Solo 401k FAQs

 

Opening a solo 401k can be confusing—from changes in contribution limits, distribution rules, investment rules to filing deadlines. In an effort to keep our clients informed, we have put together this FAQ page and add to it frequently as the IRS solo 401k rules change and field questions from our clients.

For Video Slides, CLICK HERE.

About the Self-Directed Solo 401k

The Solo 401(k) retirement plan allows for salary deferrals found in 401(k) plans, and employer contributions found in profit-sharing plans. You can make annual contributions of both salary deferral and profit-sharing contributions, empowering you to save up to $61,000 in 2022 or $67,500  if you are more than 50 years old, tax-deferred. The Solo 401k annual contribution limit increased by $5,000 for tax year 2023 to $66,000 and $73,500 for those 50 or older.

The process starts by us collecting information via our on-line application to draft the solo 401k plan documents, obtain the EIN for the solo 401k  and draft the transfer forms.

You have the option to fund the Solo 401(k) plan with annual contributions or transfers from other retirement accounts. You will have the freedom of investing those contributions through the investment vehicle of your choice. You can use any bank or brokerage account of your choice  to establish a checking account for your Solo 401(k), and we will assist you in completing  the paperwork for the solo 401k checking account.

Since we never have access to your funds, you are responsible for monitoring the balance in your Solo 401(k) account and notifying us when the balance reaches $250,000 at any year-end.

Reason being, you are required to complete an IRS Form 5500-EZ, which we can assist you with, once your balance reaches $250,000.

If you would like us to complete the form for you and to file it, no additional fees will apply. Remember, this form is only required if your Solo 401(k) balance reaches $250,000, or if you terminate the solo 401k plan regardless of value.

Also, if you process conversions or distributions from the solo 401k plan, Form 1099-R reporting also applies which we will also prepare and file at no additional cost upon your timely request.

No annual tax reporting is applicable until your assets reach $250,000. At that point, you must file a Form 5500-EZ.  Form 5500-ez support is included in our annual fee for those who notify us of their solo 401k balance.

However, you must always file a Form 1099-R with the IRS should you take a distribution of your plan assets upon plan termination or during participating in the plan. Form 1099-R also applies to in-plan Roth solo 401k conversion of both after-tax and pretax funds. Form 1099-R preparation is included in our annual fee.

Deadlines

For Sole Proprietors:
Employee and profit-sharing contributions must be funded by your tax-filing deadline plus timely filed business extension, provided your plan was adopted by December 31.

For Incorporated business:
Employee and profit-sharing contributions must be funded by your business tax-filing deadline, provided the plan was established by the end of the previous year. To learn more about the various funding deadlines, CLICK HERE.

While the 2019 SECURE Act extended the deadline to adopt a Solo 401k plan from the end of the year to the business tax return deadline including any timely filed extension, business owners had to setup/adopt the solo 401k plan by 12/31/2022 in order to qualify to make tax year 2023 Roth and pretax employee contributions in 2023 by the business tax return plus extension. However, you can still open the solo 401k in 2023 by the business tax return including business tax return extension and make voluntary after-tax contributions in 2023 for 2022.

Essentially, for making tax year 2022 employer profit sharing contributions in 2023 by the business tax return including extension the SECURE Act only extended the adoption due date to 2023. This means that those who did not establish the solo 401k plan by December 31, 2022 will not be able to make employee pretax or Roth contributions in 2023 for the 2022 tax year.

Getting Started

Starting a Solo 401(k) is easy and we will guide you through the entire account establishment process including opening a checking account at the bank or brokerage form of your choice for your new Solo 401(k). VISIT HERE to learn more about the bank account vs the brokerage account option as they both come with a checkbook.

Step 1: We need to collect information to draft the solo 401k plan documents and to get the tax identification number for the solo 401k trust. Complete our on-line application by CLICKING HERE, or call us to walk you through the on-line application.

Step 2: Once we receive your solo 401k on-line application, we will start the solo 401k establishment process by drafting the solo 401k establishment documents, and we will e-mail them to you the next business day for your signature.

Step 3: Once we receive copy of your signed Solo 401(k) plan establishment documents, we will obtain the tax identification number (EIN) from the IRS for your new solo 401k trust, prepare the transfer forms if you plan to transfer IRA and/or former employer funds to the new solo 401k. We will also proceed with assisting you in establishing the bank or brokerage account for the Solo 401(k) so you can start making investments right away.

NOTE FOR FUNDING BOTH ROTH, AND AFTER-TAX CONTRIBUTIONS: If you plan to make both Roth, and  after-tax contributions, you MUST open up additional identical checking accounts. Reason being, this is an IRS requirement, plus this will help in segregating pre-tax vs after-tax, and Roth contributions.

