Process for Moving Assets Between Solo 401k or Individual 401k or Individual K Plans

The distributing Solo 401k or Self-Directed 401k may process the direct rollover/transfer to another Solo 401k or Individual K plan in any one or combination of the following methods in accordance with Treas. Reg. 1.401(a)(31)-1, A-3.

1. Issue check directly to the Solo 401k or Individual 401k plan that is receiving the rollover.

EXAMPLE: Jane Do Solo 401k Trust, f/b/o Jane Do, Trustee

2. A wire transfer of the funds to the eligible Solo 401k or Self-Directed 401k that is receiving the rollover.

EXAMPLE: Wiring instructions are submitted to releasing Solo 401k/Individual 401k custodian by new bank or brokerage firm holding new Solo 401k/Individual 401k and funds as subsequently wired.

3. Issue a check to the participant/trustee that is made payable to the eligible Solo 401k or Individual 401k plan that is receiving the rollover.

EXAMPLE: John Do Solo 401k Trust, f/b/o Jane Do, Trustee

The only difference here is that the check is mailed directly to the Solo 401k or Individual 401k trustee.

4. Transfer/Direct Rollover of Noncash Assets: To the extent the direct rollover is in the form of noncash assets, title to the property would be directly transferred to the eligible Solo 401k or Individual 401k plan that is receiving the rollover, and the noncash assets would be mailed to the Trustee of the Solo 401k or Individual 401k.

Negative Consequences of investing Solo 401k or Individual 401k Assets in Collectibles

IRC 408(m) provides that the investment by a retirement account, including a Solo 401k or Self-Directed 401k, in personal property items known as "collectibles" subjects the plan's participant/trustee to immediate taxation on the purchase amount.

Collectibles Defined: A collectible is a work of art, rug, antique, metal, gem, stamp, coin, alcoholic beverage, musical instrument, or historical object pursuant to IRC 408(m)(2) and Prop. Treas. Reg. 1.408-10(b). The Treasury may expand this list to include any other tangible personal property.

Treated as Distribution: When the Solo 401k or Self-Directed 401k participant/trustee invests the plans assets in collectibles, the cost of the collectibles is treated as a distribution to the participant/trustee for tax purposes in accordance with IRC 408(m). This deemed distribution for tax purposes applies even though an actual distribution is not available to the participant/trustee of the Solo 401k or Solo k at the time the investment in collectibles is made.

Definition of Cost: The "cost" of the collectible is the fair market value at the time of the acquisition. This is outlined in Prop. Treas. Reg. 1.408-10(e).

Definition of Acquisition: A purchase of the collectible occurs if Solo 401k or Individual 401k acquires the collectible by purchase, exchange, contribution, or any method by which the account directly or indirectly acquires a collectible. This is detailed in Prop. Treas. Reg. 1.408-10(d).

10% premature (under age 59 1/2) distribution penalty applies: Since the acquisition is treated as a distribution for tax purposes, the premature distribution penalty under 72(t) is applicable.

Reported on Form 1099-R. The distribution is reported on a Form 1099-R and treated as if the Solo 401k or Individual K participant/trustee has actually received a distribution.

Exception for investments in certain coins and bullion: IRC 408(m)(3) exempts Solo 401k or Individual K from the collectibles rule any investments in gold, silver and platinum coins, and other coins issued under the laws of any State, and to gold, silver, platinum, or palladium bullion. This has been in effect since January 1, 1998 and is detailed in section 304 of the Taxpayer Relief Act of 1997.

Solo 401k or Individual 401k and Filing Form 1099-R with the IRS

Solo 401k or Self Directed 401k participants/trustees use IRS Form 1096, Annual Summary and Transmittal of U.S. Information Returns, to submit paper Forms 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., to the IRS.

Filing for Extension for Reporting Solo 401k or Individual 401k Distribution

Form 8809, Request for Extension of Time to File Information Returns, is used to request an extension of time to file Form 1099-R. This request must be submitted by the due date of the 1099-R return. This form may be used to request an extension of time to file information returns submitted on paper to the IRS.

