Big Crypto IRA/401K News! Fidelity will allow Bitcoin 401k – How to Open a Crypto Solo 401k at Fidelity – Fidelity Bitcoin 401k Review

In a potentially watershed moment, Fidelity reportedly will be the first major retirement plan provider to start to offer 401k plans that allow direct bitcoin investments.

Fidelity will offer a digital assets account and will reportedly charge an account fee between 0.75-0.90% plus an additional trading fee (not yet determined).

We hosted a webinar discussing the announcement as well as how to open a Crypto Solo 401k at Fidelity that allows for investing in cryptocurrency.

Fidelity Bitcoin 401k Review – Highlights

  • First major retirement plan provider to offer 401k plans that allow direct bitcoin investments
  • Full-time employer ERISA-only plans
  • Rollout in mid-2022
  • Up to 20% allocation
  • Bitcoin only
  • Custodied at Fidelity
  • Fees: account fee of 0.75%-0.90% plus trading fee (TBD)
Fidelity Bitcoin 401k Highlights
Fidelity Bitcoin 401k Highlights

Fidelity Bitcoin 401k vs. Crypto Solo 401k

Fidelity Bitcoin 401k vs Crypto Solo 401k Comparison

Steps to Invest Solo 401k Funds in Cryptocurrency

Steps to Invest Solo 401k Funds in Crypto
Steps to Invest Solo 401k Funds in Crypto

Crypto Solo 401k – Practical Tips

Open Crypto Solo 401k - Practical Tips
Open Crypto Solo 401k – Practical Tips

Continue the discussion in our My Community where our Owners host a daily LIVE webinar where you can ask questions and you can post questions in our forums: Cryptocurrency Forum

Free to Join! All are Welcome!

Protecting America’s Retirement Security Act would Require Spousal Consent for making Distributions from 401k Plans including Solo 401k Plans

Introduced by Representative Lucy McBath (D-GA) on March 31, 2022, The Protecting America’s Retirement Security Act (H.R. 7310)  The legislation “takes important steps to help Americans plan and save for a dignified retirement,” said Committee Chairman Rep. Robert Scott (D-VA) in a press release.

Spousal Protection

The bill proposes fee disclosure improvements, increasing spousal protections, and automatic reenrollment for defined contributions plans.

The highlight of the proposed bill would be the requirement of spousal consent before making distributions from qualified plans such as traditional 401k plan and solo 401k plans. A new section to Section 205 would be added to ERISA requiring meeting certain spousal consent requirements such as the following:

Provide in writing the spouse’s rights before making the 401k distribution.

The spouse of the participant would have to sign off consenting to the 401k distribution and to the change in beneficiary.

Exception

As with most regulations, there are some exceptions to the proposed spousal consent provisions including the following would not apply to distributions or to the change in beneficiary:

  • there is no spouse,
  • the participant and the participant’s spouse have not been married for at least one year as of the date of the distribution or designation or change of beneficiary, or
  • such consent cannot be obtained because: (1) the spouse cannot be located after taking documented search efforts in accordance with guidance from the Secretary of Labor; (2) there are exceptional circumstances that require the participant to seek the spouse’s consent would be inappropriate; or (3) due to other circumstances regulations prescribe.

Reporting Self-Directed Solo 401k Contributions on TurboTax

Reporting Solo 401k Contributions on TurboTax

BACKGROUND & QUESTIONS

I have run payroll for $51,000 through my LLC.
I have allocated $9000 for the employee contribution and the same was reflected in my w2.
Now I am planning for an employer contribution, which is 25% of the W2 income $51,000, that calculates to $12,750. Now I can fund my solo 401k retirement account with $12,750, right? If so how should I report this in my tax return to claim deductions? I get below screen in Turbo-Tax, what field should I fill in?

TurboTax Individual 401k Contribution Screen

ANSWERS:

Reporting contributions made to a self-directed solo 401k plan on the TurboTax software is quite confusing and requires filling our multiple fields as covered below. For this reason, most self-employed individuals who make contributions to their solo 401k don’t use the Turbotax software but rather fill out the paper tax forms.

