Investing the Self-Directed Solo 401k Fidelity Investments Non-Prototype Investment Only Brokerage Account In Certificates of Deposit (CDs)

A self-directed solo 401k from My Solo 401k Financial may be invested in certificates of deposit (CDs) through a brokerage account at Fidelity Investments.

The type of brokerage account that clients’ of My Solo 401k Financial open at Fidelity Investments for their solo 401k is referred to as a Non-Prototype Investment Only account. This means the solo 401k plan provider is My Solo 401k Financial NOT Fidelity Investments. As a result, the plan may be invested in certificates of deposit (CDs).

Please see the following guide for Investing a Self-Directed Solo 401k Using the Fidelity Investment Non-Prototype Investment Onlye Brokerage Account Titled in the Name of the Solo 401k Plan.

Slides: https://www.mysolo401k.net/wp-content/uploads/2023/03/Invest-the-Self-Directed-Solo-401k-Fidelity-Brokerage-Account-In-Certificate-of-Deposits-CDs.pdf

Do I report both Employee and Employer Solo 401k contributions on my W-2?

Please check out this good question from our Daily Live Zoom call. Subscribe to our YouTube Channel to get notifications of our Daily FAQs.

Solo 401k FAQ – Do I report both Employee and Employer Solo 401k contributions on my W-2?

QUESTION:

I make contributions to my solo 401k sponsored by my self-employed business taxed as an S-corporation.  What is the W-2 box and what W-2 label to report my Solo 401k contributions?

RESPONSE:

Great question as one of the top reasons that clients set up our Solo 401k plan is the ability to make Solo 401k contributions.

For a self-employed business taxed as an S-corporation, the ability to make Solo 401k contributions is based on w-2 wages received from the S-corporation.

Per the w-2 instructions:

  • Employee Solo 401k contributions (elective deferrals) made as a pre-tax contribution are not included in box 1 of the w-2 but instead are reported in Box 12 (Code D).
  • Employee Solo 401k contributions (elective deferrals) made as a Roth contribution do not reduce the amount reported in box 1 (since they are made on a post-tax basis) and are also reported in Box 12 (Code AA).
  • Voluntary after-tax Solo 401k contributions may be reported in Box 14 of the W-2 (Optional).
  • Employer Solo 401k contributions are not reported on the w-2. 

For more please see our Solo 401k contributions guides page where we have links to our deep-dive webinars including videos and Powerpoint presentations: Solo 401k Contribution Guides-Deep Dive

Can my solo 401k invest in real estate where I live?

Please check out this good question from our Daily Live Zoom call. Subscribe to our YouTube Channel to get notifications of our Daily FAQs.

Self-directed 401k FAQ – Can my solo 401k invest in real estate where I live?

QUESTION:

Can my solo 401k purchase my first home to live in & rent?

RESPONSE:

Good question as one of the top reasons that clients open Solo 401k accounts with us is the ability to invest in real estate.

When one makes a Solo 401k real estate investment, the real estate may not be used for personal use – even if part of the real estate will be used as a real estate investment.

While there are lenders that will lend to a Solo 401k to finance a Solo 401k real estate investment, these are specialty lenders as the loan must be a special type of loan: a non-recourse loan where the only recourse of the lender in the event of default is to foreclose on the real estate (i.e. no guaranty by the solo 401k owner/participant, etc.).

This means that one may not use an FHA loan (or a similar loan which is for residential loans) to finance a Solo 401k real estate investment.

Can I transfer stock from my Solo 401k (E-Trade/Fidelity/Schwab/TD) to my self-directed Solo 401k?

Please check out this good question from our Daily Live Zoom call. Subscribe to our YouTube Channel to get notifications of our Daily FAQs.

Can I transfer stock from my Solo 401k (E-Trade/Fidelity/Schwab/TD) to my self-directed Solo 401k?

I am upgrading my existing Solo 401k at E*Trade to a self-directed Solo 401k in order to make Mega Backdoor Roth Solo 401k contributions and invest in alternative investments (e.g. real estate, private placements, etc.).

Can my stock in my existing solo 401(k) brokerage account at E*TRADE be transferred in-kind to the new self-directed Solo 401k?  Or do I need to liquidate and sell the stock before initiating the transfer?

