I will turn age 70 1/2 soon and want to know if I have to take my solo 401k required minimum distribution (RDM) from my solo 401k, or I can just take it from my Traditional IRA. Also, I invested all of my solo 401k funds in real estate, so I don’t have any liquid funds to take out the RMD, so hence why I want to know if I can just take the RMD out of my IRA.
The rules for taking required minimum distributions from a solo 401k are almost identical as the IRA RMD rules and that once you (the solo 401k participant) reach age 70 1/2, distributions must commence by April 1 of the following year. Following is more information on the RMD rules.
- The RMD amount applicable to the solo 401k must be withdrawn from the solo 401k plan directly not from your other IRAs. This is where the solo 401k RMD rules are different from the IRA rules. With IRAs, you can take the total RMD from one IRA if you have multiple IRAs. Not so with a solo 401k plan. The solo 401k RMD amount cannot be distributed from an IRA.
- If you don’t have liquid funds in your solo 401k plan to satisfy the RMD, then you can take a partial, ink-kind distribution of an asset (e.g., real estate).
This would mean that, for example, if we are talking about a real estate property held inside a solo 401k plan, part of the property (a percentage and enough to satisfy the RMD amount) would be assigned in your name and you would pay taxes on the value of the partial property assigned to personally to you. In short, instead of receiving cash, you would receive part of the property to satisfy the RMD amount, and this amount would be subject to federal and state taxes.
- The yearly required minimum distribution must be reported to the IRS on Form 1099-R. This reporting is generally provided by the solo 401k provider, and it is covered in their annual fee.
- Please see the following for more information on the RMD rules.
Those that have multiple Roth 401k plans—for example, both a Roth 401k with a former employer and a Roth solo 401k need to understand the rules surrounding the 5 year Roth 401k distribution period.
- Each 401k plan will have its own 5-year holding period.
- The existing holding period can be rolled to a new 401k plan. For example, those that transfer a former employer Roth 401k to a new Roth solo 401k plan can carry over the former employer’s Roth 401k holding period to the new solo 401k plan.
- However, if you do a 60-day rollover from the former employer 401k to the new solo 401k plan, the existing holding period becomes that of the new plan.
Jim is 61 years old and has a Roth 401k with his former employer, The Home Store. After working for The Home Store from 2006 to 2014, Jim can take a qualified distribution from his Roth 401(k) at The Home Store because that Roth 401(k) account has been held for more than 5 years and Jim is over age 59½. Then Jim became self-employed and opened a solo 401k for his self-employed business in 2015 that allows for Roth Solo 401k contributions and started making Roth solo 401k contributions in 2016 . However, Jim cannot take a qualified distribution from his Roth solo 401(k) even though he is over 59½. Reason being, his Roth solo 401(k) account has not been held for 5 years. The time he has accrued in his former employer Roth 401(k) at The Home Store does not affect the time he has in his Roth solo for his self-employed business.
However, there is a way that Jim can take qualified distributions. Jim can process a direct rollover of his former employer Roth 401k with The Home Store to his self-employed Roth solo 401k plan. Therefore, His time in the plan at The Homes Store will also transfer to his self-employed Roth solo 401k. As a result, Jim can take qualified Roth solo 401(k) distributions from his self-employed Roth solo 401k.
I am considering the formation of a LLC that will purchase a self-storage business and small retail strip mall with monthly rental income.
One of the members of the LLC will be the solo 401k trust, and the trust will provide at least 50% of the down payment for the purchase. However there will be a recourse loan from a bank to fund the deal.
I have 2 questions:
First, is there a prohibition against my using my personal credit and guarantee for a bank loan on a commercial property if the funding for that loan comes (at least in part) from my solo 401k? (Is this considered “self-dealing”?)
Second, what are the ramifications of UBIT if solo 401k funding is used to purchase an established positive cash-flowing business (e.g. self-storage facility)? Would this be different if a separate entity (LLC) ran the business, collected the rents, and simply paid.
1. I presume that (i) the only investor in the LLC will be the solo 401k plan, (ii) the solo 401k owned LLC will not have any W-2 employees, but rather will be setup solely to invest passively in real estate, and (iii) the solo 401k owned LLC will obtain a non-recourse loan. With respect to the loan to the solo 401k owned LLC, the loan cannot be secured by you because you are considered a disqualified party. For a full list of disqualified parties, CLICK HERE.
2. Regarding your UBIT question, I presume that the solo 401k owned LLC will be buying/investing in real estate and the real estate will be rented out. When a solo 401k owned LLC invests in rental real estate—whether commercial, residential or storage—it will be deemed a passive investment not subject to UBIT. Also, neither the solo 401k owner nor disqualified parties may do physical work on the properties, but may perform managerial functions (e.g., collect rent checks, look for tenants, hire contractors to do work on the property) provided neither the solo 401k owner nor disqualified parties get compensated for these managerial functions.