We can usually adopt your solo 401k plan by the next business day that you decide to sign up. This will allow for immediately commencing the bank or brokerage account setup as well as the completion of the transfer forms for your IRA or former employer plan transfers.

No, we will need to help you obtain a separate EIN (Employer Identification Number) for the solo 401k from the IRS since a solo 401k is a retirement trust not a business. To learn more, visit here.

Rollovers

IRC Section 408(d)(3)(A)(ii) states that after-tax IRA funds cannot be transferred to a qualified plan such as a solo 401k plan. However, yes you can transfer the gains in the non-deductible IRA to the pretax bucket of the solo 401k plan. See following language on page 21 of IRS Pub 590.

Finally, once you have transferred all the gains from the non-deductible IRA(s) to the solo 401k plan, you can then convert the IRA basis to a Roth IRA. No taxes will be owed on the Roth IRA conversion because it only consists of basis.

If you receive the funds in the form of a rollover instead of a direct-rollover, you have 60 days from the day you receive your rollover check to roll your funds over. To learn about a rollover vs a direct-rollover, CLICK HERE.

By using code “K” in conjunction with code “G” in box 7 of Form 1099-R , the self-directed IRA custodian is effectively communicating to the IRS that while the direct rollover of the alternative investment held in the IRA to the self-directed solo 401k was not treated as a taxable distribution but rather a non-taxable direct rollover, the self-directed IRA custodian is not responsible for determining if the value of the alternative investment was determined prior to them processing the in-kind direct rollover. This is a way of the self-directed IRA custodian to cover themselves since they do not perform valuations of alternative investments.

If the individual is self-employed with no full-time W-2 employees, he or she can set up our solo 401(k) plan which allows for alternative investments such as private placements, syndicated real estate financing transactions, etc. provided that the investment is a passive investment (e.g. the person is not otherwise involved with the investment provider such as working for the provider nor involved with the underlying real estate in the case of a real estate fund such as using the underlying real estate property).

Moreover, our Solo 401k would allow the person to rollover an asset from a traditional IRA to the solo 401(k) (i.e. in-kind direct rollover). Specifically, to complete the rollover the investment provider  would need to update its records to show that the investment is held in the name of the solo 401(k) and under the employer identification number for the solo 401k (we obtain an EIN for the plan as part of the establishment process).  In addition, the existing IRA provider would report this transfer as an in-kind direct rollover by issuing the 1099R with a code G in box 7.  Please note that we would guide the client through transfer process as part of our services for no additional charge.  In addition, please note that the client (not us) would hold the investment documents as the trustee of the Solo 401k plan.

You can transfer other qualified plans such as former employer 401k plans as well as pretax IRAs to the solo 401k plan. Click here for a list of retirement accounts that can be transferred to a solo 401k plan.

Funds can be transferred to the solo 401k from IRAs and former employer plans at account opening or at a later date. Also, partial transfers can be processed.  Please just let us know and we can assist you in the transfer process as part of our services.

No, your stocks and alternative investments (e.g., real estate, notes, etc.) can be transferred in-kind, which means that they will be transferred as is to your new plan.

That is in line with the two year SIMPLE IRA rule.  The two-year period starts on the day the employer makes the first contribution to the individual’s SIMPLE IRA, and ends exactly two years later. See [Notice 98-4, Q&A I-2, 1998-1 C.B. 269]

No additional forms apply as it appears they processed it as a direct-rollover. When you receive the check, please make sure they made it payable in the name of the solo 401k plan name. If so, you can proceed with depositing it into the Solo 401k bank or brokerage account. Write the solo 401k account number on the back of the check before depositing it.

It is best to move the IRA funds to a solo 401k plan via a direct-rollover instead of a rollover.
Reason being, the IRS gets nervous when the IRA funds are first deposited into your personal bank account and then to a solo 401k plan 60 days later. For this reason, the IRS requires a code 1 or 7 in box 7 of Form 1099-R to report the “rollover,” which results in you as the account holder having to explain when you file your Form 1040 that the funds were rolled over to a solo 401k plan within 60 days. This is the only way the IRS will know that you in fact rolled over the funds to a solo 401k plan within 60 days because a Form 5498 does not apply to solo 401k plans.
Please VISIT HERE to learn more about the rollover and direct rollover rules.

Eligibility

If your spouse performs services and is compensated from the business, this person can participate in the same Solo 401(k) plan. The maximum amount your spouse can save also depends on his or her income, salary and age. A solo 401(k) is for business owners and their spouses.

Since Solo 401(k) is for owner-only businesses, partners are eligible to participate as well as family members if they are also partners in the same business. In other words, solo 401k plans are only for owner-only businesses with no full-time W-2 employees who are not owners of the business sponsoring the solo 401k plan.

