Number of 401(k) Millionaires Up End of 2018

According to a Fidelity Investments analysis of over 30 million retirement accounts, the number of 401k millionaires increased by 34% to $133,000 since the end of 2018. The number of IRA millionaires also increased from 138,800 to 168,100 in the 4th quarter of 2018.

Following are some other key items from the quarterly analysis:

Balances Up: The average 401k balance rose to $103,700 in first quarter of 2019, a 9% jump from 4th quarter 2018.

Record Employee Contributions: Average contribution increased in the first quarter of 2019 by 15% to $2,370 from the prior year.

Record Employer Contributions: The average 401k employer contribution reached $1,780 in first quarter — a record high and a 6% increase from a year earlier.

10-Year Anniversary of the 2008 Financial Crisis

The Fidelity Investments report also compared the same accounts of 1.64 million individuals who continued to have accounts after the 2008 financial crisis an reported the following:

GroupAverage 401(k) Balance – Q1 2009Average 401(k) Balance – Q1 2019Cumulative Percentage Change
Overall      $52,600  $297,700   466%
Millennials        $7,000  $129,800 1,762%
Gen X     $37,000  $268,900    626%
Baby Boomers     $76,000  $357,200    367%

Closing Comments

My solo 401k Financial was founded in 2009 and services over 8,000 accounts. A quick glance at our book of business also paints a similar picture to the Fidelity report analysis. For example, we have seen a large increase year over year in the number of solo 401k clients who have used our Form 5500-EZ filing services which applies once the total fair market value of the solo 401k plan exceeds $250,000. Many of our solo 401k clients have also steadily raised their annual contribution amounts each year.

Bill Reintroduced by Senators to Create Federal Retirement Commission

It has been 4o years when Jimmy Carter was president since a federal commission has conducted a survey as extensive as the one (Federal Retirement Commission Act) reintroduced on May 14, 2019 by Sens. Todd Young (R-IN) and Cory Booker (D-NJ). The commission would be made up of the Secretaries of Treasury, Labor and Commerce, two presidential appointees, six U.S. Senate appointees and six U.S. House of Representatives appointees.

These members of the commission would perform a review of the following:

  • private benefit programs in the U.S., with a focus on moving from DB to DC models (the solo 401k plan falls under the DC model);
  • private retirement coverage, individual and household accounts balances, investment trends, costs and net returns, and retention and distribution during retirement;
  • societal trends – including wage and economic growth, small business challenges, gig economy and health care costs – that could lead future generations to be less financially secure in retirement; and
  • other countries’ retirement programs.

The commission would then review private retirement benefit programs and then submit a report to Congress to recommend on how to improve private retirement security.

Partial In-Plan Roth Solo 401k Conversion of Real Estate Held in Pretax Solo 401k Account

If you solo 401k plan allows for Roth solo 401k designated account funds, physical real estate held in the pretax solo 401k holding account can be fully or partially converted in-kind to the Roth solo 401k designated holding account.
In this blog post we will discuss the logistics and rules for processing partial in-plan conversions from the pretax solo 401k to the Roth solo 401k for those looking to spread the tax hit since Roth solo 401k conversions are taxed at earned income tax rates.

The general steps involved in the partial, in-kind, in-plan conversion  of real estate held in the pretax solo 401k to the Roth solo 401k:

1. The property (real estate) will need to be appraised (third party appraisal) each time to determine the total value of the property.
2. The  percentage of the real property converted will need to be granted from the pretax solo 401k holding account to the Roth solo 401k designated account.
For Example:The third-party appraisal confirms the total value of the real estate property at $500,000. You elect (you fill out and sign the in-plan Roth solo 401k conversion form-provided by the solo 401k plan provider) to process a partial in-plan conversion of 20% ($100,000 value) of the property held in the pretax solo 401k to the Roth solo 401k designed account. As the trustee of the solo 401k plan, you have the property recorded as follows with the county recorder. 

How the Property Deed is Recorded:

Jane Do, Trustee of ABC Trust (PRETAX Designated Account), an undivided 80% and Jane Do, Trustee of ABC Trust (ROTH Designated Account) and undivided 20%

Going Forward:

  • All expenses are divided 80/20 between the PRETAX solo 401k and ROTH solo 401k.
  • All income is shared 80/20  between the PRETAX solo 401k and ROTH solo 401k.

Future In-Plan Conversions

Until the property has been fully converted in-kind from the pretax solo 401k to the Roth solo 401k, you would repeat the same steps above for future in-plan conversions including having the property value by a third-party appraiser, filling out the in-plan conversion form and updating the property deed with the county recorder to list the new ownership percentages by both the pretax solo 401k and the Roth solo 401k.

