Need to loan money to your Self-Directed 401k or Solo 401k?

It’s not commonly known, but Prohibited Transaction Exemption 80-26 (PTE 80-26), designed by the Department of Labor, allows Self-Directed 401k or Solo 401k owners to loan funds to their 401k if used for the payment of ordinary plan operating expenses (e.g., mortgage payments of 401k asset, or other payments associated with assets of the 401k) or for purposes incidental to the ordinary operation of the Solo 401k. There is no limit on loan amount.

However, before applying this PTE exemption you first have to confirm that you don’t have other viable ways of paying Solo 401k operating expenses, such as the following:

·         You don’t have cash in your Solo 401k

·         Have no other qualified plans (e.g., other 401ks, Profit Sharing Plan) or IRAs to roll over

·         Have already maximized your annual cash contribution for the year or don’t qualify to make contribution

Put simply, you can only loan funds to your self-directed 401k or Solo 401k if you have exhausted above options.

If after determining above you still need to loan funds to your solo 401k ,the following conditions must be met to be in compliance with PET 80-26:

·         The loan is interest free and no fees are charged to the Solo 401k.

·         The loan is unsecured.

·         If loan terms are for more than 60 days, a written loan agreement is required.

·         Loan is used for purposes incidental to the ordinary operation of the plan (i.e., not used for making investment purchases, or personal use)

Here’s website link for Department of Labor containing information on this PTE exemption.

 http://www.dol.gov/ebsa/regs/fedreg/notices/2006005075.htm

Here’s the contact information for DOL agent regarding this PET exemption:

Christopher Motta, Office of Exemption Determinations, Employee Benefits Security Administration, U.S. Department of Labor, (202) 693-8540.

Avoid Investment Fraud & Investment Risks: Self-Directed 401k | Self-Directed Solo 401k

While a self-directed 401k, also known as self-directed solo 401k or Solo 401k, is a safe method to invest retirement funds, you should be careful of promoters of fraudulent investment schemes, as they often target self-directed 401ks because self-directed 401ks allow investors to invest in an array of asset types such as real estate, promissory notes, tax lien certificates, precious metals and private placement securities.

Make sure you understand your role as trustee of the solo 401k. For instance, you as trustee are ultimately responsible for choosing investment types and determining their validity. Therefore, make sure to examine the quality or authenticity of an investment and its sponsor. As the investor, make sure to review investment offers and investment promoters by checking with regulators such as North American Securities Administrators Association's website. http://www.nasaa.org/

As trustee of the Self-Directed 401k, you generally safe keep the plan's alternative investments, which are unregistered securities (that is, they are not required to be registered with the SEC), with the cash held in the plan's checking account. Since you have easy access to your plans liquid funds and make the final investment decision, fraud promoters typically will offer large investment returns and spotty paperwork that has not been audited. Remember that all investments have certain risk, and the amount of risk generally correlates with the investment return. In other words, low risk investing generally equals low returns and large returns are usually associated with higher risk. A tactic fraud promoters commonly incorporate is promising high returns with no risk. Don't fall for it!

To prevent fraud, review and verify the investment sponsors account statements as alternative investments are tough to value and may be illiquid. As a result, they may be listed at their original price for several years. Also, stay in contact with the investor sponsor and get your attorney or accountant involved in reviewing the investment statements for accuracy.

                                                Additional Information

Several government websites contain educational information for investors regarding preventing investment fraud. Here are some of them:

SEC's Office of Investor Education and Advocacy's homepage: http://www.sec.gov/investor.shtml

SEC's Investor.gov website: http://www.investor.gov/

NASAA's investor education webpage: http://www.nasaa.org/

Also check out:

Questions You Should Ask about Your Investments:

http://www.sec.gov/investor/pubs/sec-questions-investors-should-ask.pdf

How to Avoid Fraud: http://www.sec.gov/investor/pubs/avoidfraud.htm

Is a Self-Direct 401k Plan Right for You?

Referred by others names such as Self-Directed Solo 401k, Solo 401k, Solo K or Small 401k, a self-directed 401k plan may be right for you based on the following.

Qualification

If you are considering investing in alternative investments such as real estate, notes, small companies or gold, a self-directed 401k may be right for you. However, you must first determine if you qualify for a small company 401k because a self-directed 401k plan is designed for the individual business owner or self employed and his or her spouse.

