BACKGROUND & QUESTIONS & ANSWERS
I am interested in opening an account for a self-directed solo 401k which does not involve a custodian bank. I am unfamiliar with the rules and regulations as to how to do so.
In broad outline, the following are some details that may be relevant.
1. I am a solo practitioner attorney operating. I operate through a PLLC that is classified as an S corporation for tax purposes.
2. I have no partners or employees.
3. My work is contingency based so my income is highly variable from year to year. (Although probably not relevant, my wife is a salaried employee here in my state also.)
4. I have an existing IRA held through CHASE that I want to transfer to the new arrangement.
Here are my questions:
1. What is the optimum arrangement to accomplish my objective.
2. What would be the approximate cost.
ANSWER: For pricing, click on the following: https://www.
3. How long does the process take.
ANSWER: For pricing, click on the following: https://www.
Please let me know any other relevant questions you may have.
ANSWER: The account can be opened in 24 to 48 hours. The funding depends on how quickly the IRA custodian or former employer plan administrator will transfer the retirement funds to the new solo 401k.
ANSWER: Please see the following for more information.
I am in the process of getting divorced. My soon-to-be-ex has a 401K through his employer. It is anticipated that this will be divided in some manner using a QDRO. I would like to know what my best options are – can I roll it over to a solo 401K or would a self directed IRA be better? I am interested in in real estate investments & flipping houses.
If your self-employed business is an S-Corp or C-Corp that sponsors a solo 401k plan, and you elect to make after-tax contributions to the solo 401k plan, you may report these contribution on Form W-2 line 14. See below.
IMPORTANT NOTE: Don’t confuse after-tax solo 401k contributions with Roth solo 401k contributions as they are different. For example, gains on Roth solo 401k contributions grow tax free whereas after-tax solo 401k contributions earnings are subject to taxes once distributed. For this reason, business owners will convert their after-tax solo 401k contributions immediately to a Roth solo 401k or Roth IRA.
The following are not elective deferrals and may be reported in box 14, but not in box 12:
- After-tax contributions that are not designated Roth contributions, such as voluntary contributions to a pension plan that are deducted from an employee’s pay. See Box 12—Codes for Code AA, Code BB, and Code EE for reporting designated Roth contributions. Required employee contributions. Employer matching contributions.
Example of reporting excess elective deferrals and designated Roth contributions under a section 401(k) plan. For 2017, Employee A (age 45) elected to defer $18,300 under a section 401(k) plan. The employee also made a designated Roth contribution to the plan of $1,000, and made a voluntary (non-Roth) after-tax contribution of $600. In addition, the employer, on A’s behalf, made a qualified nonelective contribution of $2,000 to the plan and a nonelective profit-sharing employer contribution of $3,000.
Even though the 2017 limit for elective deferrals and designated Roth contributions is $18,000, the employee’s total elective deferral amount of $18,300 is reported in box 12 with code D (D 18300.00). The designated Roth contribution is reported in box 12 with code AA (AA 1000.00). The employer must separately report the actual amounts of $18,300 and $1,000 in box 12 with the appropriate codes. The amount deferred in excess of the limit is not reported in box 1. The return of excess salary TIP deferrals and excess designated contributions, including earnings on both, is reported on Form 1099-R. The $600 voluntary after-tax contribution may be reported in box 14 (this is optional) but not in box 12. The $2,000 nonelective contribution and the $3,000 nonelective profit-sharing employer contribution are not required to be reported on Form W-2, but may be reported in box 14.
To learn more about he solo 401k rules, VISIT HERE.
If I rent real estate owned by my Solo 401k via Airbnb, will the rental income be subject to unrelated business income tax (UBIT)?
1. There will be no problem with me and my wife both getting a solo 401k, right? We can both be considered self employed. Yes provided that you are both working in the same self-employed business.
2. Would a margin stock account within a solo 401k be worth it? It sounds like you get taxed heftily coming out of it (not sure at what rate, though), but at the same time, after about 10 years margin accounts catch up and surpass pretax accounts. Whether it is “worth it” will depend on the facts and circumstances of course. From a big picture perspective, this will depend on whether the additional returns achieved through leverage outweigh the additonal taxes incurred (note that the UBIT tax rate can be as high as 40%).
3. I’d like to invest in real estate, but what are the limitations here? Can I own a real estate business with a solo 401k or does it fall under UBIT? I was going to try fundrise’s eREIT for starters. While you can invest your Solo 401k in real estate or REITs, this must be structured as a passive investment (i.e. it can be your real estate business, etc.).
4. Is owning futures (either managed or directly) or options punished in any way? If the investment is via a margin account in which case UBIT would apply.