Second Solo 401k Bank Account

Once the in-kind conversion has been processed,  a second bank account will need be opened in the name of the solo 401k to hold the rental income generated from the Roth solo 401k owned property as well as to pay for the applicable ongoing property expenses (e.g, property insurance and repairs).
While the existing EIN for the solo 401k is also used when opening the second bank account to hold the Roth solo 401k funds, the new bank account is generally titled as follows to easily distinguish between both solo 401k bank accounts (the pretax and the Roth): ABC Trust (Roth Designated Account) F.B.O. Jane Do.

Tastyworks Solo 401k Trust

With a self-directed solo 4o1k from My Solo 401k Financial,  Tastyworks can open a holding account.
When you get started with Tastyworks online application, make sure you select Trust and Cash account.
  • When prompted for Grantor information, please enter your personal information since you are the participant and trustee of the solo 401k plan.
Our records show that in addition to the solo 401k establishment documents,  Tastyworks may request a Certification of Trust. If they do, we will also provide it and it will need to be notarized.

Considerations when investing options subject to margin “naked options” “non-defined risk options”:

1. The ability to invest in options generally is already addressed in Section 3.01 of the Trust Agreement for the solo 401k plan.
2. Another factor to consider with respect to “naked margins” specifically is that the account has the potential to go negative.  In that case, you may have no ability to deposit additional funds into the Solo 401k – for example, if you have already maxed out your contributions & don’t have any funds in other retirement accounts to roll over to the Solo 401k.
3. Another factor to consider is whether investing in margin will subject your investment to Unrelated Business Income Tax: https://www.mysolo401k.net/yes-ubit-applies-to-margin-trading-court-case/

Foreign Person Tax Rules Apply to Solo 401k Distributions

After meeting certain distribution triggering events(e.g., age 59 1/2, no longer being self-employed), U.S. income taxes still apply if you live abroad and take solo 401k distributions.  The required mandatory federal tax withholding jumps from 20% to 30% . You may get some of the withholding back if a more favorable tax rate applies according to the tax treaty between the U.S. and the foreigner’s home country. You can view the tax treaty rates HERE.

To qualify for a treaty rate, the individual must provide the payor a completed Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting.

Visit HERE to view Publication 515 Withholding of Tax on Nonresident Aliens and Foreign Entities.

DOL Opinion Letter Helps Determine if Independent Contractor Status of Virtual Marketplace Workers Can Open a Solo 401k Plan

Solo 401k plans are for the self-employed including independent contractors. The Department of Labor (DOL) recently released opinion letter (FSLA2019-6) that sheds light on who is considered an independent contractor (e.g., drivers for Uber and Lyft transportation services) in the  “virtual marketplace” economy. The DOL letter specifically answers  whether service providers working for a virtual marketplace company (VMC) are employees or independent contractors under the Fair Labor Standards Act (FLSA).

The DOL opinion letter essentially confirms that virtual marketplace personal are independent contractors.

Generally, a VMC is an online and/or smartphone-based referral service that connects service providers to end-market consumers to provide a wide  variety of services, such as transportation, delivery, shopping, moving, cleaning, plumbing, painting, and household services. VMCs help consumers to obtain these services with greater  efficiency—days, weeks, or months faster than they would outside the virtual marketplace. VMCs accomplish this through a software platform called an analytic hierarchy process—a technological structure for organizing data that uses objective criteria to match consumers to service providers.

The DOL Wage & Hour Division (WHD)  reviewed the following items to make it’s opinion:

  • The nature and degree of the potential employer’s control
  • The permanency of the worker’s relationship with the potential employer
  • The amount of the worker’s investment in facilities, equipment, or helpers
  • The amount of skill, initiative, judgment or foresight required for the worker’s services
  • The worker’s opportunities for profit or loss
  • The extent of integration of the worker’s services into the potential employer’s business

To search other DOL opinion letters, Visit here.

 

GOA Issues Report on Qualified Plan,Which Includes Solo 401k, Early Distributions and Participant Loans

On Mach 9, 2019 The United States Government Accountability Office (GAO) released a report titled Retirement Savings: Additional Data and Analysis Could Provide Insight into Early Withdrawals. The purpose of the report is to bring to the forefront events that cause qualified plan including solo 401k participants to make early distributions from their retirement plans.  An early distribution from a qualified plan is a distribution taken before the plan participant reaches age 59 1/2 which results in having to pay a 10% early distribution penalty.

The findings by the GAO were drawn from data provided by the IRS, U.S. Census Bureau, and Department of Labor in addition to discussions held with qualified plan providers and tax payers.

