Restating Existing Solo 401k Plan to Full-Time Employer 401k Plan

Once you hire full-time W-2 employees in your self-employed business, you will need to either transfer the solo 401k plan to an IRA, or convert/restate the solo 401k plan to a full-time employer 401k plan.

If you choose to restate the existing solo 401k plan to a full-time employer 401k plan, the following applies.

  1. Choose: Select a new full-time employer 401k plan provider.
  2. Provider: A common provider of full-time employer 401k plans is The Stadard.
  3. Communicate: You need to let the new full-time 401k provider know that you currently have a self-employed solo 401k plan that you want to “restate” to a full-time employer plan.
  4. No Reporting: Note that we won’t have to issue a Form 1099-R or a final Form 55000-ez since you are restating the plan to a full-time employer 401k plan. In other words, your business is not shutting down, rather it is growing so it now needs to offer a full-time employer 401k plan to the full-time W-2 employees since a solo 401k plan is for owner-only businesses with no full-time employees.
  5. Moving the Funds: To move the funds from the existing solo 401k plan, simply make the check payable in the name of the new 401k plan, write “restatement of solo 401k plan to full-time employer 401k” on the memo section of the check, and deposit the funds directly into the new 401k plan.
  6. 401k Loan: Lastly, if you have an outstanding solo 401k participant loan, the loan payments will continue pursuant to the original payment schedule but made into to the new full-time employer 401k plan.

 

Transfer/Restate PAI Retirement Services Solo 401k to a Self-Directed Solo 401k

Existing clients of PAI Retirement Services that want to convert their existing solo 401k plan to a self-directed solo 401k that will allow for checkbook control for investing in alternative investments such as bitcoin, real estate, metals, tax liens, and private equity can do so by restating their Ascensus solo 401k plan to a self-directed solo 401k from My Solo 401k Financial.

When an existing solo 401k plan from a provider such as PAI Retirement Services is restated to a self-directed solo 401k plan from My Solo 401k Financial, the following PAI forms apply, which we will fill-out as part of the self-directed solo 401k setup process:

  • PAI Transfer Form (2 pages)

The above form gets submitted to PAI by fax once you setup the self-directed solo 401k with us which starts by you completing our on-line self-directed solo 401k application.

We will then assist you in opening a bank account or brokerage account for your self-directed solo 401k. To learn more about the differences and similarities between the bank account and the brokerage account, VISIT HERE.

ROTH Solo 401k Contributions vs Voluntary After-Tax Solo 401k Contributions

Both Roth solo 401k contributions and voluntary after-tax solo 401k contributions fall under the employee (salary deferral) contribution umbrella.  In other words, both of these contribution types are not considered employer (profit sharing) contributions, so the contributions are not tax deductible because they are considered made with post-tax dollars.

Not all solo 401k plan document providers will allow for either Roth solo 401k or voluntary after-tax solo 401k contributions, while some will allow for just Roth solo 401k but not voluntary after-tax solo 401k contributions. However, a self-directed 401k plan document provider like MySolo401k.Net allows for both types.

The reason many solo 401k plan providers do not allow for voluntary after-tax solo 401k contributions is because of the added reporting requirements that come with this type of contribution. For example, when voluntary after-tax solo 401k contributions are converted to a the ROTH IRA or the ROTH Solo 401k, the conversion has to be documented in writing by completing a conversion form ( the IRS will expect to see a copy of this form upon request), and a Form 1099-R has to be issued to report the conversion whether taxable or not.

Difference #1 Between Roth Solo 401k and Voluntary After-Tax Solo 401k Contributions

Roth solo 401k contributions are subject to the same pretax distribution triggering events. Therefore, in order to distribute Roth contributions, one of the following events apply:

Death of the participant;

termination of employment;

disability; or

attainment of age 59 1/2.

On the other hand, voluntary after-tax solo 401k contributions can be distributed and thus converted at any time. This is why the the conversion of voluntary after-tax solo 401k contributions has been dubbed the “mega-backdoor Roth solo 401k.”

Difference #2 Between Roth Solo 401k and Voluntary After-Tax Solo 401k Contributions

Roth solo 401k annual contributions are capped at the employee (salary deferral) limit of $18,000 for 2017, or $24,000 if age 50 or older. For 2018, the Roth solo 401k contribution limited increased to $18,500, or $24,500 if age 50 or older.

However, and not commonly known, voluntary after-tax solo 401k contributions are subject to the annual overall limit (“The 415 Limit) of $54,000 for 2017, or $55,000 for 2018.