Yes, a 501(c)(3) entity may have a solo 401(k) plan, provided the business does not employ any full-time, common-law employees because a solo 401k is for owner-only businesses.  Contributions to the solo 401k plan would be based on W-2 wages generated through the 501(c)(3) corporation.

No – the Solo 401k Must be sponsored by your self-employed business. However, some clients list their living trust as the beneficiary of the solo 401K in the event of death. Of course, you would want to discuss this with your estate tax adviser.  One of the solo 401k plan documents that we provide is the beneficiary election form where you can list your plan’s beneficiaries.

Unlike an IRA where one spouse can contribute to the other spouse’s IRA (spouse IRA) based on the contributing spouse’s earned income if certain rule are satisfied (e.g., both spouses file a joint tax return-Form 1040), the same rule does not apply to a solo 401k plan. However, if you both work for the same self-employed business that sponsors the solo 401k, you can participate in the same solo 401k plan and make contributions to the solo 401k plan based on your respective net self-employment income. I would check with your CPA as you may be able to to get creative in allocating earned income if you both  work for the same business.

Prior to hiring any full-time employees, we recommend that you get in touch with us by e-mail at [email protected] to find out how we can assist you with additional retirement plan services that will support your company’s growth.Note that once you hire a full-time employee, you will no longer be eligible to maintain a Solo 401(k). It is very important that you get in touch with us at that time to discuss your options.

Yes the S-corp can sponsor a solo 401k plan since the 1% shareholder is not a W-2 employee. Click here for additional information.

Your wife can still  participate in the solo 401k plan even if she works for another W-2 employer since she is still also doing part time self-deployment activity.  In addition to the IRS rules allowing for participation in both a full-time employer 401k with another employer (one not owned by the individual with the owner-only business) as well as a solo 401k plan for the individual’s owner only business, The IRS rules even allow for contributions to both plans provided certain contribution rules are met.

While some states do recognize the existence of an oral trust, a solo 401k plan will not be considered qualified by the IRS unless unless it is established in written form. See  Treas. Reg. 1.401-1(a)(2). The  solo 401k plan document must include specific provisions essential for qualification. See Rev. Rul 74-466, 1974-2 C.B. 131. The plan document for the solo 401k plan defines the obligations for the plan sponsor and the participant. Lastly, the solo 401k plan document must be reviewed and approved by the IRS and considered qualified once the IRS determination letter has been issued.

Contributions

No because a solo 401k is for owner-only employees not common-law employees.

No, there is not. You are not required to contribute to the plan every year.

If you are age 50 or older, you can contribute an additional $6,500 (for 2022) into your Solo 401(k) plan. The catch-up contribution increased to $7,500 for tax year 2023.

For details of how much more you can stash away this year, please contact us at [email protected], or visit our on-line solo 401k contribution calculator.

No, the profit sharing contribution limits apply separately to each employer plan. The profit-sharing contribution cannot exceed 25% of gross income from a corporation, or 20% of net earned income for sole proprietors/partners. To learn about the rules surrounding making profit sharing contributions to multiple plans, VISIT HERE.

Unfortunately, retirement payments, Social Security, and investment income are not considered earned income. Self-employment income is what is needed in order to make solo 401k contributions.

No. A roth 401k contribution is an employee contribution (salary deferral) and before being able to transfer to a Roth IRA there must be a trigger event (e.g., age 59 1/2 or over).

No. Pretax solo 401k contributions do not reduce social security tax or Medicare tax. However, the solo 401k contributions will grow on a taxed deferred basis and social security taxes won’t apply when you later distribute (at retirement age) the funds from the solo 401k plan.

No you do not need to deposit your Solo 401k contributions by year-end.  Per the IRS publication covering the rules for Solo 401k plans and other owner-only retirement plans (IRS Publication 560), both employee and employer contributions can be made by the due date of the tax return for your self-employed business including timely-filed extensions.  Specifically, the chart titled “Key Retirement Plan Rules” on page 3 the publication states that both employee and employer contributions can be made up until the tax return is due (including extensions). VISIT HERE, to learn more about this often misunderstood rule.

Since the solo 401k plan was opened after the w-2 employee separated from service and the company did not already sponsor another 401k plan, the business is not required to make any contributions on the separated employee’s behalf.
Therefore, you can make both your employee and profit sharing contributions to the solo 401k plan based on your W-2 wages since your self-employed business is and LLC taxed as an S-corp. and you don’t employee any full-time W-2 employees without having to take into account the previous w-2 employee.

Good question, but annual solo 401k contributions have to be based on self-employment income and have to be in cash form not assets (e.g., stocks, mutual funds, real estate, etc).