Elective Deferrals:

Pretax Employee solo 401k contributions also known as “elective deferrals” are reported in the box labeled “elective deferrals.” Do not list your Roth solo 401k or voluntary after-tax solo 401k contributions in this section since they are not tax deductible (i.e., do not reduce your taxable income) but list them in the next section if you did make Roth solo 401k contributions.

Catch-Up Contributions:

This is also an employee contribution but for some reason TurboTax likes to split it up. “Catch-up contributions” can only be made if the solo 401k participant was age 50 or older.

Treating the Employee & the Catch-up Contribution as Roth Solo 401k Contributions

You will see above that TurboTax has separate fields for reporting Roth solo 401k contributions. Report the employee contribution (a.k.a. elective deferrals) amount made as a Roth solo 401k contribution in this box, and report the catch-up contribution if you qualify (i.e., you are age 50 or older) in this box.

Profit Sharing Contributions

Employer pretax solo 401k contributions are also known as “profit shirring” and Turbotax also refers to them as “employer matching” contributions. If your self-employed business entity type is an S-corp., C-corp. or an LLC taxed as an S-corp., this is the filed where the 25% of your gross W-2 wages figure is listed.

Voluntary After-Tax Solo 401k Contributions

Lastly, you will see that TurboTax does not provide a box for reporting voluntary after-tax solo 401k contributions. The reason is most likely because voluntary after-tax contribution are reported in box 14 of Form W-2 if your self-employed business entity type is an S-corp., C-corp. or an LLC taxed as an S-corp. For sole proprietorships and partnerships, voluntary after-tax solo 401k contributions are also NOT reported on any tax return including your personal Form 1040 tax return. Instead, they get reported in box 5 of on Form 1099-R.

Who is Required to Take Required Minimum Distributions from their Self-Directed Solo 401k in 2022?

2022 RMD Solo 401k Deadline

Knowing when to commence or to continue to take Required Minimum distributions can be quite confusing, as the dates vary based on when your first reach age 72 and if you have already been making RMDs.  We’ve put together the following post to help solo 401k participants understand the RMD deadlines.

Existing (Ongoing Distributions)

For those who have already been making Required Minimum Distributions (RMDs) in prior years, the 2022 solo 401k RMD must be paid no later than December 31, 2022.

New (First Time Distribution) & Turn 72 Prior to July 01, 2022

Those who turn age 72 in 2022 prior to July 1, 2022 (so between January 1, 2022 and June 30, 2022) are required to make their first solo 401k RMD by the end of this year, so December 31, 2022.

New (First-Time Required Minimum Distribution) & Turn 72 After June 30, 2022

Those who turn age 72 in 2022 AFTER June 30, 2022 (so between July 1, 2022 and December 31, 2022) are required to make their first solo 401k RMD by April 1, 2023. Of course, the account holder may also make the distribution in 2022 by 12/31/2022 but is not required to do so. 

Take an RMD this year QUESTION

I just found the information above regarding the requirement to start taking money from my 401k account.  I will be 72 this coming October. Can you please confirm when I am required to take my RMD?

You have until next April 1 of 2023 to make the 2022 RMD since you won’t be 72 until after June 30 of this year. 
However, if you wait to make your first RMD (the 2022) until April 1, 2023, you will end up taking two RMDs in 2023 (the one for 2022 & the second one for 2023), with the 2023 having to be distributed by 12/31/2023. 

How to Title Self-Directed Solo 401k Alternative Investments

Unlike equities where the investments automatically get titled in the name of the self-directed solo 401k plan since they are made under the brokerage account, the same is not the case for alternative investments which include real estate, private equity/placements, tax liens, precious metals, and promissory notes, etc.

