Freeze My Solo 401k Plan

Do I have to keep my business open to keep my solo 401K plan?

Yes, generally, it would be permissible to freeze a 401(k) plan, including a solo 401k.  That said, there may be additional issues that would need to be considered, depending upon the specific situation, i.e. the employer has hired employees, the employer is closing its business, etc.
A 401(k) plan including a solo 401(k) must have a plan sponsor (even a frozen plan); if the self-employed business no longer exists, the plan would need to be terminated.
Note that the IRS indicated (informally) that a legally constituted”dormant” entity could sponsor a plan. See below.

From the 1998 ASPA meeting:

12. Regarding “orphan plans”, must a plan sponsor be actively engaged in
business? e.g., the “Houston Letter” which defined “employer” by reference
to FICA wages ($1500/quarter of payroll). Can a dormant (but legally
existing), corporation continue its sponsorship of a plan (with funds held
for terminated employees only)? Is there any difference with regard to a
sole proprietor who is no longer producing any revenue in the sole
proprietorship?

IRS: The business must be in existence, but there is no requirement for
“active” engagement in business. A legally constituted “dormant” entity may
sponsor a plan.

In sum, you will want to coordinate with your CPA or legal advisor.

No Longer Self-Employed & Transfer to IRA LLC QUESTION:

Can we transfer the self-directed solo 401k plan to an IRA LLC if we are no longer self-employed or retire?

ANSWER:

If you are retiring from your self-employed business or no longer self-employed, you can certainly wind down the solo 401(k) and rollover the funds and assets to an IRA LLC. This would entail filing a final form 5500 EZ as well as issuing a 1099R to report the rollover, both of which we will handle as part of our services.

  1. Are all of the funds and assets in a pretax sub-account of the solo 401(k)? In that case, you would simply need one traditional IRA for your benefit at an IRA custodian which will allow you to invest in an LLC.
  2. Your wife could also transfer her funds to an IRA and then invest in the same LLC. If all of her funds are pretax, she would simply transfer those funds to a traditional non-Roth IRA for her benefit at an IRA custodian which will allow her to invest in an LLC.
  3. If you invest in the same LLC, the LLC will have two members which means that you will need to file partnership tax returns (e.g. form 1065 at the federal level). Moreover, this means that each of you will be investing your funds in the same investment (i.e. since of all the investments will be done at the LLC level) where the ownership will be in proportion to the amount of retirement funds invested in the LLC.
  4. With regards to the real estate owned by the solo 401(k), this will need to be transferred in kind to the IRA and then contributed to the new LLC which means that the title will need to be changed twice (i.e. first from the solo 401(k) to the IRA custodian and then from the IRA custodian to the LLC).  Please note that if the real estate is owned by the LLC and your wife’s IRA is an owner of the LLC she will effectively own part of the real estate through her IRA.
  5. If you want to avoid shared ownership and pooling your funds for all investments, you would each want to open your own separate IRA LLC’s. This would also avoid having to file a form 1065, etc since each LLC would be a single-member disregarded entity.

About Mark Nolan

Each day I speak with energetic entrepreneurs looking to take the plunge into a new venture and small business owners eager to take control of their retirement savings. I am passionate about helping others find their financial independence. Having worked for over 20 years with some of the top retirement account custodian and insurance companies I have a deep and extensive knowledge of the complexities of self-directed 401ks and IRAs as well as retirement plan regulations. Learn more about Mark Nolan and My Solo 401k Financial >>

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