Excluded

As a small business owner, you still qualify for a self-directed 401k plan even if you have other employees. You see the law permits you to exclude from a self-directed 401k the following types of employees:

Those under age 21

Part time employees (work less than 1,000 hours per year)

Union employees

Non-resident aliens with no U.S. income

Some Advantages

• No income limit restrictions for Roth contributions
• You can invest in an S corporation
• Option to buy life insurance
• Permitted to borrow (take a personal loan) up to $50,000 or 50% whichever is less
• Gains from leveraged real estate purchases are not subject to Unrelated debt-financed income (UDFI) Tax (refer to IRS Publication 598 for information on UDFI)

Solo 401k Plan Facts

First available—made possible by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA).

Participation—designed exclusively for small business owners and is the retirement plan of choice for owner-only businesses such as sole proprietors, corporations, LPs, and LLCs.

Can Exclude Certain Employees—under federal laws applicable to qualified retirement plans, specific categories of employees may be excluded from participating in a Solo 401k plan, which are:

  Employees under age 21

  Employees working fewer than 1,000 hours in a year

  Nonresident aliens

  Union employees

Effective—designed to maximize 401(k)/profit sharing contributions while being less complex and less costly to maintain than other retirement plans.

Higher Contribution limits—allows for tax deductible contributions of 25% profit-sharing contribution and salary-deferral contribution of $16,500 for maximum amount of $49,000 per participant for tax year 2011.

Roth Contributions—allows for designated Roth contributions, $16,500 for 2011.

Loans/Borrow—resulting from change of IRC Sec. 4975(f) (6), which expanded the loan feature to Solo 401k plans, participants can borrow from Solo 401k.

Transfers/Rollovers—allows for rollovers/transfers from other retirement plans (e.g., 401ks, profit sharing plans, 403(b) s, define benefit plans, 457s and IRAs).

Annual Contributions not required—business owners can contribute in some years but are not required to contribute every year.

Easy to Administer—even though Solo 401k plans are 401(k)-based plans, they are easier to administer because they are not subject to the majority and costly nondiscrimination testing that apply to regular 401(k) plans.

Form 5500 EZ—annual return for one-participant (owners and their spouses) Solo 401k plans, and only required when plan balance reaches $250k or more, or when plan is terminated.

Plan Trust Document—in order to establish a Solo 401k plan, the employer is required to fill out and sign a written, plan trust document that has been approved by the IRS.

Contribution Types: Self-Directed 401k | Self-Directed Solo 401k | Solo 401k | Solo K

A Solo 401k, often referred to as a self-directed Solo 401k plan, Self-Directed 401k or Solo K, allows for the following three (3) types of contributions:

1. Discretionary profit sharing contributions

2. Salary deferral contributions

3. Designated Roth contributions

Each contribution types have separate limits, and, when combined, cannot exceed the maximum Solo 401k contribution amount.

The maximum contribution allowed for a self-employed business in 2011 is 25 percent of compensation, plus a $16,500 of employee salary deferral or designated Roth contributions not to exceed $49,000 plus catch-up contributions of $5,500 if eligible (i.e., your are age 50 or older in 2011 ) for a total of $54,500.

Solo 401k Contribution Types Explained

1.Profit Sharing Contributions

In accordance with IRC Sec. 404 the profit sharing contribution cannot exceed 25% of income derived from business activity.

Salary deferral contributions are not included with profit sharing contributions when calculating the 25 percent deductible contribution.

Profit sharing contributions to Solo 401k plan are not required to be made each year.

2. Salary Deferral Contributions

The salary deferral feature found under IRC Sec. 402(g) permits business owners to contribute up to 100 percent of compensation not to exceed $16,500 to the Solo 401k plan for 2011.

The rules also allow for catch-up contributions provided you are age 50 or older. For 2011, the maximum catch-up amount is $5,500 per IRC Sec. 414 (v).

3. Designated Roth Contributions

Since 2006, the self-employed (and spouse if applicable) have been allowed to treat all or some portion of their salary deferral limit (the $16,500 portion) as designated Roth 401(k) contributions.

The designated Roth contributions are outlined in IRC Sec. 402A, and treated as after-tax contributions (that is, you cannot take a tax deduction for the contribution).

However, all earnings resulting from the Roth contributions can be distributed tax-free.

Deferrals and Roth contributions together cannot exceed the $16,500, plus the $5,500 catch-up contribution if age 50 or older.

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.