While a Solo 401K can be used for the C-corp, it is typically used for “Self Employed” individuals

CONCERN:  I have a C-corp.  While I’m the only employee, I am wholly separate from the entity which is the C-corp.  While a Solo 401K can be used for the C-corp, it is typically used for “Self Employed” individuals.  On your website you speak of “Self-employed income”.   My concern is that it may undermine the separation of the employee and the C-corp entity if a Solo 401K is elected.

ANSWER: 401K plans are sponsored by a business. A solo 401k, a type of 401k but for the self-employed, is sponsored by a self-employed business, whether incorporated or not. What is more, the solo 401k is considered a trust and separate from the business and the solo 401k trustee/participant.

QUESTION 1.  For a self-employed person or a single person corp, why would a Self-Directed SEP LLC checkbook IRA be selected over a Self-directed Solo 401K….or visa versa?

ANSWER:  While both a SEP IRA and Solo 401k are for the self-employed, differences still exist, such as the following:

A solo 401k allows for solo 401k participant loans (i.e., the business owner(s) may take a loan form the solo 401k) while the SEP IRA does not.

A SEP IRA only allows for employer contribution whereas the solo 401k allows form employer and employee contributions, often resulting in higher contributions.

The solo 401k allows for a catch-up contribution for those age 50 or older of $5,500 whereas the SEP IRA does not.

To gain checkbook control over your SEP IRA retirement funds a limited liability company is required, not so with the solo 401k as it can be setup with checkbook control from the onset.

These are just some of the benefits of the solo 401k over the SEP IRA.

QUESTION 2.   Should the worst happen and an investment is deemed a “Prohibited Transaction“, is the entire solo 401K at risk or just the one investment?

ANSWER:  Per publication 560 pages 20 and 21, solo 401k prohibited transactions may be corrected.

QUESTION 3.   What if there is a falling out with the IRA Creation/Maintenance Company, can one easily move to another or is it like starting over?

ANSWER:  Yes as the market is plentiful with self-directed IRA custodians.

QUESTION 4.   What happens to the Solo 401K account if the corp shuts down?

ANSWER:  The solo 401k can remain open or it can be transferred to an IRA; you just won’t be able to make additional solo 401k contributions if self-employment activity ceases, whether a Corporation or a sole proprietorship.

QUESTION 5.  If the Roth feature of the Solo 401K is used, is a separate account needed for the Roth?  Does the Roth have checkbook control as well?

ANSWER:  While it is the same solo 401k plan, the solo 401k has what the IRS refers to as a designated Roth account built into it. This means that two separate subaccounts are required—one to hold the pre-tax solo 401k funds and the second to hold the designated Roth funds. A solo 401k checkbook is thus issued for each type, the Roth and the pretax solo 401k funds.

Thanks,

Bruce in PA

About Mark Nolan

Each day I speak with energetic entrepreneurs looking to take the plunge into a new venture and small business owners eager to take control of their retirement savings. I am passionate about helping others find their financial independence. Having worked for over 20 years with some of the top retirement account custodian and insurance companies I have a deep and extensive knowledge of the complexities of self-directed 401ks and IRAs as well as retirement plan regulations. Learn more about Mark Nolan and My Solo 401k Financial >>

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