Can an S Corporation Have an Individual 401k?

Question: My partners & I have a consulting business that is organized as an S-corporation. Are we eligible to set up an Individual Solo 401k plan for our business?

Answer: A Solo 401k plan is a 401k plan for owner-only businesses with no full-time w-2 employees (other than the owner(s)). The IRS clearly recognizes that an S-corporation can sponsor a Solo 401k (otherwise known as an Individual 401k or self-directed 401k).  For example, on the page of the IRS website dedicated to “one participant plans” (which is the technical term for a Solo 401k plan) the IRS describes a hypothetical scenario involving a Solo 401k sponsored by an S-corporation in order to explain how contribution limits apply to a Solo 401k plan.  Therefore, the clear implication is that the IRS acknowledges that an S-corporation can sponsor a Solo 401k.  For an S-corporation with multiple owners, each owner must own greater than 2% of the outstanding stock of the S-corporation (See IRC Section 1372).  Therefore, your S-corporation can open a Solo 401k plan as long as each of you own greater than 2% of the outstanding shares of the S-corporation and there are no w-2 employees of the S-corporation.

ROBS 401k Owned Corporation AZ Newspaper Publication Requirement

After the ROBS 401k corporation has been registered with the Arizona Secretary of state, they will send information regarding the newspaper publication requirement.
Within 60 days of filing Articles of Organization, you must publish a copy of the Articles of Incorporation for the ROBS 401k plan business financing corporation  in a newspaper of general circulation in the county of the known place of business in Arizona, for three (3) consecutive publications. For a list of acceptable publications, see:

Q and A Late 60-Day Rollover Revenue Procedure 2016-47

On August 24, 2016 the IRS issued Revenue Procedure 2016-47, changing the way IRA and solo 401k owners are able to complete late rollovers of retirement funds after the 60-day rollover window has lapsed. Following are some of the most common questions being asked.


How do I report on my Form 1040 a 60-day rollover using the new self-certification procedure?


You will report the transaction as a 60- day rollover, in the same fashion you would report any other 60-day rollover. No special reporting applies on your Form 1040 federal tax return. However, the IRS is planning to modify the instructions to Form 5498 to require that an IRA trustee or custodian, who accepts a late rollover with a self-certification, report that it was accepted after the deadline.  The IRS will know which rollovers were late and, therefore, can apply a higher level of scrutiny.


Can the self-certification procedure be used for  distributions from both company plans including solo 401k plans and IRAs?


Yes. The new procedures can be used by participants to roll over both distributions from company plans such as a solo 401k plan and IRAs.


Am I required to file the self-certification letter with the IRS?


No you are not required to file anything with the IRS when using the self-certification procedure. The letter will need to be provided to the IRA custodian or the solo 401k plan administrator.  A copy should also be kept in the file in the even of an IRS audit.


Is there a fee for self-certification?


There is no fee that needs to be paid to the IRS.  Previously, the only way to get  such relief was through the costly (over $10,000) private letter ruling (PLR) process.


If I violated the once-per-year rollover rule (6-day rule). Will the new self-certification rules help me?


Unfortunately, no. Self-certification will not help with this mistake. The IRS cannot allow a client to self-certify a late rollover when a timely rollover would not have been allowed in the first place.


If I do not qualify for self-certification, is there any relief available?


Possibly. However, the Revenue Procedure’s list of acceptable “excuses” is fairly exhaustive and one has to think that there would be few times when a client would not meet the requirements for self-certification. The private letter ruling process is still available for 60-day rollover requests that do not meet the 11 reasons set up by IRS. The IRS fee for those ruling requests is $10,000. In addition, you would also have to pay a professional a fee to prepare your ruling request which could be another $10,000. It generally takes IRS 6 – 9 months to issue a decision on a ruling request.

Requests that will automatically be denied include those where a non-spouse beneficiary wants to complete a 60-day rollover and where an individual did more than one 60-day IRA-to-IRA rollover in a 12 month period. IRS does not have the authority to grant a waiver in either of those situations.


When are the self-certification procedures effective?


The self-certification relief has been available since the Revenue Procedure was published on August 24, 2016.


Will the IRS know that I used the self-certification process to complete a late 60-day rollover?


Eventually, but not at the present time. Under the current reporting process, there is no way for a custodian to alert the IRS that a particular rollover is late. It’s possible that we could see the change as early as 2017.


Can IRS disallow my self-certification?