Unlike a Roth IRA where if their child works, the parents can contribute to their son or daughter’s Roth IRA, the same rule is not afforded to 401k plans including solo 401k plans, whether  Roth solo 401k contributions or pretax solo 401k contributions. Contributions to a solo 401k plan can only be based on earned income from self-employment activity, and gifted money is not considered income from self-employment activity.

In order to make annual solo 401k contributions, you must be self-employed with no full-time W-2 employees and the contribution has to be based on earned income generated from your self-employed business; therefore,  no alimony payments can not be used to make annual solo 401k contributions. On a side note, taxable alimony payments will no longer be deductible or considered eligible compensation for IRA contribution purposes beginning in 2019.

Just earned income from self-employment activity.

Investments

Just make sure the Form 1099-INT lists the solo 401k trust name and the plan’s EIN, and keep it for your records. As long as the note payments flow back to the solo 401k plan the payments will maintain their tax deferred status until you commence taking distributions from the solo 401k plan.

The Solo 401(k) plan can obtain a non-recourse loan but the borrowed funds have to be used toward the purchase of the real-estate property. Any remaining funds in the solo 401k plan after the purchase can be used to rehab the property.

Click here for a list of banks that will loan funds a Solo 401(k) plan.

Contributions, investing in alternative investments such as real estate, and taking 401(k) participant loans are all allowed under the 401(k) rules provided that the plan documents allow for such.  We have an IRS approved plan document which does allow for all of these transactions.

We are not aware of any specific prohibition on purchasing a domain name via a Solo 401k.  As such, this is acceptable provided that (i) the domain name is purchased from an unrelated person; (ii) the title is issued in the name of the Solo 401k (e.g. your name as trustee of Solo 401k) – which you should confirm that this is possible; and (iii) the domain name is not operating as an active business.

Yes as long as you are not otherwise involved in the fund & the investment is titled in the name of the Solo 401k, the funds flow in and out of the Solo 401k, etc.

I understand that the K-1 is issued to the Solo 401k for investments made via the Solo 401k.  In that case, any gains are on a tax-deferred basis since in the Solo 401k.  Please simply keep the K-1 in your records.

While a solo 401k cannot be invested in your own LLC business without running afoul with the solo 401k prohibited transaction rules, the solo 401k may be invested in a LLC for passively placing investments that can also be placed through the solo 401k directly. These passive investments include real estate, promissory notes, and tax liens, to name a few.

While you can also serve as the manager of the solo 401k owned LLC, you may not receive any type of compensation for managerial services. Please CLICK HERE for more on the Solo 401k LLC.

However, our solo 401k plan allows for solo 401k participant loans and the loan proceeds can be used in any way you want, such as putting the loan proceeds towards your startup LLC. You can borrow up to half of your Solo 401k balance, not to exceed 50,000.

If you are looking to use more than than the allowable solo 401k participant loan limit, you can also explore the business financing 401k also known as the rollover business startup which would allow you to invest your retirement money in your own business provided the entity is a C corporation that offers goods or services. To learn more about this plan, please see the following.

401k Business Financing Plan – Learn More:

No. You don’t have to submit the investments for our approval since we are not the trustee of your solo 401k plan.  At the same time, we are here if you have questions. We also have free investment forms located here for your internal use as it is important to fully document your solo 401k alternative investments.

When a solo 401k invests in allowed alternative investments directly or through an LLC where the solo 401k is the sole member, it is not considered a distribution unless you violate the prohibited transaction rules outlined in the following pages.

(1) This is acceptable provided that (i) neither of you (nor any closed related persons) are working for the entity in which you intend to invest retirement funds; (ii) neither of you (nor any closed related persons) hold any ownership position personally in the entity in which you intend to invest retirement funds; and (iii) neither of you (nor any closed related persons) otherwise do not have a relationship with this entity either in your own name or through an entity that you control (e.g. you are not a landlord, lender, vendor, etc.).

(2) The investment must be titled in the name of the Solo 401k with funds flowing from the Solo 401k account(s) and any return on the investment flowing back to the Solo 401k account(s).  If both solo 401k participants will invest in the investment, the investment would simply be titled in the name of the Solo 401k listing both participants as the trustees with funds flowing from your respective accounts at the time that the investment is made.  For administrative ease, it is acceptable if the return flows back to one account and then subsequently allocated and reconciled between the two accounts.

(2) If the investment is structured as equity (e.g. stock in a corporation, membership interest in an LLC, etc.) the investment may be subject to unrelated business income tax if (I) the entity is an active business (e.g. providing goods or services) and (ii) the entity is NOT taxed as a C Corporation. For more on investing a solo 401k plan in private equity, VISIT HERE.

