Boyfriend | Brother |Loan | Real Estate |Business

A brief background on my situation:  My brother and I together purchased my primary home back in 2013. I am 2/3 owner and he is a 1/3 owner. His 1/3 ownership includes a backyard cottage with rentable income. My plan is to buy him out and thus acquire the cottage and rental income with it. My plan is to use my solo 401K for this purpose. We have a purchase agreement for this transaction.

Questions:

1) If I take out a loan from my Solo 401K (Plan on taking 50,000 as I would roll over 112,000 K) to purchase 1/3 of the property, would this loan qualify as a loan for my primary residence and thus qualify for the 15-30 year loan repayment time? No because you already own part of that property.

 

2) After taking a loan of 50,000 (the max allowed), am I able to take a withdrawl from my solo 401K? Is there a limit in how much I can take and how soon after the loan can I take it?

ANSWER:

No a limit does not generally apply and you can generally distribute any funds that you transfer to the solo 401k from  former employer 401k plans or IRAs.  See the following links for important information on making solo 401k distributions as specific rules and reporting applies.

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

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

 

Question:

3) Another scenario if I don’t do the transaction above is to invest in a business that is co-owned by my boyfriend (he is 50% owner).  If in the future we were to marry would this investment fall out of compliance with the 401K regarding arms length transactions?

ANSWER:

Yes as onCe you marry he will be deemed a disqualified party.

Question:

How so and what would happen in that case?

ANSWER:

You would need to terminate the transaction before your marriage to him; otherwise, your entire account will be subject to taxes and penalties effective in the year of marriage.  On another note, when a solo 401k plan becomes an equity investor in a busieness that provides goods or services, unrelated business income tax applies which averages about 38% on investment gains above $1,000. See the following.

https://www.irs.gov/charities-non-profits/unrelated-business-income-tax

Good 60-Day Rollover from a Solo 401k Plan Questions

QUESTION:

Can I withdraw funds from my solo 401k and then put them back within 60 days without being hit by the IRS with taxes and penalties?

ANSWER:

Good question and the answer is no because 20% of federal taxes has to be withheld even if rolled over within 60 days.

QUESTION:

I have a lot of questions on this front.

I guess the rules are different for a 401k than an IRA in that respect? Fidelity wrote me a check for the entire amount of my rollover IRA and did not withhold any taxes. They just asked me to affirm some statement that relieved them of that responsibility. I think.

ANSWER:

Correct that the 20% mandatory federal tax does not apply to IRAs but it does to 401k plans.

See following link regarding this rule:

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

QUESTION:

I assume I would get that withholding back when I file my tax return. Would the withholding amount be treated like any other estimated tax payment at that time? I would be allowed to go ahead and make up for the withholding from other funds when I deposit back into an IRA or a qualified plan, right?

ANSWER:

You  will get back some of the withholding if you don’t owe any other income tax as the 20% is treated as tax on earned income. Therefore, yes the 20% can be viewed as an estimated tax payment. Yes you can make up the 20% from your personal funds if timely rolled over within 60 days.

QUESTION:

Under what conditions is the 20% withholding required? Is it only for in-service withdrawals? Or are all distributions from 401k plans required to withhold 20%? Is the age of the account holder relevant?

ANSWER:

Generally only death and required minimum distributions (RMDs) are not subject to the mandatory 20% federal tax withholding. See the following link: http://www.mysolo401k.net/does-the-20-federal-tax-withholding-apply-to-all-401k-distributions/

QUESTION:

How about this strategy for fun? A direct rollover from 401k into IRA, then a distribution of the IRA with no withholding, then 60-days later a deposit back into the 401k?

ANSWER:

Yes that would be allowed and the 20% withholding would not apply.

RESOURCES

Solo 401k Distributions

Solo 401k Death Distributions

Solo 401k Required Minimum Distributions

Solo 401k Deadlines

Solo 401k from My Solo 401k Financial

A solo 401k from My Solo 401k financial allows for:

  • Alternative Investments such as real estate, notes, tax liens, metals and private equity
  • 401k Participant Loan
  • Roth, pretax and after tax 401k contributions
  • Checkbook control
  • Brokerage and bank accounts

 

 INFORMATION:

Pricing:  https://www.mysolo401k.net/solo-401k/solo-401k-pricing/

Real Estate:

https://www.mysolo401k.net/solo-401k-real-estate-investment-procedure/

https://www.mysolo401k.net/purchasing-real-estate-solo-401k/

Video Webinar: Solo 401k Basics & Top 3 Reasons to Open a Solo 401k 

IRS-approved plan:  https://www.mysolo401k.net/solo-401k-provider/

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SIGN UP:

Sign-up: https://www.mysolo401k.net/solo-401k/open-a-solo-401k-account/

Alternatively, please call and we can walk you through the sign up process.

