It may come down the Employee Retirement Income Security Act (ERISA) as to whether or not funds inherited from a solo 401k plan are protected from bankruptcy creditors.
A recent court case Dockins, No. 20-10119 (Bankr. W.D.N.C. June 4, 20221) involving a Wells Fargo Bank company 401k plan for Kirk Morishita the U.S. Bankruptcy Court for the Western District of North Carolina ruled that funds inherited from a 401k are protected from bankruptcy creditors provided the 401k funds are still in the 401k plan. Apparently, Kirk’s ex girlfriend (Holly Corbell) was the name beneficiary on the Wells Fargo Bank company 401k plan for Kirk Morishita. Because she (Holly) filed for bankruptcy before she had the inherited 401k funds paid out so they remained in the 401k, the court ruled that they were protected from bankruptcy creditors. The Bankruptcy Court pointed out that the goal of Congress when it enacted ERISA was to protect the “interests of participants in employee benefit plans and their beneficiaries . . .” Therefore, shielding beneficiaries from creditors was just as important to Congress as shielding participants from them. The inherited 401k in this case was not an owner-only solo 401k plan but rather a full-time employer 401k which are covered by ERISA.
Therefore, for inherited funds, don’t expect this court case to also carry over in bankruptcy to non-ERISA plans such as solo 401k plans, Thrift Savings Plans, and certain 457(b) and 403(b) plans. Reason being, the Supreme Court ruled in another court case from 2014 (Clark v. Ramker, 573 U.S. 122) that inherited IRAs which are also not subject to ERISA are not accorded protection from bankruptcy creditors.
A client wants to invest in a private startup using solo 401k funds. My question is about her consulting or working with this company. What are the limitations she should be aware of? If she invests solo 401k dollars into the company’s equity, can she not take a job with them? Can she consult with them and earn income?
She would only be a 0.3% shareholder of this company’s C-Corp if she were to invest.
The IRS prohibited transaction rules identify the following as a disqualified person:
As indicated in the above IRS prohibited transaction rules in (H), you cannot be a 10% or more shareholder in business, officer, director or a highly compensated employee.
Of course, the IRS has the power to further scrutinize the investment for other factors including but not limited to whether or not the solo 401k participant’s parents, children, self-employed business, etc. also work for the business and or own equity in the business.
While Charles Schwab also offers their onw solo 401k plan which tends to me more restrictive, a self-directed solo 401k plan from My Solo 401k Financial may be invested in equities including stock options using a Charles Schwab company retirement account brokerage account. This is possible because you opened a solo 401k with My Solo 401k Financial and Charles Schwab is simply holding the solo 401k funds.
However, the highest level of options trading that may be done inside a self-directed solo 401k brokerage account held with Charles Schwab is level one options. Please CLICK HERE to use the Schwab application to add options trading to your self-directed solo 401k brokerage account.
Per the solo 401k Trust Agreement, you can use the solo 401k plan to invest in stock options. The retirement trust is tax exempt entity so gains from passive investments being bought and sold are deferred just like when stocks are bought and sold.
You can apply for options trading without applying for margin.
If one uses margin inside a solo 401k UBIT applies.
My Solo 401k Financial clients also have the option to convert their voluntary after-tax solo 401k funds held in a non-prototype brokerage account at Fidelity Investments to their Vanguard Roth IRA. The following video and procedure detail the following:
How to open a mega backdoor Roth solo 401k with My Solo 401k Financial;
How open the solo 401k non-prototype brokerage accounts at Fidelity Investments;
How to convert the voluntary after-tax solo 401k funds from Fidelity Investments to the Roth IRA at Vanguard; and
How to report the non-taxable conversion of voluntary after-tax solo 401k funds to the Vanguard Roth IRA.
While the Bank Secrecy Act requires reporting for certain foreign financial accounts to assist the Treasury Department to keep records of accounts by requiring the filing of a Report of Foreign Bank and Financial Accounts (FBAR) on FinCEN Form 114, it appears that IRAs and 401k plans including solo 401k plans are not subject to this foreign financial account filings.
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