I don’t plan to do Roth 401k contributions, but I do plan to do non-Roth after tax contributions. Should I create two bank accounts for the solo 401k or can I use one? I will be tracking the pre-tax and non-Roth after-tax contributions in a spreadsheet.
Separate accounts will be required. Reason being, in order for after-tax contributions to be deemed after-tax contributions they must be deposited in a separate bank/brokerage account labeled with the words “After-Tax” before they can be converted to a Roth IRA, or the Roth solo 401k designated bank/brokerage account.
Below is an illustration of how the accounts are generally titled:
- Nuggets Solo 401k Trust (ROTH) F.B.O. Larry Byrd
- Nuggets Solo 401k Trust (AFTER-TAX) F.B.O. Larry Byrd
- Nuggets Solo 401k Trust (PRETAX) F.B.O. Larry Byrd
How does the payout work for the ROBS 401k regarding profit from the business? Would the business issue a dividend to the ROBS 401k?
In short: yes. All of the revenue generated by the ROBS 401k funded business will simply flow in and out of the corporation’s business account. If at the end of the year after the company has paid expenses & taxes, the company has earned an after-tax profit the company could decide to distribute that profit to the owners. In that case, the company would pay out dividends (profit) to the stockholders in which case it must pay all stockholders dividends in accordance with the ownership percentages. For example, if you and the 401k both own stock in the ROBS funded corporation, and the corporation decided to process a dividend payment, both parties would receive dividends.
BACKGROUND & QUESTION:
I want to start investing in real estate, so I want to open a self-directed solo 401k plan for my self-employed real estate agent business. In addition to making annual contributions to the solo 401k plan, I would also like to transfer my Canadian Registered Retirement Savings Plan (RRSP) to the solo 401k plan. Can I do this under your solo 401k plan?
Good question. Unfortunately the 401k rules do not allow for incoming transfers from foreign pension plans. Therefore, because a solo 401k plan is a 401k but for the self-employed, foreign pension plans such as RRSP, UK Pension, and Australian SUPER may not be transferred to a solo 401k plan. Also, the IRS regulations do not allow for the transfer of foreign pension plans to IRAs.
BACKGROUND & QUESTIONS:
I have a Solo 401k with Fidelity Investments. I already made my Employee contribution for 2017 ( but not yet my employer contribution as I will wait til the end of the year to know the precise amount).
Is it too late to use your plan instead for 2017? Can I simply transfer this Employee contribution to a “Fidelity Investment Only” account so that I can be compliant with your prototype plan ?
I realize now I want a Solo 401k that enables me to do after tax contributions, as well as permit in service distributions of the after tax contributions into a Roth IRA (with earnings going to a traditional IRA).
Are you able to offer help to someone like me?
Is it too late to use your plan instead for 2017?
It is certainly not too late to sign up for our plan for 2017. Changing from one solo 401k provider to another is known as “restating” your plan. We would draft the Fidelity paperwork to open Fidelity Investment Only account(s) for your Solo 401k plan as part of our services for no additional charge.
Yes a Defined Benefit Plan can be transferred by the surviving spouse to a solo 401k plan in addition to an IRA. You have EGTRRA and the Pension Protection Act of 2006 (PPA) to thank for this, as these pieces of legislature changed the rules for spousal rollovers of QRP distributions and a defined benefit plan falls under the QRP category.
If a surviving spouse beneficiary of an employee receives an eligible rollover distribution from a plan, the rollover rules apply as if the surviving spouse were the employee, with no restrictions. Consequently, the surviving spouse may roll over the assets to an IRA or another eligible employer-sponsored retirement plan such as a self-employed solo 401k plan. Before 2002, only an IRA could serve as the receiving plan.
Lastly, don’t confuse the surviving spouse beneficiary transfer rules with the non-spouse beneficiary rules, as only the option to transfer the inherited defined benefit plan (DBP) to your own IRA or solo 401k plan applies to spouse beneficiaries. Non-spouse beneficiaries cannot transfer inherited qualified plans such as a defined benefit plan, 401(k), or even an inherited IRA to a solo 401k plan. Instead, the non-spouse beneficiary can transfer the DBP or other types of qualified plans to a beneficiary IRA.
