401k for real-estate rentals | IRA LLC

BACKGROUND: Trying to decide between SD IRA and solo 401k. 

I am a working individual with a 401k from a previous employer that I want to use.

Primarily looking at buying Real estate for renting out.

QUESTION: The 401K with check writing option looks much easier.
Am I eligible to do it ?

Thanx

Nitin U. in NJ

ANSWER: Generally the solo 401k plan is more advantageous than a self-directed IRA LLC for the following reason:

Unlike an IRA, you don’t need a financial institution to serve as custodian of the solo 401k plan. The IRS has detailed that a business owner whose company sponsors the solo 401k can act as the trustee of his or her solo 401k and have responsibility over the solo 401k plan’s assets. Therefore, one can serve as trustee of his or her solo 401k and safe keep the real estate documents (e.g., recorded deed) in connection with real estate rentals.

Following information will help you determine if you qualify for a solo 401k or not.

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

Undestand Corporation Solo 401k Contribution | Self-Employed 401k

QUESTION: My client gave me your name as the person to contact if I had any questions about their new solo 401k.  I'm preparing their tax returns, and here's my question - they didn't do any employee deferrals during the tax year, but it looks to me like the employer can make a contribution regardless of whether the employees defer, is that correct?  If it makes a difference, the two S Corp owners (50% each) are the only employees, so that simplifies things.  If this is true, what's the maximum that the employer could contribute in a year for each employee?  Is it just the defined contribution plan maximum (again assuming there are no employee deferrals)?

Thanks for your help!

KT, CPA in Texas

ANSWER: Pursuant to IRS Publication 560, the self-employed individual has until his or her business tax return due date to make the salary deferral and employer contribution to his or her solo 401k plan. So in your case, if both solo 401k participants are looking to still make the salary deferral solo 401k contribution portions they may do so.

Contributions (both the employee and employer) to a self-employed 401k are based on the each individual's W-2 income. If you have the W-2 figure, you can plug it into solo 401k contribution calculator located on our website and it will do the rest of the work for you.

Regardless as to whether or not the self-employed individual chooses to make a salary deferral contribution or not, the employer contribution is calculated as follows:
25% x W-2 income = profit sharing contrition not to exceed $50,000 for tax 2012 and $51,000 for 2013


See following link for breakdown on how to manually calculate the solo 401k contribution for a S-Corporation or C-Corporation:  

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

Roth Solo 401k Plan | Contributions to Roth Solo 401k

QUESTION: With the advice of my CPA, I have made contributions to both my Non-Roth and Roth Solo 401k plans.

Does my solo 401k provider need any of that information in regards to paperwork that needs to be filed with the IRS in connection with the Roth solo 401k contributions as well as pre-tax solo 401k contributions?

Thanks, Jane L. in Virginia

ANSWER: Your accountant will need to report the pretax solo 401k contribution on line 28 under the adjusted gross income section of Form 1040 so that your taxable income  for the year is reduced.  With respect to Roth Solo 401k contributions, they are not reported on Form 1040 since Roth Solo 401k contributions fall under after-tax contribution category.  Further, once your Solo 401k plan is subject to the Form 5500 EZ filing requirement, which applies once the total market value of your solo 401k is over $250K as of December 31, both the Roth Solo 401k and pretax contribution amounts will be reported in part III for Form 5500 EZ.

Lastly you may use the solo 401k annual contribution form found under the forms tab of our website to help document both solo 401k contributions (Roth and pretax solo 401k contributions) to the solo 401k.

Solo 401k multiple brokerage and bank account questions

QUESTION 1: After rolling individual IRA’s into a self-directed solo 401k trust account, is it possible, and if possible, then maybe difficult to roll funds from the 401k back out to an IRA in order to buy, say, mutual funds or stocks from a different broker and still keep the tax deferred status intact on those funds?

ANSWER: Yes the IRA and solo 401k rollover rules permit the transfer of retirement funds between each other. However, if you are seeking to invest in stocks and mutual funds, you can do so under the solo 401k plan. We can assist you in setting up a brokerage account in the name of the solo 401k at Fidelity, Charles Schwab or TD Ameritrade, for example. What’s more, the check writing feature for placing alternative investments such as real estate, promissory notes and tax liens, to name a few, can also be added to this type of brokerage account arrangement. As such, you can accomplish both the alternative investment purchase and stock and mutual fund purchases under the brokerage account without having to open a bank account for the solo 401k.  

QUESTION 2: Is it possible to buy mutual funds from multiple brokers with my solo401k?

ANSWER:  Yes but it doesn’t really make sense. You would just be creating more work for yourself and added tracking headaches by opening multiple brokerage accounts for your solo 401k.

QUESTION 3: Would the mutual fund statements act as a paper trail similar to a deed to a rental property purchased by the 401k? In other words would the mutual funds purchased by the 401k funds cause tax problems or tax confusion with the IRS, or from gains reported directly to the IRS from individual brokers?

ANSWER: No as the whole purpose of the brokerage account statements is to track the Solo 401k activity. Note that solo 401k funds are not tax reported unless you take a distribution from the solo 401k.

QUESTION 4: Would the purchase of the mutual funds purchased by, and in the name of the 401k trust, be sufficient as a paper trail and be understood by the IRS and the brokerage company, that the purchased funds and gains are all under the tax deferred bubble of my 401k?

ANSWER: Again, as outlined above in the answer to question 3, the brokerage account for the solo 401k serves for holding the tax deferred funds including the mutual fund and stock investments and no tax reporting applies provided you don’t make any solo 401k distributions.  

Multiple Solo 401k Loans | Multiple Solo 401k Providers

QUESTION: The following question popped into my head. I can only have up to a total of $50,000 outstanding solo 401k loan. Is that with one solo 401k provider, or can I have one each with multiple solo 401k providers. (so have a total of $100,000 in loans)?  I suspect I know the answer, but I thought I would check anyway. 

Thanks for your time on the phone this morning.

Regards,

Dan from Oklahoma

ANSWER: Good question, while the solo 401k  rules outlined in IRS Publication 560 allow for multiple solo 401k providers and solo 401k plans, unfortunately the solo 401k loan ceiling amount of 50% or $50,000 that a solo 401k participant may borrow from his or her Solo 401k applies to all Solo 401k plans sponsored by the same self-employed company (the company that the solo 401k was setup for). Note however that each solo 401k participant can borrow the maximum solo 401k loan account from his or her own solo 401k. Therefore, if you are married and your spouse is also involved in the same self-employed business for which the solo 401k would be setup for, then you can each borrow from your respective solo 401k funds.