QUESTION 1: My wife and I each have IRAS; can these be combined to one Self-Directed Solo 401kaccount? If so, would we be considered a sole proprietor?
ANSWER: Self-Directed Solo 401k (a/k/a Solo 401k, Individual 401k, Solo K, Single K, etc.), allows for incoming transfers/rollovers of IRAs, except Roth IRA. When you open Solo 401k, one Solo 401k plan is established and if both business owners qualify to make contributions, two bank accounts—one for each participant—are established for the same Solo 401k plan and under same EIN (employer identification number).
Jane and Mike Smith qualify for Solo 401k because they are the only owners and employees of DogsRGreat, their dog Setting Business, which is structured as a Sole Proprietor. They have decided to open Solo 401k with checkbook control to invest in rental properties. Therefore, they open the DogsRGreat Solo 401k Plan with a Solo 401k provider whose Solo 401k plan documents allow for investing in real estate. Since Jane and Mike both want to participate in Solo 401k, two checking accounts are opened (one for each participant) under the DogsRGreat Solo 401k Plan.
Here is how each checking account for the Solo 401k plan is setup at the local bank:
Bank Account 1: DogsRGreat Solo 401k Plan; EIN 12-1234567 f/b/o Jane Smith
Bank Account 2: DogsRGreat Solo 401k Plan; EIN 12-1234567 f/b/o Mike Smith
As you can see, only one Solo 401k plan is adopted/established, but separate checking account is opened for each employee/participant. Now each Solo 401k participant can transfer/rollover their former employer 401k plan or IRAs to their respective Solo 401k checking account.
To answer the rest of your question regarding qualifying for Solo 401k, to qualify for Solo 401k the IRS requires that you are self-employed with no full-time employees. Any business type can establishe Solo 401k. Therefore, sole proprietor business can open Solo 401k. Also, Solo 401k is for maximum of two individuals (in this case, you and your wife). Further, each business owner must perform services for the self-employed business that results in compensation in order for each participant to participate. So if you are the only one generating income from the self-employment business, your spouse will not be able to participate in the Solo 401k until she performs services for the owner-only business for which the Solo 401k plan was established through.
QUESTION 2: I’ am currently employed with a company and participant in their 401k; can it be rolled over to Self-Directed Solo 401k if my employer’s 401k provider allows me to transfer out to Solo 401k?
ANSWER: Yes as the regulations allow you to contribute to multiple 401k company plans as long as you do not exceed the annual 401k contribution limits between all 401k plans. For example, if you are also self-employed in addition to having a daytime job, you can contribute to your day-time job 401k as well as the Solo 401k for your self-employed business as long as you don’t exceed the annual contribution limit, which is $50,000 for 2012. If your current employer will allow you to transfer your 401k to Solo 401k, make sure to elect trustee-to-trustee transfer on their 401k distribution forms to ensure they don’t withhold 20% for taxes.
QUESTION 3: We are interested in purchasing rental property with our Solo 401k can I do maintenance and repairs myself, or do I have to hire a contractor?
This is a common and important question, and the answer is no you cannot repair or develop real estate owned by your Solo 401k as it would be deemed a Solo 401k prohibited transaction and thus subject your Solo 401k to immediate taxation and possibly penalties. When you perform maintenance or repairs for real estate owned by your Solo 401k, the IRS refers to it as self-dealing because your are considered a disqualified party. Moreover, the property repairs cannot be performed by your spouse, your parents, your children (except for stepchildren) or your Solo 401k provider because they are also considered disqualified parties. However, you brother, sister, your spouse’s parents or brothers or sisters, your aunts, uncles and cousins are not considered disqualified parties.
Visit Solo 401k real estate to learn more about how to purchase real estate with your Solo 401k.