Automatic 30-Day Extension

The automatic extension requirements are outlined in Treas. Reg. 1.6081-8. The regulations allow for an automatic 30-day extension to filers of Form 1099-R, that submit Form 8809 to the IRS by the deadline for filing the 1099-R form. The Solo 401k or Self-Directed 401k trustee/participant that fills out the remaining Form 8809 information properly and files Form 8809 on or before the date prescribed for filing the Form 1099-R to report distributions from their Solo 401k or Individual 401k return will automatically qualify for a the 30-day extension.

Additional 30 Day Extension

One additional 30 day extension may be allowed provided the Solo 401k or Individual K filer submits a request before the expiration of the automatic 30-day extension. To process the request the following applies:

· is submitted on Form 8809,

· provide detailed explanation as to why the additional time is needed, and

· include the filer's (Solo 401k trustee's) signature.

Federal Income Tax Withholding Applicable to Solo 401k or Individual 401k

Since Solo 401k or Solo k distributions are for the most part includible in the taxable income of the participant/trustee, the withholding for federal income taxes applicable to distributions is the responsibility of the Solo 401k or Individual 401k trustee. Consider the following two primary items when determining the proper amount to be withheld from the Solo 401k distribution: 1) the type of distribution the participant/trustee is receiving and 2) whether any part of the distribution includes after-tax contribution amounts or Roth Solo 401k contributions.

Who is Responsible for the Tax Withholding on Solo 401k or Individual 401k Distributions?

Treasury regulations provide that the plan administrator (usually the employer or trustee) is responsible for the withholding on Solo 401k or Individual 40k distributions. This is outlined in Treas. Reg. 35.3405-1T, A-13. The following information is helpful for preparing Form 1099-R:

1. Name, address, and social security number of the payee (Solo 401k Trustee or participant) and the payee's spouse or other beneficiary, if applicable;

2. The existence and amount of any premiums paid for the current cost of life insurance that were previously includible in income;

6. A statement of the reason (e.g., death, disability, retirement) for the payment or distribution;

7. The date on which payments commence and the amount and frequency of payments;

8. The age of the payee and of the payee's spouse or designated beneficiary, if applicable; and

9. Any other information required by IRS Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.

Reporting Distributions from Solo 401k or Individual 401k

When a Solo 401k plan or Self-Directed 401k trustee/participant or beneficiary takes a distribution, IRS reporting applies. This is done through Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. This form is sent to the IRS and the individual receiving the distribution.

Form 1099-R is used to report distributions that a Solo 401k participant intends to roll over. 

A 1099-R is issued for rollover distributions because the Solo 401k participant has the option to spend some of these funds before depositing them to another retirement plan such as a Solo 401k or Self-Directed 401k. Form 1099-R must be submitted to the IRS by February 28, or March 31 if filing electronically. 

How to Calculate Solo 401k plan or Individual K Required Minimum Distribution (RMD)

The annual Solo 401k required minimum distribution (RMD) is calculated by dividing the Solo 401k or Self-Directed 401k account balance by the applicable distribution period pursuant to Treas. Reg. 1.401(a)(9)-5, Q&A 1.

Solo 401k Account Balance

For Solo 401k plan or Self-Directed 401k, the account balance is the balance as of the last valuation date (typically December 31) in the calendar year immediately preceding a year for which an RMD is due. This is called the Solo 401k valuation year. This valuation amount is then adjusted by adding to the balance any contributions allocated to the Solo 401k plan balance after the valuation date, but during the valuation year. You must then subsequently subtract any distributions made in the valuation year that may have occurred after the Solo 401k plan valuation date.

Solo 401k plans are also allowed to exclude contributions for the valuation year not actually made in the valuation year in accordance with Treas. Reg. 1.401(a)(9)-5, Q&A 3(b). And if the first year's RMD is taken between January 1 and April 1 of the year following the first distribution year (the second distribution year), the final RMD regulations do not require that the first year's RMD be subtracted from the December 31 balance when determining the RMD for the second distribution year.

