How to make Solo 401k contributions by the extended tax return deadline

Per IRS Pub. 560, the deadline to make both employee and employer contributions is your business tax return deadline including any timely filed extension:

SEP IRA Workaround:
Make 2019 Contributions with no Solo 401k plan

  • Do you want to make Solo 401k contributions for 2019 but you missed the Solo 401k Deadline by failing to establish the plan by December 31, 2019?
  • If you filed a timely extension for your 1040 (by filing Form 4868), you can still make employer contributions to a SEP IRA.
    • 2019 Employer contribution limit is 25% of your self-employment compensation not to exceed $56,000
    • The deadline is October 15, 2020 if you filed a timely extension
    • Work with your tax advisor to report (e.g. on your 1040)
  • Future Years: For 2020 and going forward the Solo 401k deadline is aligned with the SEP IRA deadline (per the SECURE Act)

Restate Solo 401k plan to make
Roth & Mega Backdoor Roth Contributions

  • Restate Solo 401k plan established before 12/31/2019 to a plan that allows you to make Roth and Voluntary After-Tax Contributions
  • If you filed a timely extension, you can make Roth and/or Voluntary After-Tax Contributions on or before your 2019 extended business tax return deadline
    • Consider the contribution limits
    • Open new sub-accounts for Roth and Voluntary After-tax contributions
    • Convert/Rollover the funds after the deadline

Practical Tips – Making Contributions by the Extended Tax Return Deadline

  • Don’t wait until the last minute
    • Processing times increase during tax filing seasons
  • Open separate sub-accounts as needed
    • Name and EIN of the Solo 401k
    • Spouses or partners
    • Pre-Tax, Roth and Voluntary After-tax funds
  • Check payable to the solo 401k
    • Write “Annual Contribution” on the memo section of the check. 
    • Post-marked by the applicable deadline date
    • If electronic, confirm that institution providing the account will accept electronic transfer from an account with a different name

How to Invest Self-Directed IRA LLC in Cryptocurrency (Bitcoin)

What is Cryptocurrency?

Per IRS Revenue Ruling 2019-24:

  • Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value. 
  • Cryptocurrency is a type of virtual currency that uses cryptography to secure transactions that are digitally recorded on a distributed ledger, such as a blockchain. 
  • Most popular cryptocurrencies: Bitcoin, Ethereum, and Litecoin

IRS View on Taxation of
 Cryptocurrency

  • The IRS has issued guidance that cryptocurrency will be treated as property for federal tax purposes (see e.g. IRS Notice 2014-21).
  • Outside of a retirement account: the income or gains from the sale of cryptocurrency will be subject to capital gains tax rates (short-term or long-term as applicable).
  • Inside a retirement account: the gains/income derived from a cryptocurrency investment are tax-deferred (or potentially tax-free in the case of a IRA LLC account).
    • Possible exception: If you invest your IRA LLC funds in mining cryptocurrency, the income generated may be subject to unrelated business income tax (UBIT) if the mining is considered an active trade or business.

Steps to Invest Self-directed IRA LLC
in Cryptocurrency

  • STEP 1 – Open an IRA LLC
    • Confirm that you have eligible rollover funds (former employer and/or IRA) and/or can make IRA contributions
    • Choose a Self-directed IRA custodian/trust that allows for LLC investments
    • Choose an IRA LLC provider with experience in helping others invest
  • STEP 2 – Fund the IRA LLC
    • Rollover Former employer plan or IRA funds and/or make IRA contributions to self-directed IRA
    • Open a bank account in the name and EIN of the IRA LLC & invest self-directed IRA funds in IRA LLC
  • STEP 3 – Open & Fund LLC Account at Cryptocurrency Exchange
    • Open a Cryptocurrency Exchange Account in the name & EIN of the LLC owned by your IRA
    • Transfer funds from the IRA LLC bank account to the account at the crypto exchange
  • STEP 4 – Store Cryptocurrency
    • Separate and segregated wallet exclusively for IRA LLC investments
    • Store in safety deposit box associated with IRA LLC bank account

