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.

Business Financing 401k Flow for Subsequent Stock Investment in the C-Corporation

QUESTIONS:

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?

ANSWERS:

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).

403b can I use it to fund my business?

403b QUESTION:

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.

403b ANSWER:

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/ 

Can Unemployed Spouse Transfer Funds to a Solo 401k Plan?

QUESTIONS:

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?

ANSWERS:

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.

Short Term Loan |60-Day Distribution | 20% Federal Tax

QUESTION:

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.

ANSWER:

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.

https://www.mysolo401k.net/does-the-20-federal-tax-withholding-apply-to-all-401k-distributions/

 

https://www.mysolo401k.net/good-60-day-rollover-from-a-solo-401k-plan-questions/

https://www.mysolo401k.net/making-solo-401k-distributions/

 

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