Distribution from a Roth solo 401k that are not deemed “Roth solo 401k qualified distributions” will be subject to the pro-rata basis distribution rules. This means the Roth solo 401k distributions will consist partly of the after-tax contributions and partly of the pre-tax earnings in the Roth solo 401(k) account. The taxable portion of the Roth solo 401k distribution will be subject to the mandatory 20% withholding when the distribution is eligible for rollover. However, non-qualified Roth solo 401k distributions can be directly rolled over in their entirety to Roth IRAs or other full-time Roth 401k employer plans.
Jason made his first deferral to his Roth solo 401(k) in 2011. Jason is 53 in 2017 and is considering taking an early retirement. Any distribution Jason takes from his Roth solo 401(k) will not be a qualified distribution, because Jason has not yet reached age 59½. Jason has $80,000 in after-tax deferrals in his Roth solo 401(k) and $40,000 in earnings for a total balance of $120,000 as of December 2017. Jason decides to retire early and will start taking Roth solo 401(k) distribution. In December2017, he takes a distribution of $20,000 from his Roth solo 401k account. His distribution will be 66% tax-free and 34% taxable ($80,000/$120,000 = 66% of the account is after-tax funds). That means that $13,200 of his distribution is income tax free. The remaining $6,800 is taxable, subject to 20% mandatory, federal tax withholding, and also subject to the 10% early distribution penalty unless an exception to the penalty applies. Once Jason reaches age 59½, his distributions will fall under the “qualified Roth solo 401k distribution” rules and can be distributed tax and penalty free.
More Information on Roth Solo 401k Rules
In-Plan Roth Solo 401k Conversion Rules
Roth Solo 401k Contribution Overview
Separate Roth Solo 401k Component/Holding Account
What is a Qualified Roth Solo 401k Distribution
Can I transfer a Roth solo 401k to a Roth IRA?
Reporting Roth Solo 401k Distributions
IRS Finalizes Roth Solo 401k Distributions from Pretax Funds
The Roth component of a solo 401k plan for the self-employed is just that, a component. There is no such thing as a standalone Roth Solo 40l(k). Therefore, when a self-employed individual looks to have a Roth solo 401k, the self-employed business must sponsor a solo 40l(k) plan that offers a Roth component. Not all solo 401(k) providers offer plans that include the Roth solo 401k component.
Because Roth solo 401(k)s have now been around long enough, participants are starting to inquire about taking Roth solo 401k distributions.
Roth Solo 401(k) Qualified Distributions
As with Roth IRA distributions, once a Roth solo 40 l(k) distribution is qualified,” it will come out of the plan tax and penalty free. The rules for qualified solo 401k distributions are almost the same as the rules for qualified Roth IRA distributions.
- The Roth solo 401k(k) must have been established for 5 years, and
- the distribution must be made after attaining age 59½; OR
- The distribution is due to the death of the solo 401k plan participant; OR
- The distribution is due to the disability of the solo 401k plan participant.
Matt made his first deferral to his Roth solo 401(k) in 2011. In 2017, Matt is 61 and he decides to take distributions from his Roth solo 401k component. Matt is able to take a qualified distribution from his Roth solo 401(k) balance since he is over the age of 59½ and established his Roth solo 401k component more than 5 years ago. Any distributions Matt takes from hi Roth solo 401(k) will be income tax and penalty free.
If I pay my daughter to do some work, may I bring her to the solo 401k plan? Thanks,
First, it is important to understand that a solo 401k is for owner-only business.
No, your daughter cannot participate in your solo 401k plan if your self-employed business is a sole proprietor since the sole proprietor is the business sponsoring the solo 401k plan.
However, she can open her own solo 401k plan if she is self-employed (not paid by you). Her sole proprietorship business would sponsor her solo 401k plan.
Also, if your self-employed business is an LLC and you and your daughter are both partners in the LLC structured business, then you could both participate in the same solo 401k plan since the plan would be sponsored by the LLC, and you are both owner-employees of the LLC.
Due to the expansion of my wife’s business, I have a few questions regarding my wife’s Solo 401k
1. She will begin to take other real estate agents as her associates, they are not her employees. She wants to setup a new LLC for this. How will this impact her current solo401k? Does she have to move the existing solo401k under the new LLC?
2. I am also considering leaving my current job to help her expansion, so I will need to setup my own solo401k. In order to maximize the $53,000 contribution for both of us, is it better to have two different business entities, or we can achieve the same 2x$53,000 contribution under the same solo401k plan?
Good question. Provided the the other associates are brought on as contractors instead of W-2 employees ( Compliance note: a solo 401k is only for business owners and their spouses), then the new LLC
can sponsor the existing solo 401k trust. As the solo 401k plan provider
, we would simply update the plan documents to list the new LLC (the new self-employed business)
. We would also add you (the spouse) to the plan if you are are performing self-employment activity under the same LLC
Both of these updates are covered in our annual fee, so please keep us posted.
