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

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

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

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 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.

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).