Mother and Daughter Solo 401k Plan

QUESTION:

If I pay my daughter to do some work, may I bring her to the solo 401k plan? Thanks,

ANSWER:

First, it is important to understand that a solo 401k is for owner-only business.

No, your daughter cannot participate in your solo 401k plan if your self-employed business is a sole proprietor since the sole proprietor is the business sponsoring the solo 401k plan.

However, she can open her own solo 401k plan if she is self-employed (not paid by you). Her sole proprietorship business would sponsor her solo 401k plan.

Also, if your self-employed business is an LLC and you and your daughter are both partners in the LLC structured business, then you could both participate in the same solo 401k plan since the plan would be sponsored by the LLC, and you are both owner-employees of the LLC.

Solo 401k Plan Update to List New Self-Employed Business Sponsor

QUESTIONS:

Due to the expansion of my wife’s business, I have a few questions regarding my wife’s Solo 401k:

1. She will begin to take other real estate agents as her associates, they are not her employees. She wants to setup a new LLC for this. How will this impact her current solo401k? Does she have to move the existing solo401k under the new LLC?

2. I am also considering leaving my current job to help her expansion, so I will need to setup my own solo401k. In order to maximize the $53,000 contribution for both of us, is it better to have two different business entities, or we can achieve the same 2x$53,000 contribution under the same solo401k plan?

ANSWERS:

Good question. Provided the the other associates are brought on  as contractors instead of W-2 employees ( Compliance note: a solo 401k is only for business owners and their spouses), then the new LLC can sponsor the existing solo 401k trust.  As the solo 401k plan provider, we would simply update the plan documents to list the new LLC (the new self-employed business). We would also add you (the spouse) to the plan if you are are performing self-employment activity under the same LLC.
Both of these updates are covered in our annual fee, so please keep us posted.
You will then also be able to contribute to the plan based on net- elf-employment income that you generate as an employee under the LLC, which means that you could also contribute the maximum to the solo 401k plan for this year if you have enough self-employment income. You would also have your own separate holding account (bank or brokerage account) under the solo 401k plan.

 

Wash Sale Rules Apply to Solo 401k Plans and IRAs

While IRS Revenue Ruling 2008-5 December 21, 2007 references IRAs, it is safe to say that this ruling also applies to solo 401k plans as is most often the case.  This Revenue Ruling states that the wash sale rules will apply when an individual sells a stock at a loss and buys the same stock in an IRA or Roth IRA within 30 days before or after the sale. The loss on the sale of the stock will be disallowed AND there is no increase in the cost basis of the stock in the IRA or Roth IRA. Since this is a Revenue Ruling as opposed to a Private Letter Ruling, it is authoritative for all taxpayers, so everyone can rely on this ruling as the law.

Illustration:

An individual with 200 shares of stock with a basis of $2,000 sells the shares for $800 resulting in a loss of $1,200. The next day the individual causes the pretax solo 401k or Roth Solo 401k to purchase 200 shares of the same stock. The $1,200 loss on the sale of the stock is disallowed AND the basis in the pretax solo 401k or Roth solo 401k is not increased. The $1,200 loss is never recovered when the stock is sold or when distributions are taken from the solo 401k.

 

Solo 401k Real Estate LLC Investment Questions

QUESTIONS/SCENARIOS:

I am about to make an offer on a quad-plex and I need guidance.  I have read up on the process for my Solo 401K, but I still have questions and don’t want to make an offer that doesn’t comply in terms of entities.

  • I have also formed a LLC under which I intend to purchase an investment property.
  • I want to leverage my Solo401K with a non-recourse loan.  I understand that the Solo401K therefore “owns” the asset and all transactions and repairs flow in/out of it.
  • Question:  how can my  Solo 401K invest in this LLC vs being the sole owner of the entire asset?  I ask because under the LLCcan borrow hard money with less down and more options for repairs, payoff, etc?
    • Ex:  if the new LLC was going to buy an apartment building and I wanted to invest $50K of my Solo401K in that deal, alongside other investors, how does that work?
  • Alternatively, I have to invest post-tax cash in a more conventional deal, which I don’t want to do.

