Solo 401k Escrow Deposit Question

BACKGROUND: We wrote a check for $2,000.00 out of the Solo 401K account to a title company as earnest money on the purchase of a rent house.  We opted out of the purchase after the inspection.  The title company returned our earnest money.  They wrote their $2,000.00 check payable to my name personally.

QUESTION: Can we deposit this check into the Solo 401K account, or will the title company need to re-issue a check made payable to Solo 401K?

ANSWER: Because solo 401k funds were used for the earnest deposit, which is the correct method since the solo 401k plan was the party making the purchase, the reimbursement check will need to made payable in the name of the solo 401k plan, as making it payable in your name personally would in effect look like you received the reimbursement personally.

Thank you,

Christi in Wyoming

ROBS 401k Roth for Business Startup Corporation

BACKGROUND: I am looking at putting together an internet business that will be structured as a C corp.  When considering the best structuring of what could have a very high return on investment, I ran across an article in a financial publication discussing how retirement plans can be used for business startups. 

QUESTION: From the look of the link above, a C corp is established (already got an expert on that) and the shares are purchased by the retirement account (likely a self-directed Roth 401K) and the business still operates and files taxes as usual but any dividends or capital gains that go to shareholder goes to the 401K plan that holds the shares.  Do you see any issues with this?

ANSWER: We can schedule a time to talk more about this next week with our Harvard-law trained attorney, but here is a quick breakdown.

The IRS refers to this arrangement as Rollo Over Business Startup (ROBS). We refer to it as the 401k SelfStarter Plan, and Benetrends refers to it as the Rainmaker.

It only works under a C-Corp arrangement, and Roth 401k funds MAY NOT BE USED.

Below is the link to this product on our website.

http://www.mysolo401k.net/401k-small-business-financing.html

Thanks,

Scott in Arizona

Solo Roth 401k for company with full-time employees

BACKGROUND: I would like to determine if I am eligible to create and maintain a Solo Roth type 401k.

I am a 50% owner in a small corporation for which I work full time. We
offer no retirement benefits at all. We have less than 20 employees who
are generally a class of employees that would not participate in a plan
even if we were to offer it.

I also have a sole proprietorship with no employees that I work part time.

I have a Roth IRA which is fully funded this year but have been unable to
make regular contributions in the past. Consequently at 59 years old and
single I only have $20k in that IRA.

QUESTION: Am I eligible to create and maintain a Solo Roth 401k plan as long as I
keep my sole proprietorship business active? Is there an advantage in
having a Solo 401k rather than saving in a bank savings account or have
stocks/bonds etc?

ANSWER: Based on the information provided, it appears that you do not qualify to open a solo 401k because you own 50% or more of each company (Small Corporation and Sole Proprietorship). Please click here to learn about the Controlled Group Rules. It appears that your situation falls under the following type of controlled group categories:

Type 2: Brother-Sister Controlled Group

To be considered a brother-sister controlled group, the same five or fewer persons must own, in aggregate, at least 80 percent of each of the organizations in the brother-sister controlled group. Also, the same five or fewer persons who meet the controlling interest requirement must have effective control (ownership of more than 50 percent) of each organization.

As you will see, the IRS controlled group rules are complex. As such, pay close attention to them and consult with your company’s accountant to make sure you do not run afoul with the controlled group rules.

However, another option is to open a traditional 401k that includes the Roth designated account (Roth 401k) feature and also allows for investments in alternative investments such as real estate and precious metals. A traditional 401k is a type of retirement plan for companies with common-employees. These employees don’t have to participate in the 401k but at least be give the option to do so. Even if they opt out, the employer may have to share in the profits of the company in the event it elects to make profit-sharing contributions, which is an optional feature.

Regarding the difference between a solo 401k plan and a personal savings account, besides the fact you have to be self-employed with not full-time employees to open a solo 401k, gains in a savings account are subject to capital gains, whereas gains in solo 401k grow tax deferred until distributed at retirement, or tax free in the case of a Roth Solo 401k.

Thanks
Tim in South Dakota