The GOA discovered the following reasons for early withdrawals:

  • Flexibilities in plan rules.
  • Individuals   ’pressing financial needs,” such as out-of-pocket medical costs.
  • Certain  plan rules, such as setting high minimum loan thresholds, may cause individuals to take out more of their savings than they need.
  • Several elements of the job separation process affecting early withdrawals, such as difficulties transferring account balances to a new plan and plans requiring the immediate repayment of outstanding loans, as relevant factors.

Feedback Provided to Reduce Early Distributions

  • Allow continued repayment of outstanding plan loans after separation from employment (beyond the extended time period created by the Tax Cuts and Jobs Act of 2017, which lengthened the eligible rollover period to an individual’s tax return due date for the year of loan offset, including tax filing extensions).
  • Restricting participant access to plan sponsor contributions.
  • Allowing partial distributions at job separation.
  •  Building emergency savings features into plan designs, could help preserve retirement savings.

However, they noted, each strategy involves trade offs, and the strategies’ broader implications require further study.

GAO Recommendation Regarding  401k Plan Participant Loans Including Solo 401k Participant Loans

Lastly, GAO recommends that, as part of revising the Form 5500, DOL and IRS require plan sponsors to report the incidence and amount of all 401(k) plan loans that are not repaid. DOL and IRS neither agreed nor disagreed with our recommendation.

Turn 457b Into Solo 401k with Checkbook Control for Real Estate

QUESTIONS:

Good morning.
I am inquiring into the feasibility of rolling over my Deferred Compensation plan from a former employer into a self directed Solo 401K.  I plan to invest the funds into real estate, specifically flipping and buy/hold.
I am interested to know if this is feasible, and if so what are the tax implications?  Finally, I would like to know what your pricing is and if I would have checkbook control with your program.
Thank you in advance for your time and attention.  I look forward to your response.
Sincerely,
Allen

ANSWER:

An IRC Sec. 457 plan is a deferred compensation plan. A 457 plan is for employees of local governmental entities, hospitals, school districts, and certain other tax-exempt organizations.
 
Therefore, if the 457 plan you are referring to is a 457(b) governmental plan, this type of plan can be transferred to a self-directed solo 401k. See: https://www.irs.gov/retirement-plans/comparison-of-tax-exempt-457b-plans-and-governmental-457b-plans
 
Yes the solo 401k plan that we offer allows for checkbook control which means you can place the alternative investments such as real estate and promissory notes, for example, by writing a check or by wire.  
 
With our solo 401(k) plan, we will handle getting it set up with an account at the bank and/or brokerage of your choice where you will have checkbook control.

Our customers have their solo 401(k) accounts at hundreds of different banks, credit unions, etc. as well as brokerage firms such as Fidelity and Schwab just to name a couple.

If you want a brokerage account, we will prepare all the forms that the brokerage firm needs to open a free account (i.e. there are no account opening or maintenance fees and the brokerage firm only charges trading and wire transfer fees) and many firms (including Fidelity and Schwab) offer a free checkbook feature.

If you want a bank account, we will prepare a packet (including banking guide, certificate of trust, EIN letter, etc.) that you can use to open an account at the bank of your choice. We will also be available to speak with your banker if he or she has any questions.

Flipping Real Estate Inside a Solo 401k Plan: Flipping homes is generally considered a trade or business activity.  When a tax-exempt entity (e.g., Solo 401k or IRA LLC) engages in a trade or business on a regular or repeated basis, the income generated may be subject to Unrelated Business Income Tax (UBIT).   While the industry consensus is that 1-2 flips per year would not expose the income to UBIT, a higher volume of such activities increases that risk.
Solo 401k Eligibility Requirements: In a nutshell you need to be performing at minimum part-time self-employment activity in order to open and continue with the Solo 401(k) plan, and it has to be active income versus passive investment income. One way to distinguish passive income versus active income is that active income is subject to Social Security taxes were as passive income is not because it’s considered capital gains income. Visit Here to learn more about the solo 401k eligibility requirements.

