must be followed.  For example, the Solo 401k loan rules permit each Solo 401k trustee to borrow 50% of his or her Solo 401k balance not to exceed $50,000 and pay it back over 15 years. To learn more about Solo 401k loan, visit Solo 401k loan facts.

Another S-Corporation Contribution to Solo 401k Question

QUESTION: If I start to pay myself salary compensation and elect to be taxed as an

S-Corporation but still operate as an LLC, how does it affect the calculation of my contribution to the self-directed Solo 401k?

E.g total salary is $70K, net income is $30K after all expenses including salary.

Thanks.
J

 ANSWER:  Good question. Contributions to Solo 401k based on S-Corporation status are based on W-2 wages. Interesting that you pose this question because we responded to a client inquiry regarding this yesterday and posted the following blog which can be viewed by clicking on following link:

http://mysolo401k.blogspot.com/2012/11/s-corporation-contribuiton-to-self.html

S-Corporation Contribuiton to Self-Directed Solo 401k Question

QUESTION: I want to open Solo 401k to maximize my S Corp contribution to Solo 401k with about $230K annual revenue. Does this mean that I can contribute maximum $50K for pre-tax at 2012 (25% of the revenue)? 

ANSWER: The Solo 401k contribution for an S-Corp. is based on W-2 wages. Therefore, if your W-2 wages for tax year 2012 equal $230K, your maximum Solo 401k contribution for tax year 2012 is $50,000 plus an additional $5,500 if you are age 50 or older. Further, the maximum W-2 compensation that may be used for calculating your tax year 2012 self-directed Solo 401k contribution is $250,000.

Use our Solo401k contribution calculator to calculate your tax year 2012 Solo 401k contribution.  

QUESTION: Can I add my husband to the account for pre-tax now? My husband has his 401K from his Employer right now.

ANSWER: If your husband is also employed in some capacity through your S-Corp. and generating W-2 income through the S-Corporation, then he can also contribute to self-directed Solo 401k.  Read following blogs from our website for more information surrounding contributing to multiple 401k plans.

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

http://www.mysolo401k.net/blog-for-mysolo401k.html?entry=i-have-few-questions-regarding

QUESTION:  Or can I add my husband to the account any time later?

ANSWER: You can add your spouse as a participant of the Solo 401k now or later at no additional charge.

QUESTION: So the S Corp is like the Sole proprietors. I cannot go with employer profit sharing contribution? I have $24K on my W2 annually, and I probably have another $80K~90K profits at 2012. What should I do with the profits to maximum the pre-tax contribution to Solo 401K?  Could the dividend or 1099 be part of the Income   to calculate the maximum contributions?

ANSWER: Solo 401k contributions are made up of two types, regardless of entity type.

Type 1: Salary Deferral Contribution: For tax year 2012, 100% of W-2 earnings not to exceed $17,000 or $22,500 if you are age 50 or older may be processed as a Solo 401k contribution.

Type 2: Profit Sharing Contribution: As outlined in Internal Revenue Code Section 401(a)(3) the amount of employer contributions a/k/a profit sharing contributions is limited to 25 percent of the compensation paid. As such, a profit sharing contribution up to 25% of W-2 earnings can be contributed into a Solo 401k. Put differently, in the case of company, the employer profit sharing contribution has to be based on the compensation paid by company not the overall profits earned by the company.

Check with your personal tax professional or accountant, but unless the $80k-90K of profits are converted to W-2 income, they may not be used to calculate your Solo 401k contribution

Self-Directed Solo 401k bank account and contribution question

QUESTION: I plan to open Solo 401k.  As for the bank accounts, I have multiple accounts at PNC and will likely use them for simplicity to open Solo 401k bank accounts.

I plan to transfer funds out of an ING Savings account and into the self-directed Solo 401k trust account.  Do you see a problem with that?

Thanks,

MG

ANSWER: With respect to transferring funds from ING savings account, only other retirement funds such as former employer 401k plans and IRAs, with the exception of ROTH IRAS, may be transferred to Solo 401k.

With regard to making annual Solo 401k contribution based on self-employment generated in the 2012 tax year, the maximum contribution limit is 50,000 plus an additional $5,500 if you are age 50 or older in 2012. Therefore, if the funds in your ING savings account stem from self-employment income in 2012, then presumably they may be used towards calculating your 2012 Solo 401k contribution limit.

Please use our on-line calculator to calculate your annual Solo 401k contribution.  http://www.mysolo401k.net/solo401kcontributioncalculator.html

Following blog pages from our website contains good information regarding Solo 401k contributions.

http://www.mysolo401k.net/blog-for-mysolo401k.html?entry=self-directed-solo-401k-contribution

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

You can also use our annual Solo 401k contribution form to document your contributions located under following link:

http://www.mysolo401k.net/Free-Solo-401k-Investment-Forms.html

Sell San Antonio TX Real Estate to My Solo 401k

QUESTION: Is it allowable for the Self-Directed Solo 401K to purchase a San Antonio, Texas real-estate investment property owned by us?  Or does that trigger the unfair advantage rule?
I have a rental in San Antonio, TX that is underwater on the 2nd and I’m trying to decide whether to negotiate down the 2nd and take money out of the Solo 401K plan in order to pay the lender, and then have the Solo 401k purchase the property from us. If that doesn't work I'll have to short sell it. I want to keep it if I can; this is so hard to figure out!

ANSWER: Unfortunately, if your Solo 401k plan were to purchase your San Antonio, Texas owned real estate property, it would be a prohibited transaction because you fall under the disqualified party category. Similarly, your spouse, your parents, your children, your grandparents and anyone providing services to your Solo 401k also falls under the disqualified party umbrella. For a full list of disqualified and non-disqualified parties visit:  http://www.mysolo401k.net/Investments.html

The purchase or the transfer to of your personally owned real estate to the Solo 401k specifically falls under IRC 4975 code section detailing the following: “The sale, exchange, or lease of property between a plan and a disqualified person.” The plan obviously being the Solo 401k and the disqualified party means you as trustee of the Solo 401k.

  

Visit following links to learn more about the Solo 401k prohibited transaction rules. 

http://www.mysolo401k.net/Solo-401k-prohibited-transactions.html

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