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.
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?
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.
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.
- 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.
How does the release of funds work after I open the C-corporation that is funded with my business financing 401k plan?
I guess my question is, do I need to send some sort of request every time I need to use the money, does it need to get approved, or the money is available freely, and I can use it however I want, as long as the money is flowing into the business?
It is a two-step transfer process. First, the funds will flow from the existing retirement account 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. While you can make subsequent investments of 401(k) funds in company stock, each investment would need to be documented as a subsequent stock purchase which may require obtaining a valuation of the company to determine the fair market price per share (and moreover, if there any other employees participating in the plan at the time of the subsequent stock offering these individuals will be need to be given a chance to invest their 401(k) funds in company stock as well at the time of the subsequent stock offering).
I am thinking about using my 403b funds to fund my business, can this be done and would like to know how the process works timing, and fees associated with it.
While a 403b cannot invest in one’s own business, yes a 403b can be transferred to the business financing 401k provided you are no longer working for the employer that sponsors the 403b and the 401k would then be invested in your C-corporation.
Also, in order to use 401k retirement funds to finance your own business, the business has to be one that will offer goods or services. Therefore, a C-corporation that offers investments will not qualify, for example.
You will also be required to work as a W-2 employee for the C-corporation, and can thus draw a fair salary based on hours worked and what others in the same industry make. For more on the salary rules, please see the following: https://www.linkedin.com/pulse/20141011003951-361793377-robs-401k-business-financing-how-much-salary-can-i-make
Process, Timing and Fees:
- Process: We take care of everything needed to fund your business with your retirement funds including setting up the corporation and the 401k plan, assisting 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, onboarding 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.
- Timing: Typically about 15 business days depending on how long it takes the funds to be released by the current plan administrator.
- Fees: We charge a flat setup fee which includes everything to set up and fund your business with your retirement funds as well as the first 12 months of our ongoing compliance support for the 401k. Starting 12 months later we charge an annual fee. For more information, please see the following link: https://www.mysolo401k.net/401k-business-financing/401k-business-financing-pricing/
My wife (unemployed) has funds in her teacher pension account from a previous employer. Can she roll those funds over to the Solo 401k in the trust ? What are the rules on that ?
If not. And if were to simply pull those funds out of her account early and pay the tax, could I contribute those funds into the solo401k or do all monies contributed to the plan need to be generated as income of my business?
1) Even though a solo 401k plan is available to both spouses, she needs to work in the self-employed business (and report self-employment income on her taxes from the business) in order to participate and rollover funds. Please let us know if this is the case so that we can add her to the plan & guide you through the process.
2) Any contributions of non-retirement funds must be justified by self-employment income generated from the business and subject to the contribution limits.
Can I take a short term loan out of my Solo 401K? I want to take 5K out for 1 week and put it back.
While the minimum solo 401k participant loan amount is $1,000, the rules do allow for early payoff of the loan with no pre-payment penalties.
If you’re trying to take a distribution and put it back within 60 days similar to the process with an IRA, the rules are different for a Solo 401(k) plan. For example, when you try to do the same with a solo 401k plan, a 20% federal tax has to be submitted to the Department of the treasury even if you later want to rollover the amount distributed back to the Solo 401(k) plan, and in order to take such distribution, a triggering event has to be satisfied. Please see the following for more on this and give us a call if you have more questions.
I found out about your company doing a google search. I am looking to use my 401k to start a business where I am day trading and investing the money into other business ventures. The stock day trading would only be for myself and I wouldn’t have anyone’s money that I would be managing or trading.
I wanted to give you a little about my background. Right now I am currently receiving long term disability benefits that I had through my previous employer. I have been on disability since 5/16/2017. I have a permanent disability that will not allow me to go back and perform the duties of my previous position. There also haven’t been any other positions that have opened for me to do. After 1 year on disability the company will be terminating my employment officially. Since that is about a month from now I wanted to get information about starting a company where I can day trade and invest in other businesses.
My retirement account is currently made up of part 401k, part Roth, and part pension from the company. Not sure what all I will have access to.
While I certainly appreciate your inquiry, unfortunately you can’t set up and fund a business via our 401k Business Financing plan to day trade or invest in other businesses. I wish you the best of luck.
I have an opportunity to invest in a car wash in CA. I will be partnering with a local, experienced car wash operator who will be responsible for the car wash operations. My role is to provide equity and oversight. My goal is to participate in the revenue upside.
My understanding is that Business Income will be taxable, but the debt-financed income will not be taxable. For the record, a seller financed interest-only loan is being offered.
I want to check with you first make sure that I am headed in the right direction here and this is feasible through my Solo 401k.
1) Please note that if you make an equity investment (via the Solo 401k) in a business that provides goods/services and is taxed as a pass through entity (e.g. S corp, LLC, etc.) the gains that are attributable to that investment will be subject to UBIT. Please see more at the following link:
2) Please note that your investment must be passive (i.e. you can’t be involved in the operations/oversight of the business), your investment be limited to a minority ownership position, the investment must be titled in the name of the Solo 401k, the other owners must be unrelated persons.
Can a 403(b) be transferred to a solo 401k plan?
Yes a 403(b) plan can be transferred to a solo 401k plan.
What is an IRC Sec. 403(b) plan?
Similar to a solo 401k plan, an IRC Sec. 403(b) plan is a retirement plan that allows employees to make employee/salary deferrals. However, unlike 401k plans, 403(b) plans can only be offered by certain tax-exempt organizations, public and tribal government schools, and certain ministers. Lastly, employers do not generally establish a trust to hold the plan assets. Rather, each employee establishes his own annuity contract or custodial account to hold his 403(b) plan assets.