Things to consider before processing rollover from SEP IRA to: self-directed 401k | self-directed Solo 401k |401k real estate | Solo 401k | Solo K | Individual 401k | Individual K | Single 401k | self-employed 401k | owner only 401k

If you are currently participating in a simplified employee pension (SEP) IRA and want to now participate in a Solo 401k (commonly referred by other names such as self-directed 401k or Self-Drected Solo 401k), a new plan document must be signed. You cannot update your SEP IRA document to a Solo 401k plan.

With respect to terminating the SEP IRA, you have two options, which are:

1. Terminate the SEP IRA and rollover the assets to the Solo 401k plan.

2. Rollover some of the funds to the new Solo 401k plan and keep the rest of the SEP assets in the IRA--however, any assets remaining in the IRA cannot be distributed without the 10% early distribution penalty until you reach 59 1/2 (unless you qualify for an exception under IRC Sec. 72(t))

Take a loan or borrow

Lastly, after rolling over your SEP IRA assets to a Self-Directed Solo 401k plan, they can be borrowed through a participant loan, resulting in tax and penalty-free access to your money. To learn more about borrowing from a Solo 401k plan visit the following link. http://www.mysolo401k.net/Solo401kLoan.html

Items to consider before processing rollover from SIMPLE IRA to: Solo 401k | Solo K | Individual 401k | Individual K | Single 401k | Self-Directed Solo 401k | Self-Directed 401k | Owner only 401k | Self-employed 401k

Since the inception of the Solo 401k (often referred by other names such as owner only 401k, self-employed 401k or self-directed 401k) in 2002 with the passage of EGTRRA, owner-only businesses have consistently switched from participating in SIMPLE IRA to Solo 401k.

However one should consider the following before making the switch from SIMPLE IRA to Solo 401k to stay in compliance with the regulations:

Cease making contributions to SIMPLE IRA

If you currently participant in a SIMPLE IRA, not only must you first cease making contributions to it but also not have made contributions to it in the year that you would like to rollover the SIMPLE IRA to the new Solo 401k. In addition, you cannot make future contributions to the SIMPLE IRA while the solo 401k is active.

ILLUSTRATION:

Daniel has been contributing to her SIMPLE IRA for the last four years, including this year, but recently read how a Solo 401k or Self-Directed 401k will allow her to put way more for retirement. However, because Daniel contributed to her SIMPLE IRA this year, she must wait until next year to transfer her SIMPLE IRA to a Solo 401k, provided she establishes the Solo 401k by December 31 of this year.

2 Year Period to avoid 25% penalty

Before you proceed with rolling over your SIMPLE IRA to a Solo 401k, first confirm that it has been at least two years since you first contributed to it. Reason being, you will be hit with a 25% distribution penalty on the amount of the rollover if you rollover before the two year period has expired.

The role of the plan trustee: Solo 401k | Individual 401k | Self Directed 401k

A Solo 401k or Individual 401k must have a named trustee, and all plan assets must be held in a trust. The trustee holds the Solo 401k or Self Directed 401k plan non cash assets (e.g., real estate purchase documents, private investment certificates and forms, promissory notes or trust deed documents, to name a few), and ensures the cash assets are deposited in the Solo 401k’s checking account through the bank.  Additional responsibilities assigned to the trustee include managing the plan’s investments, although this function can be delegated by trustee to another individual such as an investment manager, or financial professional. Please refer to the following regulation for more information on this: [ERISA 403(a), 29 U.S. C. 1103 (1974)]
What’s more, the Individual 401k or Solo 401k plan trustee is usually responsible for processing contributions and investment transactions, disbursing funds or paying fees and expenses of the Solo 401k trust, and filing Form 1099-R (only required if distributions from the Solo 401k are processed or if assets are rolled over to an IRA), and Form 5500 once the Solo 401k reaches $250,000 in value (this value applies to cash and noncash assets combined).