Why our customers choose us? https://www.mysolo401k.net/why-us/

Testimonials: https://www.mysolo401k.net/testimonials/

ADDITIONAL INFORMATION:

Am I self-employed?:

https://www.mysolo401k.net/am-i-self-employed/

 

Solo 401k Loan:

http://www.mysolo401k.net/solo-401k-participant-loan-facts-borrowing-solo-401k-2

http://www.mysolo401k.net/solo-401k/solo-401k-loan/
Real Estate Purchase Methods:

http://www.mysolo401k.net/reale-state-401k-purchase-methods/

Promissory Notes Investment: http://www.mysolo401k.net/secured-notes/

Private Company Investment: http://www.mysolo401k.net/private-company-investment/

Real Estate Purchase Methods: http://www.mysolo401k.net/reale-state-401k-purchase-methods/

Prohibited Transactions: http://www.mysolo401k.net/prohibited-transactions-solo-401k/

Solo 401k Dos and Don’ts: http://www.mysolo401k.net/self-directed-401k-checkbook-control-dos-donts/

Solo 401k Deadlines: http://www.mysolo401k.net/solo-401k-deadlines/

Brokerage vs. Bank Account: http://www.mysolo401k.net/setting-solo-401k-brokerage-account-vs-solo-401k-bank-account/
Solo 401k Annual Contributions:
http://www.mysolo401k.net/solo-401k-contribution-limits-and-types/

 

Solo 401k Funding Methods: http://www.mysolo401k.net/funding-methods-solo-401k-self-directed-401k-individual-401k-solo-k/


IRS Solo 401k: http://www.mysolo401k.net/reason-solo-401k-individual-401k-sometimes-called-irs-solo-401k/

Prohibited Transactions: http://www.mysolo401k.net/prohibited-transactions-solo-401k/

Self-Employment Income: http://www.mysolo401k.net/self-directed-401k-self-employment-income/

IRS Publication 560 (the publication that discuss 401k pans for the self-employed: http://www.irs.gov/publications/p560/ch02.html

2016 Scholarship Winner Announced

My Solo 401k Financial is thrilled to announce Hayley McKinney (pictured) as the recipient of its 2016 college scholarship award.  Haley’s essay on “What are the benefits of using funds in your 401k, IRA or other retirementMy Solo 401k Financial Scholarship 2016 Winner account to finance your business or franchise?” was chosen from nearly 100 applicants.   Hayley is a junior in college at Dalton State pursuing a B.S. in Biology with a minor in Chemistry. After graduation, Hayley intends to enroll in a Physician Assistant program. Hayley is the secretary of the Beta Xi biological honor society. She plays golf and enjoys hiking. My Solo 401k Financial is proud to support Hayley in her educational endeavors and wishes her great success in all of her academic and professional pursuits

Tenancy in Common (TIC) vs LLC Real Estate Purchase Using Solo 401k Funds

There are a couple of ways to invest both your personal and solo 401(k) funds in real estate. Both of these options are discussed here.

Invest in Real Estate Under a Tenancy in Common (TIC)

Under this method, title is taken in both the solo 401k owner’s name and in the name of his or her solo 401k . Following is an example on  how title to the property is taken assuming the name of the solo 401k is Chargers Solo 401k Trust and the solo 401k owner’s name is Matthew Brown.

Example: 30/70 split between Matthew Brown and his solo 401k plan (Chargers Solo 401k Trust)
How the property purchase is recorded: Matthew Brown, an undivided 30% interest and Chargers Solo 401k Trust , an undivided 70% interest.
Compliance Notes
  • The percentage of ownership is determined by how much funds each party invests at time of real estate purchase.
  • All expenses and income are shared based on the ownership percentages.
  • No debt financing can be incorporate under a tenancy in common (TIC) transaction; otherwise, the transaction will be deemed a prohibited transaction.
  • The property may not be purchased from or sold to a disqualified party (e.g., the solo 401k owner, his or her parents, children, to name few).
  • The solo 401k owner is not allowed to use the property for personal use.
Invest in Real Estate Using a LLC
  • When both the solo 401k owner (in this example Matthew Brown) and his solo 401k (Chargers Solo 401k Trust) pool their funds and invest in an LLC for the purpose of investing in real estate, title to the property is taken in the name of LLC.
  • For example, if the name of the LLC is San Diego Charges LLC, title on the deed would read San Diego Chargers LLC.
  • Just like above, the LLC cannot obtain a loan and the solo 401k owner and other disqualified individuals are prohibited from using the LLC owned property for personal use.