No, you cannot loan money to your own solo 401k for investing as the solo 401k rules do not allow for it.  Reason being, the solo 401k participant/trustee falls under the “disqualified party” umbrella and thus is not allowed to loan funds to his or her solo 401k trust.

No, the rules do not allow for the solo 401k to get a loan for improving an existing solo 401k owned property. Other options to obtain liquid funds include making an annual contribution to the solo 401k plan based on net self-employment income, transferring other retirement funds to the solo 401k from former employer plans and/or pretax IRAs, or liquidating some of your solo 401k investment holdings.

Correct that the Solo 401(k) plan is not required to be the sole investor in the real-estate property. However, specific rules (e.g., the TIC rules) may apply if you or certain family members (e.g., your spouse, parent, grandparent, child, and grandchild) will also invest personal funds.

Please VISIT HERE for more information on the tenants in common rules.

While tenants-in-common is allowed, the Solo 401(k) participant/trustee cannot provide seller financing because his or her Solo 401(k) is also investing in the same property.
When investing in real-estate under a tenants-in-common arrangement using solo 401k funds and non disqualified party funds, seller financing can be utilized as long as it is not provided by the Solo 401(k) participant/trustee.
On the other hand,  if the Solo 401(k) participant/trustee is also investing personal funds alongside his or her  solo 401(k) under a tenants-in-common arrangement, no seller financing is allowed even if provided by a third-party.
 Please VISIT HERE for more information on tenants-in-common transactions.

Yes seller financing may be used as long as the buyer of the currently owned solo 401k property is not a disqualified party (e.g., you, your spouse, children, parents, etc.).  The note would need to list the solo 401k as the beneficiary (lender), an interest rate that benefits the solo 401k must be charged, and the note/loan payments must flow back to the solo 401k plan.

Yes a solo 401k may invest in a lease with the option to purchase, and the contract paperwork will need to be titled in the name of the solo 401k plan. Also, the rental income will need to flow to the solo 401k account. Lastly, The renter cannot be a disqualified party. Examples of disqualified parties include your children, parents and spouse, to name a few.

It is also important to understand the definition of a lease option in the context of reals estate. In real estate, the lease-option is a legal instrument between the investor/seller and a tenant/buyer. It involves a lease with a monthly rental amount due, but it also includes an option to buy — for a pre-determined price — at any time during the agreement.

Both you and your brother can invest funds from your respective Solo 401k plans into a new LLC which then uses the funds to purchase real estate.  If financing is used, financing can’t be guaranteed by you or your brother personally and must be non-recourse to the Solo 401k plans.  This means that the LLC will file a partnership tax return (e.g. 1065 at the federal level and issue a K-1 to each Solo 401k).  See more at the following link: https://www.mysolo401k.net/new-llc-creation-for-solo-401k-and-my-husbands-ira/  Of course, you will have to follow the rules regarding investing in real estate (no personal use, can’t work on the property, etc.). Also,  a solo 401k is a tax-deferred vehicle which means that the gains are tax-deferred.  This also means(which that the property may not be depreciated.

  • Yes you each would have separate sub accounts for your respective solo 401k funds.
  • I understand that you are seeking to buy real estate from an unrelated person with both of your funds in the solo 401(k).
  • In this case, the funds to purchase the property will flow from each of the respective sub accounts (i.e. you each write a check or wire funds to the title or escrow company).
  • Please note that for administrative ease it would be acceptable for the rental income and real estate expenses to flow in and out of one of your Solo 401k accounts provided that there is reconciliation to allocate income and expenses between your accounts in accordance with each of your respective investments in the real estate (e.g. if 2/3 of the funds to purchase the property came from one account then this same account would be entitled to and responsible for two thirds of the income and expenses).
  • It is a good practice to perform this reconciliation at least annually provided that the reconciliation is done prior to any distributions or transfers out of either of your respective accounts.

Either will be in compliance. A Solo 401(k) plan is a retirement trust, so I would say a 401k plan or a retirement trust.

Our plan does implicitly allow for margin trading and specifically references the ability to trade on options under Article III Section 3.01 of the Trust Agreement.
While a Solo 401k can invest on margin, income derived from margin trading is subject to UBIT (please see the links below for additional information.)

Option strategies such as covered calls and covered puts have no margin requirement since the underlying stock is used as collateral. If the solo 401k brokerage account has been approved for margin but the margin account is not being used then Unrelated Business Income Tax (UBIT) would not apply. UBIT is triggered when the margin account is being utilized.

Provided that they issued  the 1099 in the name of the solo 401k and used the plan’s EIN, you just need to keep it for your records since the rental income flowed back to the solo 401k which is a tax deferred vehicle.