Yes. Completing a late rollover using the self-certification process does not equal the waiver that the IRS could grant via a PLR. When a client is able to obtain a successful PLR request, the IRS has essentially “blessed” their transaction as OK. Any disputes with an IRS representative regarding the matter that later come up can be easily resolved by providing a copy of the successful PLR.

If, on the other hand, one uses the self-certification process to complete a late rollover, it’s possible that the IRS, upon examination of the client’s return, could decide that the client did not meet the requirements of Revenue Procedure 2016-47. Thus, the only sure way for one to complete a late rollover with a 100% guarantee of the IRS’ acceptance is to obtain a PLR. Given the substantial expense of a PLR, coupled with the small likelihood of an IRS overrule of a self-certified late rollover, it is hard to imagine many people opting for the PLR route.


Can you use the self-certification process when the IRA owner dies before completing a 60-day rollover?


This is a good and tough question. It is not directly addressed in the Rev. Proc. or in the 11 reasons provided in the self-certification letter. You could probably use the self-certification when the spouse is the sole beneficiary and is the executor of the estate. IRS has generally allowed this in private letter rulings requested by a spouse.

However, if the rollover is going to a new IRA established in the name of the decedent, IRS has said that the executor cannot name a beneficiary on the account. You may also have a hard time finding an IRA custodian who would be willing to open an IRA under these circumstances.


Is there a limit to the number of times that one can use the self-certification process?


There is no limit to the number of times one can utilize the self-certification process outlined in Revenue Procedure 2016-47 to complete a late 60-day rollover. However, the new IRS guidance does not change the once-per-year rollover rule. Thus, one cannot use the self-certification process to complete multiple late 60-day IRA-to-IRA rollovers or multiple late 60-day IRA-to-Solo401k plan rollovers that occurred within the same 365-day period.

Naming trust as beneficiary of Solo 401k Plan


Why would a solo 401k owner name a trust as a beneficiary?

There are a number of reasons why the solo 401k owner would want to name a trust as the beneficiary of his or her solo 401k plan.  For example, to preserve the solo 401k assets, avoiding estate taxes, protecting assets for minors or a special needs child.  A popular reason is  to limit the beneficiary’s control over the trust assets. This is specially the case when the solo 401k plan’s value is significant and the solo 401k owner’s spouse or young children have no expertise (or interest) in financial matters or when a solo 401k owner has concerns that a beneficiary lacks the judgment in making good spending decisions. Moreover, a trust can dictate how assets will be invested or can require that beneficiaries meet certain requirements before they can receive assets.

Before naming your trust as the solo 401k primary beneficiary, make sure the trust qualifies.

To qualify as what the IRS refers to as a “look-through” or “see-through” trust for Solo 401k distribution purposes, the trust must meet the following requirements outlined in Regulation Section 1.401(a)(9)-4, A-5:

1.   The trust is valid under state law or would be but for the fact that there is no corpus.

2.   The trust is irrevocable or the trust contains language to the effect it becomes irrevocable upon the death of the solo 401k participant.

3.   The beneficiaries of the trust who are beneficiaries with respect to the trust’s interest in solo 401k owner’s benefit are identifiable.

4.   The required trust documentation has been provided by the trustee of the trust to the plan administrator no later than October 31st of the year following the year of the solo 401k owner’s death.

Planning Tip

In addition to these requirements, all applicable trust beneficiaries must be individuals or the stretch option may be lost. There is no separate account rule for trusts, so while the trust can stretch distributions over the life of its oldest applicable beneficiary, the IRS will not let multiple beneficiaries be treated separately for required distribution purposes. Thus, if an applicable trust beneficiary is a charity or other entity without a life expectancy, the stretch for all trust beneficiaries may be lost.

More Information

  • Per the Retirement Equity Act of 1984 (REA), spousal consent is required if the solo 401k owner wants to name a beneficiary of his or her retirement plan to someone other than his or her spouse. This same rules also applies when naming   a trust as the beneficiary of the solo 401k plan.
  • If a trust qualifies as a “look-through” or “see-through” trust, then the trust can be treated as a designated beneficiary and can stretch distributions over the oldest applicable trust beneficiary’s life expectancy.
  • It is referred to as a “look through” trust because you ignore the fact that the trust is the named beneficiary when determining the distribution period over which RMDs must be taken, and instead, look through the trust to the ages of the named beneficiaries of the trust.
  • There is no separate account rule for trusts, so if an applicable trust beneficiary is a charity or other entity without a life expectancy, the stretch for all trust beneficiaries is lost.
  • If a see-through trust is drafted as a conduit trust, only the income beneficiaries’ life expectancies need to be considered when determining the life expectancy to use to calculate required minimum distributions (RMDs).
  • If a trust is drafted as a discretionary trust, the ages of both the income and remainder trust beneficiaries must be considered when determining the life expectancy to use to calculate RMDs.
  • Determining whether a trust beneficiary must be taken into account for purposes of determining RMD payments is complicated. The decision as to who is in and who is out can seem daunting; therefore, make sure to work with your attorney before having your solo 401k provider process a death claim.