Applicable Solo 401k Distribution Period

During a Solo 401k plan trustee's/participant's lifetime, the RMD regulations provide that the distribution period for nearly all individuals of the same age (with one exception outlined later in this section) is determined using the Uniform Lifetime Table in Treas. Reg. 1.401(a)(9)-9, Q&A 2. The distribution period based on the Uniform Lifetime Table is equal to the joint life expectancy of an individual and a beneficiary exactly 10 years younger, regardless of whether a beneficiary is actually named. The result of using the Uniform Lifetime Table is a longer lifetime distribution period for most Solo 401k individuals and their beneficiaries, thereby reducing the amount a participant must take annually from his or her Solo 401k.

ILLUSTRATION: Bill is retired and turns 71 in 2011, the calendar year in which he turns 70 1/2  . Bill's RMD for 2011 is calculated by dividing his December 31, 2010, account balance of $175,000 by the life expectancy divisor from the Uniform Lifetime Table for a 71 year old, which is 26.5. Even though Bill has not named a beneficiary for his Solo 401k plan balance, his RMD is determined using a uniform distribution period equal to the joint life expectancy of an individual and a hypothetical beneficiary exactly 10 years younger. Bill's RMD for 2011 equals $6,603.77 ($175,000 / 26.5 = $6,603.77).

Exception to Uniform Lifetime Table: Spouse Beneficiary More Than 10 Years Younger

Under the Solo 401k or Individual K RMD regulations, an exception to applying the Uniform Lifetime Table exists if a spouse, who is more than 10 years younger than the Solo 401k plan trustee/participant, is the sole beneficiary. In this event, to determine the correct distribution amount, the Solo 401k plan trustee/participant should use the longer distribution period as determined by the actual joint life expectancy of the two individuals instead of the life expectancy divisor from the Uniform Lifetime Table pursuant to Treas. Reg. 1.401(a)(9)-5, Q&A 4(b)(1). What's more, the spouse is considered the sole designated beneficiary if he or she is the sole beneficiary at all times during the Solo 401k RMD distribution year. The Solo 401k regulations provide, however, that if there is a change in marital status during the year resulting from death or divorce, the change in beneficiary for ascertaining the distribution period takes effect in the year following the year of death or divorce in accordance with Treas. Reg. 1.401(a)(9)-5, Q&A 4(b)(2).

Solo 401k plan or Individual K and Required Minimum Distributions

Upon  reaching  age 70 1/2, you as trustee/participant must begin taking distributions from the Solo 401k plan or self-directed 401k pursuant to IRC Sec. 401(a)(9)(A).

The RMD rules were last update in Treas. Reg. 1.401(a) (9)-1 and are applicable to all qualified retirement plans including Solo 401k plans.

  

As an IRC Sec. 401(a)(9) qualification requirement, a plan, including a self-directed 401k , is required to start making  RMDs no later than the Solo 401k trustee's/participant's required beginning date. The annual Solo 401k plan RMD amount is reported on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.

Required Beginning Date

The RMD regulations require a Solo 401k plan trustee/participant to start taking distributions no later than his or her required beginning date (RBD) and to continue making distributions over a period not extending beyond his or her life expectancy or over his or her life expectancy and beneficiary of the Solo 401k pursuant to Treas. Reg. 1.401(a)(9)-2, Q&A1.

The RBD for a Solo 401k plan trustee/participant is April 1 of the calendar year following the calendar year in which the trustee/participant attains age 70 1/2 in accordance with Treas. Reg. 1.401(a)(9)-2, Q&A 2(a).

Dealing With Excess Nondeductible Solo 401k or Individual K Contributions

The Solo 401k plan participant typically makes her annual Solo 401k plan contribution when she completes her business’s tax return for the year. As a result, the Solo 401k participant can usually determine her IRC Sec. 404 deduction limits before making her Solo 401k contribution, thus preventing any excess
self-directed 401k or Individual K contribution headaches.