Wash sale rules do not apply to retirement accounts such as IRAs and solo 401k plans; therefore, the wash-sale rule does not apply when the stock is bough back in the solo 401k plan or IRA. Under the IRS rules, the sale of the stock in your taxable account and the repurchase of it in your solo 401k plan is considered separate and unrelated transactions. When the stock is bought back in your solo 401k, it does not create basis because distributions from a solo 401k (assuming not a Roth solo 401k) are fully taxable regardless of how much the stock was purchased for within the solo 401k plan. What is more, the wash-sale rule does not apply because solo 401k plans do not receive capital gain tax treatment on solo 401k distributions.  Solo 401k distributions are taxed at ordinary income tax rates not capital gain tax rates.

Depreciation attributable to an investment held in a solo 401k is not applicable to the solo 401k because the income attributable to the solo 401k is tax-deferred, or tax free in the case of a Roth solo 401k.  Moreover, you are certainly not able to claim the depreciation personally.

No as the would result in a prohibited transaction. Both the IRA and solo 401k rules prohibit the lending of solo 401k funds to certain family members including parents and children, for example.

Yes, the solo 401k plan may be invested in T bills.  Click here for a guided tour by Treasury Direct on how to invest a solo 401k plan in treasury bills. You’ll need to select the account type for a  “Trust”. You will apply for the Entity/Trust using the employer identification number (EIN) of the  solo 401k plan.

Your understanding is correct that any depreciation with respect to real estate owned by your solo 401(k) would not be reported on your personal tax return nor would it applied to the solo 401(k) because the income attributable to the solo 401(k) is tax-deferred.

The retirement account rules do not allow the account holder to contribute or otherwise transfer personal assets (including cryptocurrency that you own in your own name) to a Solo 401k.

Roth 401k and Voluntary After-Tax Contributions

A solo 401(k) allows for both Roth and after-tax contributions. While a Roth IRA also allows for Roth contributions, a solo 401(k) allows for sharply higher annual Roth contribution amounts for the employee deferral election than a Roth IRA of up to $20,500 ($27,000 if age 50 or older) in the 2022 tax year versus just $6,500 ($7,500 if age 50 or older), for a Roth IRA. The Roth solo 401k contribution limit for 2023 raised to $20,500 ($27,000 if age 50 or older).

Yes, you can make contributions to both; however, the combined amount contributed in any one year is limited to $20,500 for 2022 (plus an additional $6,500 in catch-up contributions if you age 50 or older). For 2023, the limit of both employee pretax and Roth contributions increased to $22,500  or $30,000 for tax year 2023.

Yes, the combined amount contributed to all Roth accounts and traditional, pre-tax accounts in any one year for any individual is limited to $20,500 for 2022 (plus an additional $6,500 in catch-up contributions if you are age 50 or older). For 2023, Roth contributions increased to $22,500  or $30,000 for tax year 2023.

Our solo 401k plan already allows for all three types of contributions: pretax, Roth and after-tax. Therefore, when we setup your solo 401k plan, you will simply need to open separate bank or brokerage accounts  for each solo 401k contribution component. A separate holding account is required for reporting purposes.

Also, since you have already been taxed on Roth contributions, it is imperative that you record these contributions. At year-end and upon distribution, you will want to disclose to the government what contributions have already been taxed.

You should track all deposits made into your pre-tax (profit-sharing), Roth and after-tax accounts for reporting purposes on year-end tax filings and at the point of distribution. We can assist you with this.

Please note: Due to the pre-tax vs. after-tax component of the different source types, pre-tax and employer profit-sharing contributions should be deposited into the same bank account and tracked each year. The Roth 401(k) contributions, and after-tax contributions must be held in separate bank accounts and tracked separately.

However, if you roll over a distribution from a designated Roth account to a Roth IRA, you should keep track of the amount rolled over in accordance with the instructions to Form 8606, Nondeductible IRAs.

If you receive a distribution from your Solo 401(k) account, you may be responsible for filing a Form 1099-R to report the distribution to the government. When you request the distribution from your investment company, confirm whether they are going to file the 1099-R or not.

Yes, you can roll your Roth 401(k) account over, but only to Roth 401(k) account of another employer, or to your personal Roth IRA.

If you do not roll your Roth account over as described above, the previously unntaxed earnings will be treated as an early distribution from a qualified plan (and consequently subject to the taxes and penalties for any such early distribution) UNLESS you had this Roth account for more than five years.

Yes. Earnings associated with solo 401k voluntary after-tax contributions are pretax amounts in your account.  Thus, voluntary after-tax contributions can be rolled over to a Roth IRA without also including earnings.  Under Notice 2014-54, you may roll over pretax amounts in a distribution to a traditional IRA and, in that case, the amounts will not be included in income until distributed from the IRA.