Basic Trust Document Requirements and Advantages: Self Employed 401k | Solo 401k | Self Directed 401k

Self Employed 401k plans, like other types of qualified plans, must meet the basic qualification requirements for retirement plans as outlined in Code Section 401(a).

Advantages afforded to a Solo 401k plan that is qualified

The many advantages of having a qualified Self Directed 401k plan or Solo 401k include the following:

1. The employer can take a tax deduction for making contributions to the self employed 401k plan.

2. Investment earnings of the Solo 401k plan's assets are not subject to current taxation.

3. As a Participant or Trustee of the plan, you can avoid current taxation of amounts allocated to the self directed 401k.

4. As a Participant/Trustee of the plan, you may roll over plan benefits from or to other employer-sponsored plans or IRAs  tax-free.

The Solo 401k plan must be in writing

Some states recognize the existence of an oral trust; however, a Solo 401k or self employed 401k plan will not be considered qualified unless it is established and operated in accordance with a definite written program. This is outlined in the following regulation- [Treas. Reg. 1.401-19(a) (2)]. The Solo 401k written document must include all provisions essential for qualification as outlined in [Rev. Rul. 74-466, 1974-2 C.B. 131]. The Solo 401k Plan document serves to define the rights and obligations of the plan sponsor, Participant/Trustee, and beneficiaries. It also must be reviewed by the IRS, which it then issues a determination letter confirming that the plan is tax-qualified.

Employer may establish a 401k plan that covers only one participant: Self Directed 401k | Solo 401k

Nothing in the law prohibits an employer from establishing a 401k plan that covers only one participant. In fact, because elective deferrals (the maximum elective deferral is also referred to as employee contribution and for 2011 the cap is $16,500) do not count toward the Code Section 404 deduction limit (25 percent of compensation also known as employer contributions), and because that limit is based on compensation before reduction for elective deferrals, a greater amount can be contributed to a one-person 401k also know as a Solo 401k or Self Directed 401k plan that can be contributed to a profit sharing plan.

Example 1. In 2011, The XYZ Corporation has only one employee, Jack, who has annual pay of $110,000. If XYZ Corporation adopts a profit sharing plan, the maximum amount that can be contributed and deducted for Jack is $27,500. On the other hand, XYZ Corporation would be better off establishing a Solo 401k plan to which it can contribute the same $25,000, but to which Jack can also contribute $16,500 of elective deferrals for a total contribution of $44,000.

Example 2. The facts are the same as those in Example 1 except that Jack’s compensation in 2011 is $50,000. If XYZ Corporation makes a contribution for Bill to a profit sharing plan, the contribution would be limited to $12,500 (25% X 50,000). However XYZ Corporation has the option to contribute the same amount to a Solo 401k plan, which would allow Jack to contribute an additional $16,500.

Sole Proprietor Plan Types: Owner only 401k or Solo 401k vs. SEP and SIMPLE

A sole proprietorship is the simplest business type—and unincorporated business entity owned by one person. While sole proprietorships can have employees, the majority of entities are owner-only business. The simplicity of a sole proprietorship’s business structure calls for a retirement plan that is specific to sole proprietor or has its best interest. Sole proprietors generally require a retirement plan that is cost-effective for a small business, easy to administer, and beneficial from an income tax perspective.

Sole proprietors typically open one of the following types of retirement plans. Each plan type offers a different approach to retirement plans saving.

Simplified Employer Pension (SEP IRA)

SEP IRA plans allow sole proprietors to shield a substantial portion of employer income from taxes each year (25% of compensation). The contributions are also discretionary, which means you don’t have to make a contribution every year. One of the main differences between a SEP plan and a profit sharing plans is that SEP contributions are made to the sole proprietor’s Traditional IRA rather than to a plan account.  

Saving Incentive Match Plan for Employers (SIMPLE IRA)

SIMPLE IRA plans are also effective and simple to administer retirement options for sole proprietors. SIMPLE IRA plans allow the sole proprietor reduce his or her taxable business income by allowing for the deferral of income on top of a required match contribution.