Top 10 Business Financing 401k (ROBS 401k) Items to Know

  1. Neither nondeductible (after-tax) IRAs nor Roth IRA funds can be transferred to the Business Financing 401k (ROBS 401k).
  2. While Roth 401k, Roth 457 and Roth 403b can be transferred to the “Roth Designated Account” bucket of the Business Financing 401k (ROBS 401k), this bucket cannot be invested in your C-Corporation business.
  3. As a rule of thumb, in order to transfer an employer plan such as a PSP, 401k, 403b and 457b plan to the Business Financing 401k (ROBS 401k), you either have to be no longer employed (separated from service) with the employer that sponsors the retirement plan or be age 59 ½ or older (retirement age). However, some exceptions apply. Or only if you transferred funds from a previous employer plan or IRA you generally will be able to transfer these funds from the plan to the ROBS 401k plan prior to separating from service.
  4. The Business Financing 401k (ROBS 401k) setup fee cannot be paid with retirement funds or the C-corporation funded business. Also, once the business has been funded, business funds cannot be used to pay off your personal credit card that was used to pay the ROBS 401k setup fee.
  5. The purpose of the Business Financing 401k (ROBS 401k) is to fund your own business; therefore, you have to (don’t have a choice other than being) be a W-2 employee of the retirement funded business.
  6. The use of the Business Financing 401k (ROBS 401k) strategy requires a C-corporation entity (no exception).
  7. All  the revenue generated by the ROBS 401k funded C-corporation 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 company could decide to distribute that profit. In that case, the C-corporation would pay out dividends (profits) to the stockholders in which case it must pay all stockholders dividends in accordance with the ownership percentages (i.e., the 401k for you benefit and you personally). For example, if the only two stock investors in the C-corporation are you and your ROBS 401k, profits/distributions attributable to the shares in the 401k would flow to the 401(k) account on a tax-deferred basis and the remaining profits would be distributed to you personally; you would have to pay capital gains on your personal amount on your personal taxes.
  8. You should wait to receive w-2 compensation (e.g., salary, bonuses, etc.) until the C-corporation is generating income to justify your salary and then your salary should not be unreasonably high (i.e., no more than what the company would have to pay someone else to do all of the things that you do).  Any compensation that you receive should be paid to you as W-2 wages (i.e. not as 1099 income).  As such, it will be prudent to coordinate with your business tax adviser.
  9. Your ROBS 401k cannot guarantee a business loan to your ROBS 401k funded C-corporation.
  10. Your ROBS 401k funded business cannot do business with any other business that you or disqualified persons own. Disqualified persons include you, your spouse, child, grandchild, for example.

More Items to Know

  • Inherited IRAs or inherited qualified plans such as a former employer 401k plan cannot be transferred to the ROBS 401k plan if the funds were inherited from a non-spouse.
  • You cannot loan personal funds to the ROBS 401k funded business. This same rule also applies to disqualified parties such as your parents, children, spouse, etc.
  • The ROBS 401k funded business can be operated via/through a subsidiary LLC that is wholly-owned by the C-corporation.
  • The ROBS 401k funded business must be a C-corporation and Can NOT be an S-corporation.

 

 

Steps Involved In Using a TSP to Fund a ROBS C-Corp Business

Request:

Please give me a list of the steps involved in moving my money from my TSP account into a C Corp and using the funds to buy a business.

ANSWER:

The Business Financing 401k Plan, also known as a ROBS 401k, allows you to fund a business with your retirement funds without taking a taxable distribution. This can be done provided that the business you are looking to start or buy is a good and/or services business.

If you’re no longer working for the government and this is a former employer TSP plan. The IRS rules allow for the transfer of a TSP to a 401k and a ROBS falls under the 401k or define contributions umbrella. We will handle the transfer process (including completing all of the necessary paperwork).  As part of our process, the administrator of the TSP will provide the transfer paperwork (Form TSP-70-T, or TSP-70 if you want to process a full transfer) or to rollover funds from your TSP to your new employer ROBS 401(k) plan (which paperwork we would complete as part of our services).

We take care of everything needed to fund your business with your retirement funds including setting up the corporation including drafting the Articles of Incorporation and filing them with the Secretary of State on your behalf. We draft the 401k plan documents, assist with the transfer of the funds to ensure that no taxes or penalties are incurred, and then documenting the transaction with corporate records such as stock certificates, bylaws, etc.  Going forward, we provide all of the ongoing compliance support for the 401k plan including the annual 5500 filing, on-boarding any eligible employees who wish to participate, keeping the plan up-to-date to ensure that it maintains its status as an IRS-approved qualified plan, mandatory plan testing, etc.