Good question but the answers is no because the Roth solo 401k contribution is considered an elective deferral and is made up of 100% of compensation (“earned income” in the case of a self-employed individual) up to the annual contribution limit of $20,500 in 2022, or $27,000 for 2022 if age 50 or over. Therefore, since your earned income is $10,000, you will not be able to contribute the full $20,500 to the Roth solo 401k plan for tax year 2022.

Effective September 27, 2010, the Small Business Jobs Act of 2010 allows participants in solo 401(k) plans to roll over (i.e., convert) non-Roth assets such as pretax tax funds to a designated Roth account within the solo 401k plan. Regardless of the self-employed business entity type, the Roth 401k including the Roth solo 401k conversion rules require the conversion processed (i.e., the funds and/or assets converted to the Roth designated account) by 12/31/2018 in order for it to be effective for tax year 2018.

Yes. At the time that you establish your Solo 401k checking account or when you are ready. The key is that you have to segregate the regular (pre-tax) contributions from the Roth (post-tax) contributions by establishing two checking accounts under the name of your Solo 401k. When you are ready just gives a call and we can assist you with this.

If you already have a Solo 401k plan with us, you will need to open up an additional checking account with your bank provider for your Roth contributions.

To find out how to set up a Roth account with us if you already have a Solo 401k account, please contact us.

Participant Loans

It takes about two business days to process the loan.

Yes you can take multiple loans up to the 50% of your solo 401k account balance not to exceed $50,000 in aggregate. You can take multiple loans subject to the multiple loan rules.  Under those rules, the sum of the balances of the outstanding loans (using the highest outstanding balance of each loan over the last 12 months) can’t exceed 50% or $50,00 whichever is less.  Thus, if you took a $50,000 loan and paid it back within 6 months, you would need to wait another 6 months before you could take another $50,000 loan.To learn more about the solo 401k participant loan limits, CLICK HERE.

You can borrow for a maximum of 5 years because title to the property would need to be taken in your name not the LLC in order to fall under the primary residence exception which would allow  for a 15 or 30 year pay back period.

No. The rate does not vary once the solo 401k participant loan has been processed. If the Federal Reserve reduces rates such that at a future point in time the Prime Rate is also reduced, then the rate for new participant loans will also be reduced on new loans as of that date. The current prime rate plus an additional 1% is how the rate for 401k participant loans is derived at time the solo 401k participant loan is processed.

In order to have a term longer than five years, the proceeds of the Solo 401k loan must be used to purchase your primary residence. Here, you would not be able to take advantage of the longer-term because you already purchased the property. In that case, the term of the loan would be limited to five years.

 

The solo 401k participant loan is based on the value of the plan assets (i.e. cash plus stock and any other investments in plan such as real estate) and not just cash – this means that it doesn’t matter whether you take the participant loan before or after the investment in stock or real estate, and you can take a 40k loan in both cases.

As far as the terms of the loan, you would need to pay it back on a monthly or quarterly basis (as you select) over a five-year term with payments of principal and interest at a rate of prime +1%.

Solo 401k loan payments including the interest which all flow to the solo 401k plan are not tax deductible. This is one of the disadvantages of borrowing from a solo 401k plan.

No tax forms need to be filed on account of taking a solo 401k participant loan unless the loan goes into default. Also, the solo 401k participant loan balance as of the end of the year is reported on Form 5500-EZ once this return applies to the solo 401k plan.

Yes, you can find answers by visiting the IRS page on 401k loan rules.

You can also visit our solo 401k loan FAQ page by CLICKING HERE.

While the solo 401k plan can be adopted in 24  hours, what adds to time to the solo 401k establishment process is the transfer process from IRAs or former employer plans as the institution holding the existing retirement funds has their own processing times. As  a result, you will want to easily allow 10 to 12 business days before your account is fully funded with transfers from IRAs for your former employer plan.  The solo 401k participant loan documents can be drafted in one to two business days once the funds are available in the solo 401k plan.

Termination

(i) First, your business may hire an independent contractor with no impact to the Solo 401k.  Your business may also hire w-2 employees who work less than 1000 hours per year with no impact to the Solo 401k.
(ii) If your business hires a w-2 employee who is working more than 1000 hours per year with 1 year of service, the plan will either need to be shut down (and the assets tranferred to an IRA) or the plan will need to be amended to allow for non-owner employees to participate (with the associated costs incurred).
(iii) If the plan is shut down, the investments do not need to be liquidated but rather can be transferred in-kind to an IRA.  Please note that if your Solo 401k is invested in alternative investments these investment will need to be tranferred to an IRA that will allow you to hold such investments (e.g. our IRA LLC plan).  Please note that if you have an outstanding loan, the loan will need to be paid back prior to shutting down the plan or the unpaid balance will be considered a taxable distribution subject to taxes and/or penalties.
(iv) If your plan is amended to allow for other non-owner employees to participate, it may be difficult to find an economical provider that allows for both additional employees and alternative investments.  As such, if you don’t want to liquidate the investments you may need to transfer the alternative investments to an IRA that will allow you to hold such investments & then amend the plan to allow for additional investments.