RESPONSE:

Good question as we help people convert their existing solo 401k to our self-directed solo 401k to take advantage of the services and features that our plan offers.

The process to convert the existing solo 401k plan to our plan is referred to as a restatement.

As part of the restatement, new accounts will need to be opened for the restated Solo 401k plan at the bank or brokerage of choice.

If the solo 401k owner wishes to transfer stock in-kind, we would prepare the paperwork to open a new account at E*Trade for the restated solo 401k plan so that the stock can be transferred from the existing account to the new account.

Items to Consider if You Plan to Process a Self-Directed Roth Solo 401k Pretax In-Plan Conversion in 2023

While you have until December 31, 2023 to convert pretax solo 401k funds including assets (e.g., Real estate, private investments/syndicates, promissory notes as well as equities) so that the conversion is effective for 2023, make sure to start planning now as certain preparation applies.

If you have not yet done so, you first need to open a designated Roth solo 401k brokerage or bank account as Roth solo 401k funds are required to be separately tracked under a defined contribution plan such as a solo 401k plan.

Note: opening a separate bank/brokerage account to hold the Roth solo 401k funds does not mean you are opening an additional solo 401k but rather an additional holding account under the existing self-directed solo 401k to hold the Roth solo 401k funds. The IRS refers to this additional solo 401k holding account as a Roth Designated Account.

If Using Solo 401k Bank Accounts- In-Plan Pretax Solo 401k Roth Conversion

CLICK HERE for the PROCEDURE If Your Are Using Bank Accounts for the Solo 401k

Step 1-Open Bank Account: Make sure to open up a bank account to hold the Roth solo 401k funds. 

Step 2. The Roth solo 401k bank account needs to be titled in the name of the solo 401k followed by the word ROTH in parenthesis (ROTH), and use the same employer identification number for the solo 401k. 

EXAMPLE: If the name of your solo 401k is “Futuristic Times Trust”, then the bank account to hold the Roth solo 401k funds would be titled as follows: Futuristic Times Trust (ROTH)

Important Note:  If each participant (e.g., both spouses) are converting funds, separate solo 401k bank accounts are required for each. 

 

Step 3. Move the funds from the pretax solo 401k bank account to the Roth solo 401k bank account. You will work with your bank in moving the fund by check or electronically.

Step 4: Report the Taxable In-Plan Conversion on Form 1099-R. We will issue the Form 1099-R by February of 2024 as long as the following on-line conversion form[CLICK HERE to complete the form] is received by 12/31/2023, so make sure to fill it out once you have moved the funds to the Roth solo 401k bank account.

If using Solo 401k Brokerage Accounts (e.g., Fidelity, Schwab, E-TRADE or TD AMERITRADE- In-Plan Pretax Solo 401k Roth Conversion

CLICK HERE for the PROCEDURE If Your Are using Brokerage Accounts for the Solo 401k

Step 1. Open the Brokerage Account: Make sure to open a brokerage account to hold the Roth solo 401k funds if you have not already done so. Please send us an email to: [email protected] if you have not yet opened the addition brokerage account to hold the Roth solo 401k funds so that we can assist. Make sure to reference your plan name. Also, if both participants (e.g., both spouses) will process a conversion, they each need separate Roth solo 401k brokerage accounts.

Step 2. The Roth solo 401k brokerage account needs to be titled in the name of the solo 401k followed by the word ROTH in parenthesis (ROTH), and use the same employer identification number for the solo 401k.

EXAMPLE: If the name of your solo 401k is “Futuristic Times Trust”, then the brokerage account to hold the Roth solo 401k funds would be titled as follows: Futuristic Times Trust (ROTH)

Step 3. Move the funds from the pretax solo 401k brokerage account to the Roth solo 401k brokerage account. You will work with your broker in moving the funds by check or electronically. 

Step 4: Report the Taxable In-Plan Conversion on Form 1099-R. We will issue the Form 1099-R by February of 2024 as long as the following on-line conversion form[CLICK HERE to complete the form] is received by 12/31/2023, so make sure to fill it out once you have moved the funds to the Roth solo 401k bank account.

amount converted from the pretax solo 401k to the Roth solo 401k is considered a taxable conversion so is includible in gross income in the year of the conversion, but going forward eligible distributions from the Roth solo 401k account (including earnings) are generally tax-free. This is why the self-employed business owner must separately account for all contributions, gains and losses to this designated Roth solo 401k account until this account balance is completely distributed.