Titling the Alternative Investment

As an illustration let’s say Matt Sims has a self-directed solo 401k named Eagle Talon Trust and is investing his solo 401k in a private fund. The alternative investment is generally titled as follows:

Matt Sims, Trustee of Eagle Talon Trust

Title can also be taken as follows: Eagle Talon Trust, Matt Sims as Trustee

Title to other alternative investments such as real estate, precious metals, notes, and tax liens would also follow the above titling method.

List the Solo 401k EIN on Form W-9

Just like title to alternative investment is taken in the name of the solo 401k plan, the solo 401k EIN (employer identification number) is used by the investment sponsor, property manager, and partner when issuing tax forms in connection with the solo 401k alternative investment. Therefore, make sure to fill out Form W-9-Request for Taxpayer Identification Number Certification and list the solo 401k plan’s EIN NOT your SSN or your self employed business tax identification number. For guidance in completing Form W-9, VISIT HERE.

Property Manager Issued Form 1099-MISC for Self-Directed Solo 401k Owned Property

https://www.mysolo401k.net/

BACKGROUND & QUESTIONS:

Last year we hired a property management company to manage the 4-plex apartment building I own in the self-directed Solo 401K. The company issued a 1099 with the gross rental income for 2021.  How do I notify the IRS that this “income” is part of my 401-K and therefore not taxable?

ANSWER:

Not Taxable

While rental income is generally considered taxable income, as long as the rental property is owned by the solo 401k, annual taxes won’t be due on that income.

Rental income stemming from real estate property (e.g., single, home, family home, apartment, condominium, etc.) owned under the solo 401k ( a retirement trust) flows back to the solo 401k and is sheltered from taxes until distributions commence (generally at retirement age) from the solo 401k.

Therefore, if you receive a Form 1099-R MISC from the property manager, and even though they submitted a copy to the IRS, the form may be stored in your solo 401k file but you do not file it with your personal tax return, business tax return or any return for the solo 401k including Form 5500-EZ.

Properly Issued Form 1099-MISC

Make sure the Form 1099-MISC was issued to the correct payer. The form needs to be issued in the name of the solo 401k using the solo 401k plan’s EIN. If the property manager issued the Form 1099-MISC make sure to have it correct immediately before they file it with the IRS, or request that they file a corrected form if they already filed it with the IRS. To ensure the property manager correctly issues the Form 1099-MISC to the solo 401k, provide then a copy of  a Form W-9.

Items to Consider if You Plan to Process a Self-Directed Roth Solo 401k Pretax In-Plan Conversion in 2022

You first need to open a designated Roth solo 401k brokerage or bank account as Roth solo 401k funds are required to be separately tracked under a defined contribution plan such as a solo 401k plan.

Note: opening a separate bank/brokerage account to hold the Roth solo 401k funds does not mean you are opening an additional solo 401k but rather an additional holding account under the existing self-directed solo 401k to hold the Roth solo 401k funds. The IRS refers to this additional solo 401k holding account as a Roth Designated Account.

Taxable Conversion 

The amount converted from the pretax solo 401k to the Roth solo 401k is considered a taxable conversion so is includible in gross income in the year of the conversion, but going forward eligible distributions from the Roth solo 401k account (including earnings) are generally tax-free. This is why the self-employed business owner must separately account for all contributions, gains and losses to this designated Roth solo 401k account until this account balance is completely distributed.

You may be considering converting your traditional (pretax) solo 401k to a Roth solo 401k (designated Roth account) in 2021. Following are key items to understand prior to proceeding.

December 31, 2022 is the Deadline

  • Conversions must be processed by December 31, 2022 in order to count for 2022.
  • This means that the funds and/or assets must be deposited from the solo 401k pretax bank/brokerage account to the Roth solo 401k bank/brokerage account by 12/31/2022.
  • Don’t confuse the contribution deadline rules with the conversion deadline. Unlike contributions where you can make them the following year (2023) by  the  self-employed business tax return due date plus extension, the Roth solo 401k conversion rules require the funds and or asset converted by 12/31/2022.
  • Don’t forget that your solo 401k provider may need more time than you think to complete the conversion including assisting in opening the Roth solo 401k bank or brokerage account if that has not yet been done. Waiting until the last minute can be a nail biter.