Practical Tips:
Investing IRA LLC funds in cryptocurrency

  • Opening an Account at a Cryptocurrency Exchange
    • Name and EIN of the LLC owned by your IRA (consider tax reporting by the exchange)
  • Funding an Account at Cryptocurrency Exchange
    • Confirm that the account can be funded with Fiat money
    • Wire/ACH funds from a bank account in the name of the LLC owned by your IRA
    • Do not fund from personal account per IRA LLC funding rules
  • Private Transactions
    • Confirm that the seller or buyer is not a disqualified person to ensure that you don’t commit a prohibited transaction
    • Do not combine or “tie” the transaction with non-retirement transactions

Transfer Boeing Former Employer 401k to a Self-Directed Solo 401k Plan

BACKGROUND & QUESTIONS:

I have a 401K plan with my former company (Boeing) that I would like to see about moving into a Solo 401K that I would be able to control personally and have the ability to access at a moment’s notice.
This, I understand, would require me to create a LLC so that I then could subsequently create the Solo 401K.
I need to figure out all the steps to do this…any dangers/pitfalls in doing this.  I would have my LLC with myself and my wife (initially) as “employees” and would plan on investing in property.

ANSWERS:

While a former employer 401k plan from an employer such as Boeing qualifies to be transferred to a self-directed solo 401k plan  for investing in alternative investments such as real estate, for example, the first step in the solo 401k discovery process is to understand the solo 401k eligibility rules.

In order to participate in a solo 401k plan, you have to be an owner-employee of the business with no full-time W-2 employees. This eligibility requirement also extends to other businesses that you may own and operate. For example, if you own two businesses and one of those businesses employees non-owner, full-time W-2 employees, you would not qualify for a solo 401k plan even if the other business does not employee any full-time, non owner W-2 employees. This multiple employer rule is known as the controlled group rule.

With respect to your particular scenario,  you and your wife can participate in the same solo 401k plan if you are both performing self-employment activity (material services) under the same self-employed business. What is more, the self-employed business entity type can be a sole proprietorship, LLC, Patership or Corporation.  The income generated would be reported as earned income on your taxes.

In contrast, any investing (e.g., real estate) done through the Solo 401k would be considered passive and not be considered self-employment, nor would the income be considered earned income. Instead, the income would flow back to the solo 401k and continue to grow on a tax deferred basis. To learn more about the solo 401k eligibility requirements, please click here.

On July 29, 2020 the IRS issued a reminder that the Coronavirus Aid, Relief, and Economic Security (CARES) Act can help eligible taxpayers access funds from retirement plans and IRAs

The IRS issued a reminder on July 29, 2020 that retirement account (e.g., solo 401k plans) and IRA account holders affected by COVID-19 may be able to access their retirement funds under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, provided they meet one of COVID-19 requirements (see below).

The Deadline

As the law currently stands under the CARES Act, self-employed individuals eligible for coronavirus-related relief may be able to withdraw up to $100,000 from IRAs or their self-employed solo 401k plans before December 31, 2020.

Important Note: The $100,000 maximum distribution does not apply per IRA or per solo 401k plan. Instead, the $100,000 is aggregated between your IRAs and your solo 401k plan.

Things to know about the coronavirus-related distributions:

  • May be included in taxable income either over a three-year period (one-third each year) or in the year taken, at the individual’s option.
  • Are not subject to the 10% additional tax on early distributions that would otherwise apply to most withdrawals before age 59½,
  • Are not subject to mandatory tax withholding, and
  • May be repaid to an IRA or solo 401k plan within three years.

Taking a Solo 401k Participant Loan

Self-employed Individuals who participate in a solo 401k plan and qualify for COVID-19 relief  may also, until September 22, 2020, be able to borrow as much as $100,000 (up from $50,000) from their solo 401k plan. Loans are not available from an IRA.

Tip: Since a solo 401k plan  is for owner-only businesses and their spouses with no full-time W-2 employees, each participant can borrow up to 100,000 from their respective solo 401k funds. Therefore, if both spouses have funds in the same solo 401k plan, they can each borrow $100,000 from their respective participant funds under the solo 401k plan.

More Information

COVID-19 FAQs

CARES Act Further Broken Down

Solo 401k Participant Loan 

Solo 401k Distributions

Spreading the Income Tax Over 3 Years

June 19, 2020 IRS Notice 2020-50

IRS Notice 2020-51 Extends RMD Rollover Period to August 31, 2020

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