You may be considering converting your traditional (pretax) solo 401k to a Roth solo 401k (designated Roth account) in 2023. Following are key items to understand prior to proceeding.

December 31, 2023 is the Deadline

  • Conversions must be processed by December 31, 2023 in order to count for 2023.
  • This means that the funds and/or assets must be deposited from the solo 401k pretax bank/brokerage account to the Roth solo 401k bank/brokerage account by 12/31/2023.
  • Don’t confuse the contribution deadline rules with the conversion deadline. Unlike contributions where you can make them the following year (2024) by  the  self-employed business tax return due date plus extension, the Roth solo 401k conversion rules require the funds and or asset converted by 12/31/2023.
  • Don’t forget that your solo 401k provider may need more time than you think to complete the conversion including assisting in opening the Roth solo 401k bank or brokerage account if that has not yet been done. Waiting until the last minute can be a nail biter.

Don’t Forge About Taxes

The conversion of pretax solo 401k funds to the Roth Solo 401k designated account is considered a taxable event but not subject to the 10% early distribution penalty.

The pretax solo 401k conversion will increase your ordinary income for 2023 – potentially causing the loss of exemptions, credits tax deductions, taxation of Social Security, and increased premiums for Medicare Part B and Part D premiums – but this only happens for the year of the conversion. The trade-off is that all future qualified distributions from your Roth solo 401k will be distributed completely tax-free.

Reasons to Process a Conversion

Should you convert solo 401k funds to the Roth solo 401k bucket? Some factors in favor of converting include not needing your money soon, or even at all and expecting your future tax rates to be higher. Being younger can favor conversion as younger people generally are in a lower bracket, have not yet accumulated large sums in their solo 401k, and have long retirement savings timelines to work with.

Reasons not to Processing a Conversion

Conversion may make sense for some but is not for everyone. Why may you not want to process an in-plan solo 401k conversion? Conversion may not be for you if:

are older and will need the money soon;

you think you will be in a lower tax bracket at retirement; and

not having available, non-retirement assets to pay the tax due on the in-plan solo 401k conversion.

No Do Over

Just like Roth IRA conversions, you cannot change your mind once the in-plan solo 401k conversion has been processed. To learn more about the in-plan Roth solo 401k conversion rules, VISIT HERE.

In-Kind Conversion of Solo 401k Private Equity Investment (private placement / Syndicate) to the Roth Solo 401k

In addition to converting pretax funds held in a pretax solo 401k to the Roth solo 401k, private equity/private placement/Syndicate/private shares held in a pretax solo 401k may also be converted to the Roth solo 401k.

Here are the typical steps that apply to an in-kind, in-plan conversion of a Private Equity Investment (private placement / Syndicate)held in a pretax self-directed solo 401k:

  1. Get a fair market valuation: Federal taxes and possibly state taxes will be due on the value converted. Therefore, it is important the private investment is valued prior to the conversion in order to determine the value subject to taxes.
  2. Change Ownership: Once the fair market value is determined, work with the private investment (private placement / Syndicate) sponsor to update their investment offering documents to reflect the Roth solo 401k portion of your solo 401k now owns the shares/units.

For example: If  title to the private investment document reads as follows:

Jane Smith, Trustee of ABC Retirement Trust

The private investment documents would be updated to read as follows, for example: Jane Smith, Trustee of ABC Retirement Trust (ROTH)

3. Fill out our on-line solo 401k conversion form if you are a client of My Solo 401k Financial: The solo 401k provider will need to issue a Form 1099-R by February of the following year to report the taxable conversion to the IRS.

4. Open a separate solo 401k bank or brokerage account to hold the Roth solo 401k funds: If you have not yet opened a separate bank or brokerage account under the solo 401k plan to hold the Roth solo 401k funds, make sure to do so as all the income and expenses associated with the Roth solo 401k owned private investment/syndicate will need to be accounted through that account.

See also the following page for more information.