 

A Self-Directed Solo 401k is Revocable

QUESTION:

Could you please confirm that the Solo 401K is a “living, revocable trust”?

ANSWER:

A Solo 401k is a revocable trust, meaning it can be updated and often is for changes in the law (e.g., contribution limits, who can participate, distribution rules, types of contributions, allowed investments, etc.). It is not a “living” trust. Further, self-directed solo 401k trusts are not registered with the state and are considered retirement trusts under the internal revenue code.

Lending Opportunity while having outstanding solo 401k Loan

QUESTION:

I would like to use the money that I have in my Solo 401K to lend to a real estate investor short term (up to one year) for his rehab. Currently, there is about 70K in my account, but there is existing solo 401k loan that I should be paying off completely in January. Is the solo 401k loan affecting how I can use the money in the Solo 401k account?

ANSWER:

1. No outstanding solo 401(k) participant loans do not affect how the owner invests the rest of her solo 401k funds. In other words, the solo 401k owner is not required to keep funds in reserve because she has an outstanding solo 401k Loan. Therefore, the remaining solo 401k funds can be invested in investments such as promissory notes, real estate, and tax liens, to name a few.

Solo 401k Set up / Adoption Deadline is December 31

For those who are self-employed (i.e., own their own business with no, full-time, W-2 employees), an important deadline is approaching (19 days from today to be exact) that will afford the self-employed business owner(s) the opportunity to save thousands of dollars in taxable income for tax year 2015.   If you are self-employed and open a solo 401k plan by December 31, 2015, you will be able to wait until next year (2016) to contribute $53,000 plus an additional $6,000 if you turn 50 in 2015 or are already over age 50.  Yes you read this correctly. Specifically, you just need to sign the solo 401k adoption documents to be able to wait until your business tax return due date plus timely filed extensions to make both the profit sharing and employee contributions for tax year 2015.

A solo 401k is not subject to Department of Labor rules because a solo 401k is for owner-only businesses with no common-law employees. As a result the contribution deadlines are more favorable for a solo 401k. For example, as long as the solo 401k is set up/adopted by December 31, both the salary deferral and employer contributions can be made up until the due date of the self-employed business tax return plus any timely filed extensions. See the following chart found on page 3 of IRS Publication 560- Retirement Plans for Small Businesses.

When looking at the chart, look at the row labeled “Defined Contribution Plan” as a solo 401k plan falls under this umbrella.

Type of Plan Last Date for Contribution Maximum Contribution When To Set Up Plan
Qualified Plan: Defined Contribution Plan Elective deferral: Due date of employer’s return (including extensions)Employer contribution: Money Purchase or Profit­Sharing: Due date of employer’s return (including extensions). Employee contribution: Elective deferral up to $18,000, $24,000 if age 50 or over.Employer contribution: Profit­Sharing:: Smaller of $53,000 or 100% of participant’s compensation. By end of the tax year.
Qualified Plan: Defined Benefit Plan Contributions generally must be paid in quarterly installments, due 15 days after the end of each quarter. See Minimum Funding Requirement in chapter 4. Amount needed to provide an annual benefit no larger than the smaller of $210,000 or 100% of the participant’s average compensation for his or her highest 3 consecutive calendar years. By end of the tax year.

Can I loan my Solo 401k funds to my spouse’s business?

QUESTION:

My wife recently started a business (she formed an LLC if that matters) but she wasn’t approved for the business loan she applied for. Are there any tax/legal ramifications for me providing her company with a business loan from my solo 401k?

ANSWER:

That would be a solo 401k prohibited transaction because it is your wife’s business. However, you can take a solo 401(k) participant loan up to the statutory limit which is 50% of your solo 401k balance not to exceed 50,000, and you can use the loan proceeds however you wish including investing them in her business. The reason the 401k loan is allowed is because when you borrow from your own 401(k) plan the funds are no longer consider 401(k) funds.

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