Solo 401k for Real Estate Agent


Can a real estate agent filing a schedule C , with 1099  from  coldwell banker start her own solo 401k?  she files basically as a business, with business expenses. Her only income is the 1099  , usually over 100k per year.


Hi and yes as that is the most common way of generating self-employment income and the most popular group that open a solo 401(k) plan. Because she files a Schedule C to report her earned income from self-employment activity, her contributions to the solo 401k plan will be based on line 31 (Ne profit of loss line) of her Schedule C which is an attachment to her personal tax return (Form 1040). Click here to learn more about self-employment income and types of entities.

I would like to place a gas lease in the Solo 401k


I would like to place a gas lease in the Solo 401k. The original lease expired, and we are about to sign a new one.

No drilling has been done, so the current value is uncertain. Is it possible to place this in the 401k as a contribution?

If that didn’t work, could I purchase it from my Dad within the 401k?


Good question. While a solo 401(k) can invest in gas leases, gas lease cannot be deposited into the solo 401(k) as contributions.

Also because your dad is considered a disqualify party, your solo 401(k) cannot buy a gas lease from him.

In order for solo 401(k) to invest in a gas lease,  it would have to be purchased from a third-party that is not considered a disqualified party. Click here to see a list of qualified and disqualified parties.

What is more, your father cannot sell a gas lease to a third-party party and then the solo 401k plan purchases the gas lease from the third-party. This is known as a straw-man transaction which is also a  prohibited solo 401k investment.

Primary Residence 401k Loan – Using Your 401k to Buy a Vacant Lot


I have over $100,000 in my Solo 401k and want to take a $50,000 401k loan.  If I use the proceeds of my Solo 401Ik loan to purchase land intended to build a house for primary residence, can the term of the loan be longer than 5 years?  Must there by a residence already on the property, or does a vacant lot count?


Generally a 401k loan must be repaid within 5 years.  The 5 year repayment requirement does not apply to any loan used to acquire any dwelling unit which within a reasonable time is to be used as the principal residence of the participant. [Internal Revenue Code Section 72(p)(2)(B)]
A vacant lot is not a dwelling unit – i.e. a building where someone could sleep, eat and reside.
Moreover, given the time that that will take to construct a home on the vacant lot, it will likely be a significant amount of time before the house will be used as your principal residence.
Therefore, purchasing the lot does not qualify for the principal residence loan exception to the 5 year repayment requirement.  As a result, while you can use the proceeds of your 401k loan to buy a vacant lot, the loan must be repaid within 5 years.


Can I just invest part of my ROBS 401k in a business?


Can I take part of my 401K to buy the business and keep the balance invested?


In short yes.   As part of the establishment process, two accounts will be created: one for the corporation and another account for the ROBS 401(k). We set this account up for the 401(k) at Fidelity (since we don’t hold any of our clients’ funds).  The funds that you don’t invest in the business will be at this Fidelity account and you can invest those funds however you see fit (e.g., mutual funds, stock, bonds , real estate, notes, metals, etc.).

Selling a house in under a year while inside the Solo 401K Trust


I am buying a house inside of my setup solo 401K.  Are there any negative tax consequences with selling the house in under a year’s time-frame?  I do this business full time and this would be the only property that I have bought to date with the 401K.


Good question. Generally when real estate flipping is performed inside a solo 401k plan, it will deemed a business and thus subject the retirement account to unrelated business income tax (UBIT). The reason for this tax is to even the playing field for those that don’t use retirement funds to flip real estate.

A rule of thumb is not to flip real estate consistently inside a solo 401k plan.

Tax rates regarding my Solo 401k investments


I have a question in regards to tax rates regarding my Solo 401k investments.

Once I retire and I have full access to withdrawal from my solo 401K, how will rental income from my investment properties be taxed? Will these be taxed at income tax rates or will these be taxed as passive or portfolio income?


Distributions from retirement plans including solo 401(k) plans are taxed at earned income tax rates not capital gain tax rates. Solo 401k funds grow on a tax-defer basis until you start making distributions in which case federal and state taxes will apply.

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