10 Percent Penalty and Form 5330: When the Solo 401k participant contributes more than the allowable deduction for a given tax year, she is typically required to pay a 10 percent penalty on the over contribution amount also known as the excess nondeductible contribution amount pursuant to (IRC Sec. 4972). As such, this penalty amount must be reported to the IRS by the Solo 401k participant since she is the owner of the business by filing IRS Form 5330, Return of Excise Taxes Related to Employee Benefit Plans, and remit the penalty to the IRS. Please refer to IRC Sec. 404(a)(1)(E)  as it details that the amount of the otherwise deductible contribution that exceeds the limitation for any given year shall be carried forward indefinitely and applied to subsequent years.

IMPORTANT: Even though excess nondeductible Solo 401k or Individual K contributions may be returned to the Solo 401k employer under limited circumstances, the self-directed 401k employer runs the risk of incurring substantially greater penalties by taking a reversion of plan contributions. The reversion penalty is typically as high as 50 percent depending on the circumstances pursuant to (IRC Sec. 4980).

Claiming the Solo 401k Plan or Individual K Contribution Deduction

The process of claiming a tax deduction for a Solo 401k plan contribution is based on the type of entity maintaining the Solo 401k plan (e.g., corporation, partnership, or sole proprietorship).

Sole proprietors and partners deduct contributions for themselves on their individual tax returns (i.e., IRS Form 1040, etc.).

Corporations deduct all Solo 401k or self-directed 401k contributions on the corporate tax return. The chart in our immediate prior blog posting lists where various business entities claim deductions for Solo 401k or Individual K contributions. Here is the link: http://mysolo401k.net/Blog-for-MySolo401k.html?entry=where-solo-401k-plan-or

 IMPORTANT: Owners in a Subchapter S corporation can only use their W-2 income--not their pass-through income--for contribution purposes when contributing to their Solo 401k plan or Self-Directed 401k.  For more information regarding this rule see (Revenue Rulings 71-26 and 59-221).

Self-Employed Individuals

When identifying compensation for Solo 401k Plan or Individual K contribution purposes as a self-employed individual, you must first determine the your earned income or net earnings from self-employment.  As a self employed individual and depending on your type of self-employment, use one of the following forms to calculate net earnings for year of your Solo 401k contribution.

•   A partnership generates a Schedule K-1, Partner's Share of Income, Deductions, Credits, etc., (an attachment to IRS Form 1065, U.S. Return of Partnership Income) for each individual partner reflecting the partner's net earnings for the year.

• A sole proprietor must file a Schedule C, Profit or Loss From Business, (an attachment to IRS Form 1040, U.S. Individual Income Tax Return) reflecting the net earnings from the business for the year.

• Farmers file a Schedule F, Profit or Loss From Farming, (an attachment to their IRS Form 1040) to show net income from farming.

• Limited liability companies generally elect to treat their members as sole proprietors or partners for tax purposes. In this situation, members must file the appropriate schedule, as described above.

Deducting Solo 401k or Individual K Contributions

Contributions made to your Solo 401k plan (except for after-tax contributions) are tax deductible to you as the owner of the employer pursuant to IRC Sec. 404. However, for the Solo 401k contributions to be deductible for a given tax year, you as the employer must make the Solo 401k contribution by no later than the business's tax return due date, including any extensions  as outlined in (IRC Sec. 404(a)(6)).

