Consolidate existing plans and IRAs into a self-directed solo 401k

We had a brief chat yesterday regarding Solo 401K and LLC to investment those funds into real estate.

Here are some follow up questions. Would you please have some time to answer these questions?

Context:

 

I work for a big company ABCD and also own a small company XYZ with just two employees - me and my wife. We currently have the following accounts and plans for XYZ:

Not operational, SEP-IRA accounts for both me and my wife at Fidelity (no deposits ever since we opened the Solo 401K accounts with Fidelity)

Operational and active Solo 401K accounts for both me and my wife at Fidelity

(All four of the above accounts are using free Keogh and other plans that Fidelity provides)

A Non-Prototype account with Fidelity for a combine Cash Balance (Defined Benefit) plan administered by a third party.

Here is what I wish to do:

QUESTION 1: Create a more liberal Solo 401K plan. Roll over all SEP IRA and Fidelity Solo 401K funds into non-prototype accounts opened with this new Solo 401K Plan. Is that possible?

ANSWER: While you state above that Fidelity is providing free solo 401k accounts, I can assure you that is not the case. Just like most brokerage firms, Fidelity is giving the appearance that you are not being charged because they are taking the fees out of the underlying values of the mutual funds, cash account and equity positions which you never see. Now, to answer the rest of your question, yes you can transfer your existing SEP IRAS and Solo 401k plans to a self-directed solo 401k (terms used to describe solo 401k plans that permit investments in alternative investments such as real estate, precious metals, and LLCs, to name a few).

QUESTION 2: Open an LLC and fund it with the two newly formed Solo 401K plan accounts, and the already existing Cash Balance plan account. Purchase a real estate property for rental investment from this LLC and hold the title with the LLC. Is that possible? Would this be an IRA LLC or some other type of LLC?

ANSWER: Yes a self-directed solo 401k along with other types of retirement plans (e.g., a cash balance plan) may be invested in a private company such as an LLC that will invest in rental properties. For your information, an IRA LLC is one where only IRA funds are invested in an LLC. In your case, you would be investing a variety of retirement vehicle types so a better term to use would be a “retirement account LLC".

Other related questions, now that you know the context:

QUESTION 3: Does your Solo 401K plan allow rollovers of some amounts to a self-directed IRA, while the Solo 401K plan is still active (i.e. I have $50K in solo 401K in 2013, and I roll over $10K to IRA just because I want to)?

ANSWER: Yes our solo 401k plan allows for the partial transfer/rollover of funds to a self-directed IRA. We would take care of the 1099-R reporting to the IRS to report the non-taxable transfer/direct rollover to the self-directed IRA.

QUESTION 4: Do you provide assistance to open such an LLC yourself, or through third-party. There is a lot of google documentation on IRA LLC, but nothing that says about an LLC which is funded solely from Defined Benefit and Solo 401K accounts. Are there any special considerations for such an LLC? The Defined Benefit plan admin says it is okay as long as there is an annual appraisal of the LLC and of the assets held by the LLC.

ANSWER: Yes we facilitate the LLC process which includes registering the LLC with the secretary of state, drafting of LLC operating agreement containing specific retirement account language and obtaining the employer identification (EIN) for the LLC.

QUESTION 5: If Solo 401K invests into LLC and partly owns it and real estate owned by LLC tanks due to market drop, so the evaluation of Solo 401K investments are reduced by 50%. Does that mean I need to put in additional money in the LLC or Solo 401K plan accounts, to justify some minimum return promise? E.g. this is a requirement with Defined Benefit plan that there is about 5% annual return available in the account after every year, during actuarial evaluation. Need to know the same about Solo 401K plan requirements.

ANSWER: When a solo 401k invests in a LLC through an equity investment (i.e., the purchase of units), the 401k plan’s investment in the LLC is not guarantee and, thus, it may lose value, which is a risk that applies when investing, whether solo 401k funds or personal funds.

QUESTION 6: Also, related to this question. In such a situation, can I roll over the 401K assets into the LLC and put them into Roth 401K (also under your solo 401K plan), so as to minimize distribution considerations at that point, and hope to achieve more tax free profits in the long run when the real estate market goes up?

ANSWER: First, the solo 401k funds cannot be rolled over into a LLC because a LLC is not a retirement account; instead, the solo 401k would invest in the LLC. The solo 401k asset or liquid funds may be converted to a Roth Solo 401k, however.

QUESTION 7: What documents does the Solo 401K plan need from the LLC annually, once it invests into the LLC ? Does it need some sort of annual appraisal like the Defined Benefit plan does?

ANSWER: A tax form titled Form 500-EZ must be filed for the solo 401k after the total value of the solo 401k exceeds $250,000 as of the end of the year. Therefore, if the Solo 401k invests in an LLC, the LLC must be appraised to determine whether or not the total value of the solo 401k will exceed $250,000 by year end and, therefore, the Form 5500-EZ filing requirement will apply.

QUESTION 8: If I terminate the Solo 401K plan, while the accounts are holding assets in an LLC. Can I rollover those assets into a Self-Directed IRA at that time without needing to dispose of the assets into liquid money?

ANSWER: If the LLC is an asset of the solo 401k, then yes the LLC can be transferred in-kind to the self-directed IRA.

QUESTION 9: An LLC, thus created, would it need to file a tax return with the IRS? I was reading that some IRA LLCs do not have a requirement to file tax returns (it all depends on some rules that I don't fully understand).

ANSWER: Yes a tax return will need to be filed for the LLC if both retirement plans are invested in the LLC as it will be deemed a multi-member LLC. You in conjunction with your personal CPA will be responsible for filling the LLC annual tax return (Form 1065).

QUESTION 10: Can I choose to purchase gold bars from my Solo 401K account and keep those bars with me for safe keeping? I can easily appraise the value of the BAR every year with some registered agent in CA if required. But need to know if that is possible. Again, can I move those gold bars to Roth 401K if gold price tanks down, or is there a minimum return expectation from Solo 401K plan?

ANSWER: While gold bars including other precious metals are allowable solo 401k investment, to answer your question no you may not purchase gold bars from your solo 401k because the solo 401k owner (you in this case) is disallowed from buying assets of the solo 401k. Yes Solo 401k assets, whether real-estate or precious metals, may be converted to a Roth Solo 401k, provided the correct value is reported on Form 1099-R and thus taxes paid. 

Awaiting your responses eagerly.

P.P. in San Francisco, CA