 

ANSWERS:

Option 1 is for the solo 401k to be the sole member of the LLC and the LLC gets the non-recourse loan. It would still need to be a non-recourse loan because the solo 401k is the member of the LLC.
To fund the LLC, the funds will flow from the solo 401k bank account directly to the LLC bank account. Since the solo 401k would be the only member of the LLC, the LLC will not need to file a federal tax return on an annual basis.
Title to the investment is taken in the name of the LLC
Option 2 the solo 401k invests in an LLC with other investors (pooled LLC). For the initial funding of the LLC, funds would flow to the LLC from the solo 401k. The LLC will need to file a federal tax return and issue a K1 to the solo 401k.
Title to the investment is taken in the name of the LLC
Option 3 entails the single member LLLC–that is, the LLC where the only member is the solo 401k (option 1 above) and it invests along side other investors. This is essentially a tenants-in-common transaction.
All investors ownership percentages would be listed on the recorded deed.

Solo 401k Entity Investment FAQs

QUESTION 1:

Can I Lend After Tax $ (non-qualified) to a business entity if my solo 401k plan is also lending money to it ?

ANSWER:

GENERALLY YES AS LONG THE BORROWING ENTITY IS NOT AN ENTITY THAT YOU OR CERTAIN FAMILY MEMBERS (E.G., PARENTS, SPOUSE OR CHILDREN) WORK FOR OR MANAGE.

QUESTION 2:

Can I Lend After Tax $ (non-qualified) to a business entity if my solo 401k plan is also taken an equity position in it ?

ANSWER:

Generally yes as long as the solo 401k plan owns less than 50% and the ENTITY IS NOT AN ENTITY THAT YOU OR CERTAIN FAMILY MEMBERS (E.G., PARENTS, SPOUSE OR CHILDREN) WORK FOR OR MANAGE.

QUESTION 3:

Can I invest After Post Tax $ (non-qualified) to a business entity if my solo 401K plan is also lending money to it ?

ANSWER:

Generally yes provided the ENTITY IS NOT AN ENTITY THAT YOU OR CERTAIN FAMILY MEMBERS (E.G., PARENTS, SPOUSE OR CHILDREN) WORK FOR OR MANAGE.

QUESTION 4:

Can I invest Equity After Tax $ (non-qualified) to a business entity if self-directed solo 401K plan is also taken an equity position in it ?

ANSWER:

GENERALLY YES AS LONG as THE ENTITY IS NOT AN ENTITY THAT YOU OR CERTAIN FAMILY MEMBERS (E.G., PARENTS, SPOUSE OR CHILDREN) WORK FOR OR MANAGE, and in aggregate, the ownership percentages is less than 50%.

QUESTION 5:

Can I lend funds as a Trustee from a self directed 401k Pre-Tax Qualified plan  to a business entity if no equity investments in same business entity from same SD 401K ?

ANSWER:

Generally yes provided  as THE ENTITY IS NOT AN ENTITY THAT YOU OR CERTAIN FAMILY MEMBERS (E.G., PARENTS, SPOUSE OR CHILDREN) WORK FOR OR MANAGE.

QUESTION 6:

Can I invest equity as a Trustee  from a solo 401k Pre-Tax Qualified plan  to a business entity if same 401K has not lent any  funds ?

ANSWER:

Generally yes provided  as THE ENTITY IS NOT AN ENTITY THAT YOU OR CERTAIN FAMILY MEMBERS (E.G., PARENTS, SPOUSE OR CHILDREN) WORK FOR OR MANAGE.

Tap Solo 401k for Retirement Home Down Payment

QUESTION:

I’ve had a Oppenheimer SEP IRA for about  20 years and retired.  I’m interested in buying a retirement home and would like to tap that account for a $50,000 maximum loan for the down payment,  but apparently must first convert it that plan to a solo 401k?

ANSWER:

Our Solo 401(k) plan would certainly allow you to take a loan. You would be able to borrow up to 50% of the balance not to exceed $50,000. You would be able to use the proceeds of the loan for virtually any purpose (e.g. paying off personal credit card debt, business financing, tuition, etc.). Many of our clients enjoy this feature because it allows them to access funds quickly (e.g. no credit approval process, etc.) and without having to pay back interest to a bank (i.e. the loan is paid back to your own retirement account).  Moreover, if the funds are used to purchase your primary residence then the term can be longer than the standard 5-year term.  Please see the following link for more information: Primary Residence Loan 
 
As part of our service, we would handle all of the required loan documentation requirements for no additional charge. As far as the terms of the loan, you would need to pay it back on a monthly or quarterly basis (as you select) over a five-year term (or longer per the link above) with payments of principal and interest at a rate of prime +1% (which would currently amount to 5%).

Compare Solo 401k Providers – Broad Financial Reviews | Sense Financial Reviews

I am considering opening a Solo 401k to invest in real estate and have been researching Broad Financial Reviews, Sense Financial Reviews, and the other companies in this space.  What sets My Solo 401k Financial apart?