Don’t Forge About Taxes

The conversion of pretax solo 401k funds to the Roth Solo 401k designated account is considered a taxable event but not subject to the 10% early distribution penalty.

The pretax solo 401k conversion will increase your ordinary income for 2022 – potentially causing the loss of exemptions, credits tax deductions, taxation of Social Security, and increased premiums for Medicare Part B and Part D premiums – but this only happens for the year of the conversion. The trade-off is that all future qualified distributions from your Roth solo 401k will be distributed completely tax-free.

Reasons to Process a Conversion

Should you convert solo 401k funds to the Roth solo 401k bucket? Some factors in favor of converting include not needing your money soon, or even at all and expecting your future tax rates to be higher. Being younger can favor conversion as younger people generally are in a lower bracket, have not yet accumulated large sums in their solo 401k, and have long retirement savings timelines to work with.

Reasons not to Processing a Conversion

Conversion may make sense for some but is not for everyone. Why may you not want to process an in-plan solo 401k conversion? Conversion may not be for you if:

are older and will need the money soon;

you think you will be in a lower tax bracket at retirement; and

not having available, non-retirement assets to pay the tax due on the in-plan solo 401k conversion.

No Do Over

Just like Roth IRA conversions, you cannot change your mind once the in-plan solo 401k conversion has been processed. To learn more about the in-plan Roth solo 401k conversion rules, VISIT HERE.

SECURE Act 2.0 Approved on March 29, 2022 by the House of Representatives Still Needs Approval by the U.S. Senate

On March 29, 2022 the House of Representatives approved SECUR Act 2.0 formally known as The Securing a Strong Retirement Act of 2022 (H.R. 2954) which is intended to add more provisions to the original SECURE Act. The new also includes provisions from the Retirement Improvement and Savings Enhancement (RISE) Act that came out of the House Education and Labor Committee last November.

Following are the Key  Provisions Found in SECURE Act 2.0

  • Increased the start-up credit from 50% to 100% for costs associated with establishing a 401k plan for a small employer during the first 3 years.
  • A new credit of $1,000 for employers who make employer contributions each employees 401k plan, so $1,000 per employee.
  • The required minimum distribution (RMD) age is gradually increased over the next 10 years. It would increase to age 73 in 2023, to age 74 in 2030 and to age 75 in 2033.
  • The 401k catch-up contribution in increased to $10,000 for participants 62-64 years of age. 
  • The excise tax for missed RMDs is reduced from 50 percent to 25 percent.
  • Treats student loan payments as elective deferrals for purposes of making 401k contributions.
  • Employees are permitted elect Roth treatment of both employee and employer contributions to SEP IRAs and SIMPLE IRAs.  
  • 401k catch-up contributions would have to made as Roth not pretax.
  • The current three years of service period for part-time W-2 employees to be given an option to participate in a 401k plan including a solo 401k is reduced to two years.

For a section-by section summary of this bill, visit HERE

Lastly, this SECURE 2.0 is not yet law as it also has to pass the Senate and ultimately requires President Biden’s signature. The expectation is that SECURE 2.0 will pass by the end of this spring,  however. 

 

Not Enough Total Earned Income to Contribute to Both a Roth IRA and a Self-Directed Solo 401k

Do Roth IRA Contributions Reduce my annual solo 401k contribution amounts?

No, Roth IRA contributions do not count toward your solo 401k annual contribution limit.

However, Roth IRA contributions do count towards your total IRA contribution limit. So, if you contribute to both a Roth and traditional IRA, the combined amount can’t exceed the annual contribution limit, which for 2022 is $6,000 ($7,000 if you’re 50 or older).

Same for spousal Roth IRA contribution, those contributions don’t count toward your solo 401k annual contribution limit. The total of your combined contributions in a spousal IRA can’t exceed the taxable compensation reported on a joint tax return.