Can my ROBS 401k (business financing 401k) Funded Business Pay me as 1099-NEC Instead of W-2?

In short, no. The purpose of the business financing 401k (aka ROBS 401k) is to finance a C-corporation using your retirement funds that you will operate as a w-2 employee.

As a result, any compensation that you receive for the work performed for your ROBS 401k funded corporation needs to be paid as w-2 wages.

ROBS  401k plans are for bona fide W-2 employees and 1099 independent contractors are not eligible to participate in the ROBS 401k. For this reason, any compensation that you receive must be reasonable and must be paid as w-2 wages (not as 1099 income).

Receiving Disability Benefits – Can I open a self-directed solo 401k?

I retired early from a government job through a disability retirement.  The plan allows me to work part-time as long as I don’t exceed a certain limit.  My question is:  Can I open a solo 401-K when I am receiving retirement income?  I will be 60 years old next month.

ANSWER:

Good question and the answer is yes you can open a solo 401k plan from a solo 401k qualifying perspective, regardless if you are receiving disability income, as long as you perform at minimum part-time self-employment activity and do not have any full-time W-2 employees working under your self-employed business.  However, you would not be allowed to make contributions to the solo 401k plan based on your disability benefit payments. Other income that does not qualify for solo 401k eligibility or for making contributions includes the following: 

  • Alimony Pay stemming from divorce
  • Earnings and profits from property and investments, such as rental income, interest income, and dividend income
  • Deferred compensation
  • Income from a partnership for which an individual does not provide services that are a material income-producing factor
  • Pass-through income earned by a shareholder in an S corporation is not classified as earned income.
  • Retirement income, including Social Security, pension, and annuity income
  • Disability pay
  • Worker’s compensation

In sum, not all income qualifies for opening/participating in a solo 401k plan regardless if you plan to make annual solo 401k contributions or not. When opening a solo 401k plan, make sure that you are truly self-employed (i.e., you are performing material services that help to produce the income). 

Do I need to set up an LLC/S corp before opening a Solo 401k?

Please check out this good question from our Daily Live Zoom call. Subscribe to our YouTube Channel to get notifications of our Daily FAQs.

Self-employed 401k Daily FAQ – Do I need to set up an LLC or S corp before opening a Solo 401k?

QUESTION:

Do I need to set up an LLC or S-corp before applying for the Solo 401k?

RESPONSE:

Good question!

No – one doesn’t need a formal legal entity to be eligible to set up a solo 401k.

One may set up a Solo 401k as long as they are reporting earned self-employment income on their taxes and provided that they have no full-time non-owner/non-spouse w-2 employees working for any business owned by such person (or a spouse if any).

If the Solo 401k owner/participates sets up the solo 401k plan as a sole proprietor and then later decides to incorporate and reorganize the self-employed business as an LLC or an S-corporation, the solo 401k plan documents can be updated to reflect the new business structure (with no impact to the solo 401k accounts and investments).

What does it mean if my spouse is the Co-Trustee of my Solo 401k?

Please check out this good question from our Daily Live Zoom call. Subscribe to our YouTube Channel to get notifications of our Daily FAQs.

Self-directed 401k – What does it mean if my spouse is the Co-Trustee of my Solo 401k?

If I specify my spouse as the co-trustee but not yet a participant in the plan, what does that mean?

RESPONSE:

Listing the spouse as a Co-Trustee on our Solo 401k application will result in the spouse being listed on the plan documents as a trustee.

Since the spouse is listed on the documents as a trustee, if and when your spouse is working in the self-employed business and wishes to participate in the plan no changes will need to be made to the Solo 401k establishment documents and it’ll just be a matter of opening an account(s) in the name of the Solo 401k for the benefit of the spouse.

In addition, by listing the spouse as a co-trustee if the solo 401k owner/participant predeceases the spouse, it will make it easy for your spouse to take over the account.

It means that the spouse now has signing authority – for example, if the solo 401k owner/participant is not able to sign on behalf of the Solo 401k for a particular investment the spouse who is a Co-Trustee may sign on behalf of the plan to make an investment.

It is noteworthy that the spouse does not need to be an owner of the company, nor does the spouse need to be reporting self-employment income, in order to be eligible to serve as a Co-trustee of the Solo 401k.

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