Our customers choose us because of our ExpertiseService & Reputation.
  • Expertise:  Since 2009, My Solo 401k Financial has been providing an IRS approved Solo 401k.  Our team is led by our Founder/Compliance Officer Mark Nolan who has over 20 years experience in the industry & George Blower (attorney, Harvard Law).  Our Owners are very hands-on in ensuring that your Solo 401k plan is set up quickly and correctly.
  • Service:  Based on our client feedback (e.g., A+ BBB rating with no complaints, etc.), this leads to a better service experience for our clients.    Rather than a sales person who may be focused on signing you up now and who may not be there in the long run, you will be working directly with the owners of the company throughout the entire business funding transaction.  We are going to be just as focused as you are in ensuring that your Solo 401k account is opened quickly and correctly so that you can achieve your objectives.    We are not focused on “closing the sale” but rather have a long-term view.
  • Reputation: The entire My Solo 401k Financial team works very hard to maintain our Pristine Reputation with no negative reviews! We are grateful that our customers and others have recognized our experience, expertise & customer service in selecting us over other options that are available to them.
    • Please visit our Testimonials to see examples of customers whom we have helped take control of their retirement funds with our Solo 401k plan.
    • We have received “5-Star” & “A plus” ratings from the Better Business Bureau (BBB) and have never received a single customer complaint served against us as confirmed by the BBB.  This is based on 40 glowing and unfiltered customer reviews. Click here to read our customer reviews.
    • See our Yelp page where we have received 100% 5-star ratings for all customer reviews.

Solo 401k Loan | Roth 401k Loan Rules

QUESTION – ROTH 401K LOAN RULES

I am an independent financial adviser with an Individual Solo 401k.  I have approximately $80,000 in pre-tax funds and $60,000 of Roth funds in my Solo 401k.  I would like to take a loan from my Solo 401k to expand my business and payoff some personal credit cards.  How much can I borrow? Can I borrow from both my pre-tax and Roth sub-accounts? John, Arlington, Virginia

ANSWER – ROTH 401K LOAN RULES

The Solo 401k loan rules provide that you can borrow up to 50% of the balance of your Solo 401k not to exceed $50,000.  The 50% calculation is cumulative including balances in both your pre-tax and Roth sub-accounts.  In your case, you can borrow up to $50,000 given that your cumulative account balance in your plan exceeds $100,000.

If you choose to borrow from both pre-tax and Roth sub-accounts, this would be documented as two separate loans.  Per IRS Publication 560: “If the loan is from a designated Roth account, the payments must be satisfied separately for that part of the loan and for the part of the loan from other accounts under the plan.” [See also FAQ regarding taking a loan from a Roth 401k on the IRS website which confirms this.] For example, you could take a $20,000 solo 401k participant loan from the Roth sub-account and a $30,000 loan from the Pre-tax sub-account.

The repayment terms of each loan would monthly or quarterly payments of principal and interest of prime plus 1% over a 5 year term.

Court Case: Prohibited to Personally Guarantee a Loan to Your Solo 401k or IRA

A court case (James E. Thiessen et ux. v. Commissioner; 146 T.C. No. 7; No. 11965-10) from March of 2016 serves to remind us that it is prohibited for the solo 401k owner to personally guarantee a loan to his solo 401k or IRA.

In this court case the IRA owners (Mr. and Mrs. Thiessen) invested their IRAs in a corporation and then guaranteed a loan made to the IRA funded corporation. When the IRS discovered the prohibited transaction during an audit, the IRS ruled that the Thiessens’ guaranties were prohibited transactions. The Tax Court concluded the same and the Thiessen’s were both on the hook for $180,129 in taxes. On top of this amount, their IRAs were also subject to a 10% early distribution penalty because they were under age 59 ½.

The Thiessens’ participation in the prohibited transactions caused their IRAs to close as of the first day of the year in which the prohibited transactions occurred. They were deemed to have received distributions of amounts equaling the fair market values of all assets in their IRAs on that day.

On a side note, the Thiessens also became employees of the IRA funded corporation which is also prohibited. Essentially, it appears that the Thiessens were under the impression that they can fund their own business directly with an IRA which is obviously not the case. They may have gotten confused with the rules that allow one to use their 401k to fund their own business. This type of 401k is known as a rollover as business startup 401k/PSP, which does allow the individual to transfer his IRA or former employer retirement plans to a ROBS 401k/PSP which can then be invested in your own C-corporation and the ROBS 401k/PSP owner can also guarantee a loan to the corporation.

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