While a Self-Directed 401k with checkbook control is not required in order to gain access to investing in alternative investments such as real estate, precious metals, trust deeds, tax liens, private company shares (passively only) and even foreign real estate in places such as China, Italy, Greece, Mexico, Costa Rica, Canada, India, etc., if you decide to add the checkbook control feature to your Self-Directed 401k make sure to first understand the do’s and don’ts of of Self-Directed 401k checkbook control.
Background: Self-Directed 401k
Before discussing the do’s and don’ts of Self-Directed 401k with checkbook control, let’s first compare the Self-Directed 401k vs Self-Directed 401k checkbook control.
Self-Directed 401k Defined
Used to describe a 401k for the self-employed that names him or her as trustee of the 401k and includes specific language in the Solo 401k plan document allowing for alternative investments and for the trustee to self-trustee the assets of the Solo 401k. Alternative investments include real estate, tax liens, commodities, private equity, promissory notes, etc.
Self-Directed 401k Checkbook Control Defined
Just like a Self-Directed 401k, the self-employed business owner has control over the investment decisions of his or her Self-Directed 401k and thus has the option to invest in alternative investments such as real estate, precious metals, tax liens, promissory notes, commodities, private company shares; however, investment purchases are made by writing a check from the Self-Directed 401k bank account-hence why it’s commonly referred to as Self-Directed 401k checkbook control.
The Do’s and Don’ts of Self-Directed 401k Checkbook Control
- Do open checking account in the name of the Self-Directed 401k not your personal name as it will be considered an immediate and taxable Self-Directed 401k distribution.
- Do open multiple Self-Directed 401k checking accounts if both Solo 401k trustees will be making contributions to the Solo 401k, and/or one or both trustees will be making both traditional and Roth Solo 401k contributions.
- Do deposit gains from the self-directed 401k investments ; for example, real estate gains such as rents or proceeds from the sell of real-estate property.
- Do pay expenses associated with investments held in the Self-Directed 401k, such as rental property repairs.
- Do make annual Self-Directed 401k contributions to the Self-Directed 401k checking account(s). Note that if both trustees are participating in the Self-Directed 401k, each respective trustees’ contributions need to be deposited in their respective Self-Directed 401k checking accounts.
- Do not deposit personal funds in Self-Directed 401k checking account(s) unless they are truly Self-Directed 401k contributions from self-employment income and you qualify to make them.
- Do not obtain credit card in the name of the Self-Directed 401k or in your name.
- Do not deposit funds from Self-Directed 401k to your IRA without first checking with your Solo 401k provider if the rules allow for it or without filling out the necessary forms and understanding that it’s a reportable transaction to the IRS on Form 1099-R using letter “G” in box 7.
- Do not pay personal expenses with funds from your Self-Directed 401k as it’s considered a taxable distribution.
- Do not pay your self a salary with funds from the Self-Directed 401k as it will considered a prohibited Solo 401k transaction.
- Do not commingle Roth Self-Directed 401k contributions and investment gains with Traditional Self-Directed 401k funds.
- Do not process Solo 401k Loan without firs having your Solo 401k provider prepare Solo 401k participant loan documents and payment schedule that conforms with the IRS Solo 401k rules.
Is there an advantage of having the checkbook for my solo 401k trust in my retail bank versus an investment firm like Fidelity Investments?
Having a brokerage account allows for investing in traditional investments (e.g. mutual funds, stocks, etc.) that you can’t invest in via a bank. Having a bank account allows for access to bank checks & a debit card. You can have both a bank and a brokerage account as long as both holding accounts are opened in the name of the solo 401k trust using the trust’s EIN for reporting purposes.