Solo 401k or Individual 401k or Individual K or Solo K
A sole proprietor with no employees (other than his spouse) also has the option of establishing an owner only 401k plan also known as a Solo 401k or Self-Directed 401k. While owner-only 401k or Solo 401k plans have been available since the inception of the 401k plan, there had been no persuasive tax reason for an owner-only business to establish such a plan. Reason being, other plan types offered the same or larger tax benefit or savings limits, without the added complications. This all changed, however, with passage of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), which changed the way deferrals are included in determining the employer’s deductible contribution. This change resulted in higher contribution amounts in a cost-effective, less complex plan. Also known as Solo k or self-employed 401k or Single K, Solo 401k plans have gained popularity since EGTRRA provisions became effective in 2002.

Process for Terminating or Closing a: Solo 401k | Solo K | Individual 401k | Individual K

Does a Solo 401khave to be maintained indefinitely? Although all qualified retirement plans, including Solo 401k plan or Individual K, are required to be established with the intention of being continued indefinitely, the IRS has outlined procedures for terminating a Solo 401k or Solo K.

What's the IRS required process for terminating a Solo 401k? After the assets have been distributed (e.g., taxes are paid on distribution or assets have been transferred to another 401k or IRA), a Final Form 5500-EZ, Annual Return of On-Participant (owners and Their Spouses) Retirement Plan, must be filed with the IRS. See IRC Sec. 6058a.

IMPORTANT:In the year in which final distribution occurs, even if the assets are under $250,000, Form 5500-EZ is always required, even if the employer has never filed one before.

What's the deadline for distributing all assets from a terminating Solo 401k? All Solo 401k plan assets generally must be distributed within one year of the Solo 401k termination date.

What's the due date of the final Form 5500-EZ? The final Form 5500-EZ is due at the end of the seventh month following the month in which all Solo 401k plan assets are distributed.

Who Must File Final Form 500-EZ?

The plan administrator or employer/Trustee is responsible for filing the annual 5500 series return.

Is a Final Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., required when closing out Solo 401k?

Yes a final Form 1099-R must be filed with the IRS when terminating a Solo 401k or Solo K.

Investing in Life Insurance with: Solo 401k| Individual 401k| Solo k| Individual K

Though restricted, you may use your Solo 401k to invest in Life Insurance. This makes sense in the following cases:

·         You may not otherwise qualify for life insurance because of health reasons;

·         don’t have other disposable funds; or

·         want more protection for your beneficiaries.

General Guidelines for investing in Life Insurance with Solo 401k: In general no more than 50% of Solo 401k or Individual 401k plan contributions may be used to purchase “whole” life insurance (i.e., policies with both nondecreasing death benefits and nonincreasing premiums), and no more than 25% may be used to purchase term or “universal” life insurance.

Different treatment for Solo 401k contributions used to purchase life insurance: when a self-employed business owner invests her Solo 401k in Life Insurance, she does not receive a tax deduction for Solo 401k contributions attributable to the purchase of a life insurance benefit, therefore, she does not pay taxes on P.S. 58 costs (that is, life insurance premiums) for the year of contribution. By denying the self-employed individual the Solo 401k contribution deduction, she is effectively including the PS-58 costs in income like the common-law employee.  

Issuing life insurance policy: A group or individual life insurance policy purchased by the Solo 401k Plan may be issued on the life of an Owner-Employee, an Owner-Employee’s spouse, an Owner-Employee’s child or children, a family member of the Owner-Employee, or any other individual with insurable interest.

Ownership of Life Insurance Policies: The Trustee of the Solo 401k is the owner of any life insurance policies purchased under the Solo 401k plan. Further, any life insurance policy purchased under the Solo 401k Plan must designate the trustee as owner and beneficiary under the policy. The insurance premiums are paid with funds from the Solo 401k’s checking account.