WHERE Solo 401k Plan or Individual K CONTRIBUTIONS ARE DEDUCTED

WHERE Solo 401k Plan CONTRIBUTIONS ARE DEDUCTED
Employer Type	Contributions for Business Owners
Sole Proprietorship	IRS Form 1040
Partnership	IRS Form 1040
Limited Liability Company (LLC)	IRS Form 1040 or 1120, depending on election
Subchapter S Corporation	IRS Form 1120S
Subchapter C Corporation	IRS Form 1120

Solo 401k Plan Prohibited Transaction Examples Continued: Investments in qualifying employer real property

The leasing of real property by the Solo 401k  to a disqualified (e.g., trustee, father, son, mother, sister) person would generally be considered a prohibited transaction. However, ERISA 407 prescribes rules that permit certain investments by the Solo 401k plan in qualifying employer real property. In addition, ERISA 408(e) exempts from the prohibited transaction rules, the sale or acquisition or lease by the Solo 401k plan of qualifying employer real property that satisfies the requirements of 407. IRC 4975(d)(13) exempts from the excise tax provisions of 4975 any transaction which is exempt because of ERISA 408(e). ERISA 408(e) requires that the transaction relate to qualifying employer real property. The percentage of assets held in qualifying employer real property is limited by ERISA 407. See ERISA 408(e)(3). To be an exempt transaction, the sale must be:

1.    For adequate consideration and

2.    no commission may be charged with respect to the transaction.

Definition of qualifying employer real property. To be qualifying employer real property:

1.    The property must be leased from the Solo 401k plan to the employer (or to an affiliate of the employer).

2.    The parcels of employer real property must be geographically dispersed, and

3.    Any improvements on the real property must be suitable for more than one use.

The primary purpose of the geographical dispersement and multi-use requirements is to minimize the investment risk to the Solo 401k plan participant. Investments in qualifying employer real property are exempt from the diversification requirements under ERISA 404.

Confusion exists. A lot of confusion exists with respect to the exception for qualifying employer real property. Many solo 401k plan trustees have made the mistake that any parcel of land owned by the employer may be acquired by the Solo 401k plan and leased back under this exception. This is simply not correct.

Geographical dispersement. The geographical dispersement requirement implies that there must be more than one parcel of land. In Zabolotny v. Commissioner, 7 F.3d 774 (8th Cir. 1993), a corporation unsuccessfully argued that its single parcel of farmland could satisfy the definition of qualifying employer real property. The court held that a single parcel does not satisfy the geographical dispersement requirement. Similarly, in Rutland v. Commissioner, 89 T.C. 1137 (1987), an office building failed to meet the definition of qualifying employer real property because it constituted the only parcel of land being leased to the employer. In Lambos v. Commissioner, 88 T.C. 80 (1987), the geographical dispersement requirement was failed, even though there were three parcels of land, because they were all located in the same county. Also see TAM 8753001, where the parcels were located in the same city and the IRS ruled the parcels did not satisfy the geographical dispersement requirement.

Limitations on the percentage of assets invested in qualifying real property. ERISA 407 limits the percentage of Solo 401k plan assets that can be invested in qualifying employer real property without engaging in a prohibited transaction.

10% is general limit. If a Solo 401k plan acquires qualifying employer real property, the aggregate fair market value of such property held by the plan may not exceed 10% of the fair market value of the Solo 401k plan assets, determined immediately after the acquisition. See ERISA 407(a)(2).

Adequate consideration requirement. The acquisition, sale or lease involving qualifying employer real property is not exempt from the prohibited transaction rules unless it is for adequate consideration. See ERISA 408(e)(1). DOL Reg. 2550.408e(d) provides rules for determining adequate consideration. For a marketable obligation, adequate consideration is determined under ERISA 407(e)(1), which determines the appropriate price based on whether the obligation is acquired on the market, from an underwriter, or directly from the issuer. In all other cases, adequate consideration means a price not less favorable to the Solo 401k plan than the price determined under ERISA 3(18), which is either the price on a generally recognized market, or is the fair market value determined in good faith by the trustee or named fiduciary.

Exemption not available unless no commission is charged on transaction. The prohibited transaction exemption for acquisitions of qualifying real property is not available unless there is no commission charged with respect to the transaction. See ERISA 408(e)(2). A commission includes any fee, commission or similar charge paid in connection with a transaction, except a charge incurred for the purpose of enabling the Solo 401k plan fiduciaries to evaluate the desirability of entering into the transaction (e.g., appraisal or investment advisory fee). See DOL Reg. 2550.408e(e).