Yearly annual contributions to a self-directed solo 401k are not impacted by your Roth IRA contributions.

Put differently, Roth IRA contributions won’t reduce the total solo 401k contribution provided enough net self-employment income was generated to make the the applicable solo 401k contribution.

The net self-employment income for solo 401k contribution purposes is not impacted by Roth IRA contributions.

To determine how much can be contributed to the solo 401k, you first have to determine the business owner’s earned income or net earnings from self-employment income.

If the self-employed business is a sole proprietorship, the net self-employment figure is found on line 31 of Schedule C. Subsequently, 1/2 of self-employment income tax is subtracted from the line 31 figure. The resulting amount is referred to as the business’s owner’s adjusted net business income.

While both designated Roth solo 401k and Roth IRA contributions cannot be claimed as deductions on your tax return, pretax solo 41k contributions do reduce your taxable income. For example, pretax contributions for a sole proprietorship business are reported on IRS Form 1040.

QUESTION 1:

I am a sole proprietor, have a solo 401k and report $20,000 of line 31 net self-employment income.

For 2022, if I contributes $6,000 to my  Roth IRA, can I still contribute $18,587.05 to my  Roth designated solo 401k account for 2022 based on $20,000 of line 31 schedule C income or do I have to first reduce the $18,587.05 by the $6,000 Roth IRA contribution?

ANSWER:

You are able to make an elective deferral Roth solo 401o contribution of $18,587.05 for 2022 based on $20,000 of line 31 Schedule C self-employment income. Any Roth IRA contribution  you can make based on your filing status and modified gross income up to the $6,000 limit for 2022 would not reduce your adjusted gross income since Roth IRA contributions are not deductible.

QUESTION 2:

How about vice versa, if I maximize my Roth designated solo 401k contribution with $20,000 of line 31 income, will I not be able to make any Roth IRA contributions?

ANSWER:

Roth solo 401k designate contributions do not reduce your modified adjusted gross income. The amount of any Roth IRA contributions you can make depend on your filing status and modified adjusted gross income.  As you can see by the following language an chart found in IRS Pub 590, neither Roth solo 401k contributions nor voluntary after-tax solo 401k contributions reduce your MAGI.

Amount of your reduced Roth IRA contribution

If the amount you can contribute must be reduced, figure your reduced contribution limit as follows.

  1. Start with your modified AGI.
  2. Subtract from the amount in (1):
  3. Divide the result in (2) by $15,000 ($10,000 if filing a joint return, qualifying widow(er), or married filing a separate return and you lived with your spouse at any time during the year).
  4. Multiply the maximum contribution limit (before reduction by this adjustment and before reduction for any contributions to traditional IRAs) by the result in (3).
  5. Subtract the result in (4) from the maximum contribution limit before this reduction. The result is your reduced contribution limit.

See Publication 590-A, Contributions to Individual Retirement Accounts (IRAs), for a worksheet to figure your reduced contribution.

New IRS Beneficiary Distribution Rules For Solo 401k and IRAs Effective for 2022 & Later Years REG-105954-20 & SECURE Act

Last month (February 2022), the IRS finally published (see REG-105954-20) updated beneficiary distribution rules (the distribution rules for those who inherit IRAs, an d 401k plan funds including solo 401k). These rules replace the rules last published in 2002 and also encompass many of the provisions found in the SECURE Act of 2019 which then became effective January 2, 2020.

The Main New Beneficiary Distribution Provisions Found in the New Rules

  1. The state’s child age-of-majority rule does not apply. Instead, the new IRS regulations age of majority which is age 21 and his or her 21st birthday applies. 

ILLUSTRATION: 

Jane is 13 in 2021 and inherited a solo 401k from her mother. Jane can delay taking beneficiary distributions until she reaches age 21 in 2029. Starting in 2029, Jane will be required to commence making distributions for the next 10 years. This is known as the 10 year beneficiary distribution rule.

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