5. Lastly, any limitations on peer to peer investing? Lendingclub.com does do IRAs, but I wanna make sure. Peer-to-peer lending is certainly allowed provided that the loan is to un-related person, on market terms & documented in the name of the Solo 401k. With regards to a paricular provider, the question will be whether they will open an account in the name of the Solo 401k (as the account can’t be in your name if you are investing Solo 401k funds).
I’ve been reviewing your website and considering my options with
regard to some of my retirement accounts. Last year I accepted a
payout of my old employer pension plan. I rolled over those funds
into a newly created IRA at Schwab. Currently I am self employed and
have a solo 401k with Schwab that is also managed by an outside
financial advisor. I would like to be able to self direct the new IRA
funds into other alternative investments, private reits, trust
deeds/notes. The new IRA is under $100,000. If I understand it
correctly the self-directed 401k would have less fees, administration
than a self directed IRA and would not require the formation of an
LLC. Is this correct?
Correct. There are other advantages as well – CLICK HERE for more on this.
Would I be able to convert my Schwab solo401k to a self-directed
solo401k – transfer the new IRA funds to the solo401k, which could then be invested in notes and maintain the brokerage account with Schwab (which would continue to be managed by the current broker/advisor). If yes, would it require liquidating all holdings in the current brokerage and then re-buying them? (potentially costly).
(1) Yes (2) Your investments can be transferred in-kind.
Does the 2 year hold period (on SIMPLE IRA?) apply to a rollover IRA that was funded with pension funds? No.
I’m thinking my other alternative would be a checkbook IRA LLC. I see you charge $1100 to set up but i did not see your annual fee. Do you maintain compliance on these accounts similar to the solo401ks? GHB: While we certainly provided ongoing support to our IRA LLC customers, the account of the IRA (which is invested in an LLC) would be at a company called IRA Services Trust company and this company would be your primary contact for ongoing support.Since it is an LLC don’t you need to pay the $800 california llc fee every year? Yes the CA franchise tax fee will apply since you are located in CA.
To learn more about the process of changing solo 401k providers, VISIT HERE.
A self-directed solo 401k is a type of retirement plan for the self-employed that allows for investing in alternative investments such as real estate, notes, metals, tax liens and traditional investments like stocks and mutual funds. Visit here for a list of popular solo 401k investments.
While the above investment types including real estate may be placed directly through the solo 401k plan instead of a solo 401k owned LLC, this blog post covers the process of placing investments through a solo 401k owned LLC (i.e., single member solo 401k LLC).
NOTE: My Solo 401k Financial also specializes in setting up single member LLC’s where the solo 401k is the sole member.
The first step is to open a self-directed solo 401k with a solo 401k provider whose solo 401k plan allows for investing in alternative investments such as as single member LLC.
Once the solo 401k has been established, the next step is to open the solo 401k bank account and to fund it by either making an annual contribution or by transferring IRAs (except for Roth IRAs as the Roth IRA rules do not permit transfers to a solo 401k-clicke here to learn more about this restriction), and/or former employer plans to the solo 401k plan.
After the self-directed solo 401k has been funded, it is now time to register the LLC with the secretary of state. The Secretary of State will charge a fee to register the LLC and the fee varies by state.
After the above steps have been completed, the next step is to have the LLC operating agreement prepared. This is a vital step as the LLC operating agreement will need to outline both the solo 401k rules and IRS rules. For this reason, it is not recommended to use an off-the-shelf (e.g., a legal zoom) LLC operating agreement. For example, regulatory language surrounding the 401k prohibited transaction rules, disallowed investment rules, decedent account rules, QDRO rules, distribution rules, RMD rules, UBIT and UDFI rules will need to be included in the LLC operating agreement.
To obtain employer identification number (EIN) for the LLC, use the following IRS site:
This is a separate bank account from the solo 401k bank as this bank account is for the LLC. You choose where to open the LLC bank account and does not require the use of the same bank or credit union where you opened the bank account for the solo 401k. The bank or credit union representative will ask for the LLC articles of Organization and a copy of the LLC employer identification number letter.
After the LLC bank account has been opened, the next step is to fund with solo 401k funds. Funding the LLC bank account can be done by check or by wire, and the funds have to flow directly from the solo 4o1k bank account to the LLC bank account. If funding is done by check, the check will need to be made payable in the name of the LLC not your personal name.
After the LLC has been funded using solo 401k funds, future investments will be placed through the LLC bank account not the solo 401k bank account. Also, investments will be titled in the name of the LLC. If the LLC invests in real estate, for example, the funds for the purchased will flow from the LLC bank account to the seller, expenses and gains will also flow to the LLC bank account not the solo 401k bank account. However, once you are ready to dissolve the LLC or no longer wish to place investments via the solo 401k owned LLC, the funds will flow back to the solo 401k bank account. Also, solo 401k participant loans, and distributions such as required minimum distributions (RMDs) will need to be processed from the solo 401k bank account not the LLC bank account.