You will then also be able to contribute to the plan based on net- elf-employment income that you generate as an employee under the LLC, which means that you could also contribute the maximum to the solo 401k plan for this year if you have enough self-employment income. You would also have your own separate holding account (bank or brokerage account) under the solo 401k plan.
While IRS Revenue Ruling 2008-5 December 21, 2007 references IRAs, it is safe to say that this ruling also applies to solo 401k plans as is most often the case. This Revenue Ruling states that the wash sale rules will apply when an individual sells a stock at a loss and buys the same stock in an IRA or Roth IRA within 30 days before or after the sale. The loss on the sale of the stock will be disallowed AND there is no increase in the cost basis of the stock in the IRA or Roth IRA. Since this is a Revenue Ruling as opposed to a Private Letter Ruling, it is authoritative for all taxpayers, so everyone can rely on this ruling as the law.
An individual with 200 shares of stock with a basis of $2,000 sells the shares for $800 resulting in a loss of $1,200. The next day the individual causes the pretax solo 401k or Roth Solo 401k to purchase 200 shares of the same stock. The $1,200 loss on the sale of the stock is disallowed AND the basis in the pretax solo 401k or Roth solo 401k is not increased. The $1,200 loss is never recovered when the stock is sold or when distributions are taken from the solo 401k.
I am about to make an offer on a quad-plex and I need guidance. I have read up on the process for my Solo 401K, but I still have questions and don’t want to make an offer that doesn’t comply in terms of entities.
- I have also formed a LLC under which I intend to purchase an investment property.
- I want to leverage my Solo401K with a non-recourse loan. I understand that the Solo401K therefore “owns” the asset and all transactions and repairs flow in/out of it.
- Question: how can my Solo 401K invest in this LLC vs being the sole owner of the entire asset? I ask because under the LLC I can borrow hard money with less down and more options for repairs, payoff, etc?
- Ex: if the new LLC was going to buy an apartment building and I wanted to invest $50K of my Solo401K in that deal, alongside other investors, how does that work?
- Alternatively, I have to invest post-tax cash in a more conventional deal, which I don’t want to do.
Option 1 is for the solo 401k to be the sole member of the LLC and the LLC gets the non-recourse loan. It would still need to be a non-recourse loan because the solo 401k is the member of the LLC.
To fund the LLC, the funds will flow from the solo 401k bank account directly to the LLC bank account. Since the solo 401k would be the only member of the LLC, the LLC will not need to file a federal tax return on an annual basis.
Title to the investment is taken in the name of the LLC
Option 2 the solo 401k invests in an LLC with other investors (pooled LLC). For the initial funding of the LLC, funds would flow to the LLC from the solo 401k. The LLC will need to file a federal tax return and issue a K1 to the solo 401k.
Title to the investment is taken in the name of the LLC
Option 3 entails the single member LLLC–that is, the LLC where the only member is the solo 401k (option 1 above) and it invests along side other investors. This is essentially a tenants-in-common transaction.
All investors ownership percentages would be listed on the recorded deed.
Individual 401k/Solo 401k Contribution Questions
Happy Spring! We have been very excited about our Solo 401K you set up for us almost a year ago. A couple of our friends also set up their Solo 401K with your help at our recommendation.
We set up our Solo 401K for our consulting business/partnership. (On Form 1065 Schedule K-1). In addition to this business, each of us receives w-2 and/or 1099s from other sources. Can this income be counted as self-employment earnings for purposes of making Profit Sharing and Salary Deferral Contribution to our Solo 401K?
Sorry to bother you with this question. You are the most knowledgeable Solo 401K expert we know.
Andy & Andrea, Charlotte, North Carolina
Individual 401k/Solo 401k Contribution Answers
Thanks so much for your business, Andy & Andrea! We certainly appreciate your positive feedback and are happy to answer your questions as we are always here to help!
- You are correct that the starting point for making 401k contributions is self-employment income.
- For example, for a self-employed business such as your’s that is taxed as a partnership, the starting figure for calculating the annual solo 401k contribution is K-1 (Form 1065) line 14 (after deducting one-half of self-employment tax).
- You mention that you receive w-2 and/or 1099s. While income from your w-2 employer is not self-employment income that would form a basis to make contributions to your Solo 401k, if your 1099R income is for self-employment activity and is reported on Scheduled C on your taxes, this could be a basis to make Solo 401k contributions as (1) the starting figure for calculating the annual solo 401k contribution is line 31 of Schedule C (after deducting one-half of self-employment tax); and (2) you can aggregate from all sources of self-employment income (see e.g. Ernst & Young Tax Guide 2017).
- If you are participating in your w-2 employer-sponsored plan, please note that any employee contributions made by to such plan will be aggregated with any employee contributions made to the Solo 401k plan in determining whether the limit has been met.