Make sure to familiarize yourself with the Roth IRA 5 year rule before proceeding to move Roth solo 401k funds to a Roth IRA. Roth solo 401k funds moved to a Roth IRA will always use the 5-year holding period associated with the Roth IRA. The existing holding period accumulated in the Roth solo 401k retirement plan will be lost.
Bill has had a self-employed Roth solo 401k plan for 9 years. He opened a Roth solo 401k plan as soon as the Roth component first became available it in 2007. Bill has finally decided to stop being self-employed and is age 62. Even though Bill can take qualified distributions from his Roth solo 401k since he is over age 59 1/2 and his Roth solo 401k plan has been held for more than 5 years, he has decided to instead l move his Roth solo 401k assets to a Roth IRA. Bill is opening a Roth IRA for the first time in 2017. When he moves his Roth solo 401k assets to his newly established Roth IRA, they will all go in as basis. As a result, Bill will not be able to take qualified distributions of his Roth IRA earnings, because the 5-year holding period will be determined by the time he has had a Roth IRA. The holding time that had accumulated in the Roth solo 401k plan will be lost. However, Bill will be able to distribute the basis tax and penalty free because all funds go into the Roth IRA as basis and are available for distribution tax and penalty free.
I will turn age 70 1/2 soon and want to know if I have to take my solo 401k required minimum distribution (RDM) from my solo 401k, or I can just take it from my Traditional IRA. Also, I invested all of my solo 401k funds in real estate, so I don’t have any liquid funds to take out the RMD, so hence why I want to know if I can just take the RMD out of my IRA.
The rules for taking required minimum distributions from a solo 401k are almost identical as the IRA RMD rules and that once you (the solo 401k participant) reach age 70 1/2, distributions must commence by April 1 of the following year. Following is more information on the RMD rules.
- The RMD amount applicable to the solo 401k must be withdrawn from the solo 401k plan directly not from your other IRAs. This is where the solo 401k RMD rules are different from the IRA rules. With IRAs, you can take the total RMD from one IRA if you have multiple IRAs. Not so with a solo 401k plan. The solo 401k RMD amount cannot be distributed from an IRA.
- If you don’t have liquid funds in your solo 401k plan to satisfy the RMD, then you can take a partial, ink-kind distribution of an asset (e.g., real estate).
This would mean that, for example, if we are talking about a real estate property held inside a solo 401k plan, part of the property (a percentage and enough to satisfy the RMD amount) would be assigned in your name and you would pay taxes on the value of the partial property assigned to personally to you. In short, instead of receiving cash, you would receive part of the property to satisfy the RMD amount, and this amount would be subject to federal and state taxes.
- The yearly required minimum distribution must be reported to the IRS on Form 1099-R. This reporting is generally provided by the solo 401k provider, and it is covered in their annual fee.
- Please see the following for more information on the RMD rules.
Those that have multiple Roth 401k plans—for example, both a Roth 401k with a former employer and a Roth solo 401k need to understand the rules surrounding the 5 year Roth 401k distribution period.
- Each 401k plan will have its own 5-year holding period.
- The existing holding period can be rolled to a new 401k plan. For example, those that transfer a former employer Roth 401k to a new Roth solo 401k plan can carry over the former employer’s Roth 401k holding period to the new solo 401k plan.
- However, if you do a 60-day rollover from the former employer 401k to the new solo 401k plan, the existing holding period becomes that of the new plan.
Jim is 61 years old and has a Roth 401k with his former employer, The Home Store. After working for The Home Store from 2006 to 2014, Jim can take a qualified distribution from his Roth 401(k) at The Home Store because that Roth 401(k) account has been held for more than 5 years and Jim is over age 59½. Then Jim became self-employed and opened a solo 401k for his self-employed business in 2015 that allows for Roth Solo 401k contributions and started making Roth solo 401k contributions in 2016 . However, Jim cannot take a qualified distribution from his Roth solo 401(k) even though he is over 59½. Reason being, his Roth solo 401(k) account has not been held for 5 years. The time he has accrued in his former employer Roth 401(k) at The Home Store does not affect the time he has in his Roth solo for his self-employed business.