Furthermore, transferring the funds is a two-step transfer process. First, the funds will flow from the existing retirement account (TSP) to the new 401(k) sponsored by the new C Corporation. Then you will invest however much you want to in the stock of the C Corporation such that the funds will flow from the new 401(k) account to the business bank account of the C Corporation. The funds that are invested can then be used for any legitimate business purpose by the C Corporation.

The entire process 15 to 20 business days. Typically, the biggest “X-factor” in terms of timing is the process to rollover the funds from your existing retirement account(s). To shorten the time to fund your business through our ROBS 401k Business Financing Plan, we will start the transfer process immediately including handling all the required transfer paperwork. In addition, each 401k plan administrator or financial institution that holds your existing retirement will have its own unique transfer process.  Moreover, while many companies have started to modernize their transfer process over the last few years by moving to a telephone or online process, the process is still quite cumbersome for many companies.  Our team has deep experience and expertise in navigating the varying transfer processes so that your funds can be transferred and your business funded as soon as possible!

 

Questions about investing in RE With a Solo 401k Plan

QUESTIONS:

Hi –
I was looking at self directed retirements plans &  reviewing your plans.
Q 1: I am curious can a solo 401k be my lender on an investment property, allowing me to pay the interest to my 401k?
Q 2: Or can they come in after i have bought to find the mortgaged portion … like in the TIC situation you described?
Q 3: Or is this really more useful fir any future properties i buy?
I’m future properties, if i don’t have enough funds to purchase in cash as me or in the Solo… and i buy with personal funds & the 401k funds in a TIC, can my portion be via a third party loan or does the cash/loan purchase have to be only with the non recourse loan to the Solo.
Q 4: How difficult is it to find a non-recourse loan?  Seems like banks would be hesitant.
Just trying to figure out how to best use my 401 in real estate, knowing it likely doesn’t have enough to fully own & fund a property on its own.
Thanks!
Laura

ANSWERS:

First, in order to open a solo 401k plan you must be self-employed. Click here to learn about the solo 401k eligibility requirements.

ANSWER TO Q 1:

You can take a solo 401k participant loan up to the limits and use the funds for any purpose including investing in real estate.

ANSWER TO Q 2:

Once you borrow from the solo 401k plan, you can use those funds for any purpose because they are no longer deemed solo 401k funds.

ANSWER TO Q 3:

You can use the borrowed funds now or later. From a solo 401k loan perspective what matters is that you pay the solo 401k loan back pursuant to the rules.

ANSWER TO Q4:

To learn about the solo 401k non-recourse loan rules, see the following.

https://www.mysolo401k.net/quick-yet-precise-explanation-solo-401k-non-recourse-loan-debt-financing-leverage-process/

 

https://www.mysolo401k.net/securing-personal-loan-using-solo-401k-funds-vs-non-recourse-loan-to-solo-401k/

 

https://www.mysolo401k.net/solo-401k-non-recourse-loan-question-aswered/

For a list of banks that will loan funds to a solo 401k plan for investing in real estate, VISIT HERE.

 

 

 

Non-Recourse Loan to Solo 401k Plan for California Real Estate

QUESTIONS:

I have a few Q’s and please excuse me as I have limited experience as I foray into this.
non-recourse loan:  one of my sources tells me that it is default California law that the loan will be non-recourse.  California is a non-recourse state. So does the loan really need to be specifically designated as non-recourse?  the reason I ask is b/c of the rates on these non-recourse designated ones are quite high.
second question, there seems to be more options for loans if the trust and a guarantor (like myself) is on the loan.  can this happen?

ANSWERS:

  1. You cannot personally guarantee a non-recourse loan to your solo 401k trust as doing so would result in a prohibited transaction.
  1. If you are looking to use a loan for a solo 401k real estate investment, which means the loan is to the solo 401k plan, then it is required that the loan be a non-recourse loan and the loan documents specifically refer to it being a non-recourse loan to the solo 401k plan. Below is a link from our website that talks about non-recourse loan for solo 401k’s and real estate investment procedures.