Reasons not to invest Solo 401k plan assets in life insurance: Although IRC §501(a) provides tax-exempt status to a qualified plan, including a Solo 401k, resulting in tax-deferred investment accumulation on the Solo 401k plan assets, a life insurance vehicle is tax-deferred on its accumulation outside of the plan as well. As such, the assets in the Solo 401k plan that are used to purchase life insurance are not getting any special income tax benefit on the accumulation in the contract by being held in the Solo 401k or Individual K plan.
Less Solo 41k funds to invest: The purchase of life insurance will reduce the amount available for investing in other assets such as real estate. Although life insurance may have an investment element (i.e., cash value accumulations), you may be foregoing higher returns by not investing all your Solo 401k plan in other investments.

Solo 401k | Individual 401k | Solo K: Contribution Deadlines That Fall on Weekend or Holiday

If the due date of the employer’s tax return for making the Solo 401k annual, tax-deductible contribution falls on a holiday or weekend, then the contribution due date is the next business day. For example, the due date for a sole proprietor’s tax return for a taxable year ending December 31, 2011, normally would be April 15, 2012; however, because that date is a Sunday, the due date will be April 16, 2012. Since a Solo 401k plan contribution made on April 16, 2012, falls on the deduction deadline for the year ending December 31, 2011, it is deductible in that prior year.

Rule Also Applies to Extensions: The weekend/holiday rule also applies to extensions of the tax return due date. For instance, if a corporation obtained the 6 month extension on its tax return for a taxable year ending December 31, 2011, the extended due date normally would be September 15, 2012, but because that date is a Saturday, the extended due date will be September 17, 2012. As such, a Solo 401k plan contribution made on September 17, 2012, would be within the allowable deduction period for the taxable year ending December 31, 2011.
MPORTANT: The Solo 401k | Individual 401k | Solo 401k| must be in existence by the end of taxable year for which deduction is first allowed. Simply put, a deduction is not allowed for a prior taxable year if the Solo 401k plan is not established by the end of that taxable year.

EXAMPLE: Establishment of Solo 401k Plan. Corporation Y is a calendar year corporation. It establishes a Solo 401k plan on February 1, 2011. The plan cannot be made effective for the taxable year ending December 31, 2010, to obtain a deduction  for 2010, because the plan is established after the close of the taxable year (i.e., after December 31, 2010).

Note: Although the Solo 401k plan must be established by the end of the taxable year, it is not required to be funded by that date.  

Solo 401k | Solo K | Individual 401k: Annual Contribution Deadline Depends on Type of Employer

When the employer is a corporation, the Solo 401k contribution deadline is based on the due date of the tax return (Form 1120) that is filed by the corporation for the taxable year. See chart below.

When the employer is a partnership, the applicable due date is for the tax return (Form 1065) filed by the partnership for the taxable year, not the individual tax returns of the individual partners.

When the employer is a sole proprietorship, the applicable Solo 401k contribution deadline depends on the tax return (Form 1040) due date, filed by the sole proprietor. Note that a sole proprietor's trade or business income is reported on Schedule C of Form 1040.

A limitedliability company (LLC) will file Form 1120 or Form 1065 (or Form 1040, if there is one owner), depending if it has elected to be treated as a corporation or an unincorporated entity for federal tax purposes.

The below table lists the filing deadlines for calendar year entities, and is a good source for determining applicable Solo 401k or Individual 401k contribution deadlines:

Employer Type*	Tax Return	Filing Deadline	Extended Deadline
Corporation	Form 1120	March 15	September 15
LLC Taxed as Corp.	Form 1120	March 15	September 15
Partnership	Form 1065	April 15	October 15
LLC Taxed as Part.	Form 1065	April 15	October 15
Sole Proprietorship	Form 1040	April 15	October 15
*Calendar year tax filer

EXAMPLE: Individual Partner Extends Her Return

Partnership X is owned by Ed and Jane. The tax return (Form1065) for 2010 tax year is filed on time. However, Jane extends her personal tax return until August 15, 2011. The partnership must make the contribution for Jane to the Partnership X Solo 401k plan by the due date of the Form 1065, regardless of the due date of Jane's personal return, in order to deduct the Solo 401k contribution for the 2010 tax year.