However, there is a way that Jim can take qualified distributions. Jim can process a direct rollover of his former employer Roth 401k with The Home Store to his self-employed Roth solo 401k plan. Therefore, His time in the plan at The Homes Store will also transfer to his self-employed Roth solo 401k. As a result, Jim can take qualified Roth solo 401(k) distributions from his self-employed Roth solo 401k.
I am considering the formation of a LLC that will purchase a self-storage business and small retail strip mall with monthly rental income.
One of the members of the LLC will be the solo 401k trust, and the trust will provide at least 50% of the down payment for the purchase. However there will be a recourse loan from a bank to fund the deal.
I have 2 questions:
First, is there a prohibition against my using my personal credit and guarantee for a bank loan on a commercial property if the funding for that loan comes (at least in part) from my solo 401k? (Is this considered “self-dealing”?)
Second, what are the ramifications of UBIT if solo 401k funding is used to purchase an established positive cash-flowing business (e.g. self-storage facility)? Would this be different if a separate entity (LLC) ran the business, collected the rents, and simply paid.
1. I presume that (i) the only investor in the LLC will be the solo 401k plan, (ii) the solo 401k owned LLC will not have any W-2 employees, but rather will be setup solely to invest passively in real estate, and (iii) the solo 401k owned LLC will obtain a non-recourse loan. With respect to the loan to the solo 401k owned LLC, the loan cannot be secured by you because you are considered a disqualified party. For a full list of disqualified parties, CLICK HERE.
2. Regarding your UBIT question, I presume that the solo 401k owned LLC will be buying/investing in real estate and the real estate will be rented out. When a solo 401k owned LLC invests in rental real estate—whether commercial, residential or storage—it will be deemed a passive investment not subject to UBIT. Also, neither the solo 401k owner nor disqualified parties may do physical work on the properties, but may perform managerial functions (e.g., collect rent checks, look for tenants, hire contractors to do work on the property) provided neither the solo 401k owner nor disqualified parties get compensated for these managerial functions.
Distribution from a Roth solo 401k that are not deemed “Roth solo 401k qualified distributions” will be subject to the pro-rata basis distribution rules. This means the Roth solo 401k distributions will consist partly of the after-tax contributions and partly of the pre-tax earnings in the Roth solo 401(k) account. The taxable portion of the Roth solo 401k distribution will be subject to the mandatory 20% withholding when the distribution is eligible for rollover. However, non-qualified Roth solo 401k distributions can be directly rolled over in their entirety to Roth IRAs or other full-time Roth 401k employer plans.
Jason made his first deferral to his Roth solo 401(k) in 2011. Jason is 53 in 2017 and is considering taking an early retirement. Any distribution Jason takes from his Roth solo 401(k) will not be a qualified distribution, because Jason has not yet reached age 59½. Jason has $80,000 in after-tax deferrals in his Roth solo 401(k) and $40,000 in earnings for a total balance of $120,000 as of December 2017. Jason decides to retire early and will start taking Roth solo 401(k) distribution. In December2017, he takes a distribution of $20,000 from his Roth solo 401k account. His distribution will be 66% tax-free and 34% taxable ($80,000/$120,000 = 66% of the account is after-tax funds). That means that $13,200 of his distribution is income tax free. The remaining $6,800 is taxable, subject to 20% mandatory, federal tax withholding, and also subject to the 10% early distribution penalty unless an exception to the penalty applies. Once Jason reaches age 59½, his distributions will fall under the “qualified Roth solo 401k distribution” rules and can be distributed tax and penalty free.
More Information on Roth Solo 401k Rules
In-Plan Roth Solo 401k Conversion Rules
Roth Solo 401k Contribution Overview
Separate Roth Solo 401k Component/Holding Account
What is a Qualified Roth Solo 401k Distribution
Can I transfer a Roth solo 401k to a Roth IRA?
Reporting Roth Solo 401k Distributions
IRS Finalizes Roth Solo 401k Distributions from Pretax Funds