 

Quick Yet Precise Explanation of Solo 401k Non-Recourse Loan (debt financing or leverage) Process

Solo 401k Real Estate Investment Procedure

 

If debt is used to purchase the property, the debt must be non-recourse financing.  Please see the following for more information:

Following lenders specialize in non-recourse loans to solo 401k plans:

 

http://www.iralending.com/

 

http://myiralender.com/

 

Here is some information on the process:

 

http://www.isolo401k.com/non-recourse-loan.html

 

http://www.isolo401k.com/qualifying-for-a-non-recourse-loan.html

 

http://www.isolo401k.com/non-recourse-loan-criteria.html

Solo 401k Loan for Business Financing & 401k Business Financing Plan

If you are seeking to use your retirement funds for business financing and currently have retirement funds in various former employer plans and IRA accounts, the financing of the business can be done using solo 401k funds through a solo 401k participant loan or using the 401k business financing plan (also known as a ROBS 401k PSP Plan).

Method 1 Funding Own Business Using a Solo 401k Participant Loan

Using a Solo 401k Loan for Business Financing would allow you to borrow up to 50% of the balance (not to exceed $50,000) that you could use for business financing.  This option has a lower cost and would allow you to operate the business through an LLC or S-corporation but requires repayment of the loan(s) and is designed for a business with no w-2 employees who work more than 1000 hours per year.

Method 2 Funding Own Business Using the 401k Business Financing Plan

Funding you business via our 401k Business Financing (or rollover as business startup) would allow you to invest all of the retirement funds and does not require repayment but is a higher cost and would require operating the business as a a C-corporation.  The funds not invested in the business can be invested in equities.

 

TSP LOAN OFFSET QUESTION

QUESTION:

I had an outstanding TSP loan that I had to “settle” before I could have my funds rolled over into my Solo 401k (I chose not to repay it at the time).  The loan has been “closed” via TSP and declared a taxable distribution, but I received the attached letter stating I have 60 days to potentially roll over the amount and avoid the current tax bill (and early withdrawal penalty).  Am I able to do this using my Solo 401k?  If so, how do I go about doing that?

ANSWER:

The attached letter from TSP is referring to the “loan offset rule.”
 
The loan offset amount will be taxed to you and subject to the 10% early distribution penalty if you’re under age 59 ½. However, you can avoid taxes and penalties by rolling over the loan offset amount to your solo 401k plan. You’ll have to come up with the cash from personal assets or a bank loan, but at least you have an opportunity to avoid taxes on the offset amount.
 
The letter incorrectly says that you will only have 60 days to accomplish the rollover; however, the Jobs Act of 2017 (P.L. 115-97) that was signed into law by President Trump on December 22, 2017, extended the 60-day period for rolling over the amount of an “offset” to a solo 401k plan  to the tax filing deadline, including extensions, for the tax year in which the offset/distribution occurs. 

Roth IRA for Working Kids

If you child or grandchild has earned income, then he or she can open a Roth IRA and make annual contributions. While the kid/child needs to have earned income in order for contributions to be made, the contribution can come from their parents, uncles, god parents or any other individual. The Roth IRA regulations do not require that the contribution is made from a check coming from an IRA owner’s bank account. Anyone can technically write the check for a valid Roth IRA contribution, as long as the Roth IRA owner qualifies.

Earned Income for Kid/Child Roth IRA

As long as the kid/child has earned income that can be reported on a tax return he or she can open and contribute to Roth IRA. This could be a child’s summer job, whether working for a company or earning money on their own walking the neighbors dogs, watching the neighbors kids,  mowing lawns,  modeling jobs, or part-time jobs during the school year.

Distributions from Kid/Child Roth IRA

A Roth IRA for a kid/child also allows for distributions of the basis (contributions) tax and penalty free before age 59 ½. What is more, once the kid/child reaches age 18, he or she can also distribute the gains (earnings) without having to pay the 10% early distribution penalty if the funds are used to pay for college tuition; however ordinary income taxes would still apply.

The prior year kids Roth IRA contribution must be made by April 15 of the following year even if a timely filed tax extension was filed. For example, the 2018 Kid/Child Roth IRA contribution has to be made by April 15, 2019 not October 15, 2019.

More Information

  • The 2018 contribution limit to a kid/child Roth IRA is $5,500 or the amount of compensation, which ever is less.
  • See IRS publication 929, Tax Rules for Children and Dependents for reporting and paying taxes on kid/child income.
  • The tax code does not require a minimum age for opening a Roth IRA. While minor cannot legally sign the forms for establishing a Roth IRA, the child’s parents or an adult can open the Roth IRA for the kid.
  • About MySolo401k

    We help our clients take control of their retirement money. Our products and services provide our clients the freedom to invest their retirement savings in their own business as well as alternative investments such as real estate, private companies, promissory notes, precious metals, tax liens and equities.
    Learn more

    Connect with us

  • We’re here to help.

    Call: 800-489-7571

    Monday-Saturday

    7:00 am - 5:00 pm PT

    Why us?
MENU