Information Regarding Investing a Solo 401k Plan in Real Estate: You can use debt in conjunction with your solo 401(k) funds to purchase real estate provided that the debt is non-recourse financing. For more information please see the following link:

  • Nonrecourse financing: Find lenders that specialize in nonrecourse loans to solo 401k plans: CLICK HERE
  • Real Estate Investment Procedure: Click Here
  • Real Estate FAQs: Click Here
  • Invest in Real Estate: Click Here
  • Full Setup Assistance:  As part of our services, we would guide you through the process to set up an account for your Solo 401k.  You can have a bank or brokerage account for your solo 401(k), or even both (and we would help you set up the accounts as part of our services).  For example, if you wish to have an account at a brokerage like Fidelity or Schwab, we would prepare all of the paperwork that Fidelity or Schwab needs to set up a free account for the Solo 401k (i.e. no set up or maintenance fees) that comes with a free checkbook and through which you can invest in traditional investments (e.g., stocks, mutual funds, bonds, etc.) as well as alternative investments such as real estate, promissory notes, etc. since they are allowed under our IRS-approved plan documents. Please see more at the following links:
  • Our Fair Fee Structure: Our Solo 401k fee structure is 100% flatOur initial fee is $550which covers everything to establish the plan (for both of you), including account set up, transfer of existing retirement funds as well as the first 12 months of ongoing compliance support.  Starting 12 months later, we charge a flat annual fee of $125.  Please see more the following link:
  • Guide for Choosing a Solo 401k Provider: Click Here to view our guide for choosing a solo 401k provider.
  • Solo 401k Compliance & Audit Guarantee: It is important to work with a solo 401k provider that will stand behind their solo 401k plan and service. Click Hereto view our solo 401k audit guarantee.

Investing Solo 401k Plan in Fundrise (1099-DIV, UBIT)

QUESTION:

I have initiated investing in Fundrise eREIT.  I received this message below.

 

Before I approve investment please confirm that this is an acceptable investment for my Solo 401K.  It is my understanding, that I as the trustee would keep the tax document records, and will not have to report any special forms to the IRS since my total 401k account balance is below $250,000.  Thank you.

ANSWER:

1.       This confirms that is acceptable for your solo 401(k) funds to be invested in investments offered by Fundrise.

2.       Please note that the communication below confirms that a 1099-DIV or K-1 will be issued.  For this reason, it will be important to confirm that the account is set up under the employer identification number (EIN) for the solo 401(k) – since this tax reporting will be with respect to this employer identification number and the employer identification number was specifically obtained for a 401(k) (which means that the IRS knows that the income is flowing to a tax-deferred entity).

3.       Please note that the communication below indicates that “eFunds” investments may be subject to unrelated business income tax (UBIT).  If you will invest in such investments, it will be prudent to discuss this with your tax advisor as your tax advisor will need to file the applicable tax returns (e.g., Form 990-T) in the event that your investment is subject to unrelated business income tax.

Solo 401k Provider for RIAs

QUESTION:

We are a wealth planning firm in Houston and in researching after-tax solo 401k plans we ran across your website. Schwab, Fidelity, TD etc. plan docs don’t allow for after-tax contributions to solo 401k plans. Do you all ever collaborate with RIAs?  Can you all handle the plan doc and administration while the account sits at a custodian like Schwab etc.?  Many thanks in advance!

ANSWER:

In short, we can easily do what you want to do.

We certainly work with advisors and the accounts can be at any of the firms that you mention.

We will take care of not only being the solo 401k plan provider who offers a solo 401k plan that can hold voluntary after-tax contributions but also roth and pretax solo 401k contributions. We also handle the reporting for the in-plan conversion or direct rollover to the Roth IRA.

Following is a list of the ongoing solo 401k compliance support that we provide.

  • Year 2020 Required IRS Plan Update.
  • Responding to IRS Compliance Checks-the IRS routinely reviews solo 401(k) plans for compliance with reporting and the solo 401(k) plan rules.
  • Consulting regarding investment rules (e.g., investing in real estate, precious metals, private companies, tax liens, promissory notes, etc.)
  • IRS Form 5500-EZ preparation  When your account balance reaches $250,000. Note: It is  the responsibility of the client to let us know once the account reaches $250K so that we can assist with this tax filing because we don’t have access to your funds.
  • For all annual distributions, preparation of Form 1099-RNote: It is the responsibility of the client to let us know when they process distributions so that we can assist with this tax filing because we don’t have access to your funds.  
  • 1099-R reporting for In-Plan Conversions to Roth Solo 401k and Conversion of after-tax funds to Roth IRA. Note: It is the responsibility of the client to let us know when they process conversions so that we can assist with this tax filing because we don’t have access to your funds.
  • QDRO review and distribution reporting processing
  • Annual Compliance Support
  • Assignment of Personal Solo 401k Expert for all future questions and communications.
  • Full customer service support including on Saturday
  • Maintaining qualified plan documents
  • Amendments as required to keep up with tax law changes
  • Assistance in setting-up checking account for your Solo 401k
  • Assistance in transferring IRAs or other 401ks into your new solo 401k
  • Computation of plan contribution amounts
  • preparation of plan tax forms
  • interpretation of plan provisions
  • 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.
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