Yes you can still continue to participate in the Solo 401(k) plan provided you continue to be self-employed with no full-time W-2 employees.  Therefore, the solo 401k plan can be updated to list your new self-employed business entity from the LLC to the sole proprietorship. Please let us know when you’re ready to proceed and we will process the necessary plan update to reflect your new self-employed business.  All other information for the plan would remain the same including the plan’s name, EIN, bank/brokerage account, and title listed on the solo 401k owned investments. Otherwise, if you are no longer self-employed the solo 41k plan can be transferred to a self-directed IRA LLC.

In-Kind Distributions QUESTION:

Rollovers

IRC Section 408(d)(3)(A)(ii) states that after-tax IRA funds cannot be transferred to a qualified plan such as a solo 401k plan. However, yes you can transfer the gains in the non-deductible IRA to the pretax bucket of the solo 401k plan. See following language on page 21 of IRS Pub 590.

Finally, once you have transferred all the gains from the non-deductible IRA(s) to the solo 401k plan, you can then convert the IRA basis to a Roth IRA. No taxes will be owed on the Roth IRA conversion because it only consists of basis.

If you receive the funds in the form of a rollover instead of a direct-rollover, you have 60 days from the day you receive your rollover check to roll your funds over. To learn about a rollover vs a direct-rollover, CLICK HERE.

By using code “K” in conjunction with code “G” in box 7 of Form 1099-R , the self-directed IRA custodian is effectively communicating to the IRS that while the direct rollover of the alternative investment held in the IRA to the self-directed solo 401k was not treated as a taxable distribution but rather a non-taxable direct rollover, the self-directed IRA custodian is not responsible for determining if the value of the alternative investment was determined prior to them processing the in-kind direct rollover. This is a way of the self-directed IRA custodian to cover themselves since they do not perform valuations of alternative investments.

If the individual is self-employed with no full-time W-2 employees, he or she can set up our solo 401(k) plan which allows for alternative investments such as private placements, syndicated real estate financing transactions, etc. provided that the investment is a passive investment (e.g. the person is not otherwise involved with the investment provider such as working for the provider nor involved with the underlying real estate in the case of a real estate fund such as using the underlying real estate property).

Moreover, our Solo 401k would allow the person to rollover an asset from a traditional IRA to the solo 401(k) (i.e. in-kind direct rollover). Specifically, to complete the rollover the investment provider  would need to update its records to show that the investment is held in the name of the solo 401(k) and under the employer identification number for the solo 401k (we obtain an EIN for the plan as part of the establishment process).  In addition, the existing IRA provider would report this transfer as an in-kind direct rollover by issuing the 1099R with a code G in box 7.  Please note that we would guide the client through transfer process as part of our services for no additional charge.  In addition, please note that the client (not us) would hold the investment documents as the trustee of the Solo 401k plan.

You can transfer other qualified plans such as former employer 401k plans as well as pretax IRAs to the solo 401k plan. Click here for a list of retirement accounts that can be transferred to a solo 401k plan.

 

Funds can be transferred to the solo 401k from IRAs and former employer plans at account opening or at a later date. Also, partial transfers can be processed.  Please just let us know and we can assist you in the transfer process as part of our services.

No, your stocks and alternative investments (e.g., real estate, notes, etc.) can be transferred in-kind, which means that they will be transferred as is to your new plan.

 

That is in line with the two year SIMPLE IRA rule.  The two-year period starts on the day the employer makes the first contribution to the individual’s SIMPLE IRA, and ends exactly two years later. See [Notice 98-4, Q&A I-2, 1998-1 C.B. 269]

No additional forms apply as it appears they processed it as a direct-rollover. When you receive the check, please make sure they made it payable in the name of the solo 401k plan name. If so, you can proceed with depositing it into the Solo 401k bank or brokerage account. Write the solo 401k account number on the back of the check before depositing it.

It is best to move the IRA funds to a solo 401k plan via a direct-rollover instead of a rollover.
Reason being, the IRS gets nervous when the IRA funds are first deposited into your personal bank account and then to a solo 401k plan 60 days later. For this reason, the IRS requires a code 1 or 7 in box 7 of Form 1099-R to report the “rollover,” which results in you as the account holder having to explain when you file your Form 1040 that the funds were rolled over to a solo 401k plan within 60 days. This is the only way the IRS will know that you in fact rolled over the funds to a solo 401k plan within 60 days because a Form 5498 does not apply to solo 401k plans.
Please VISIT HERE to learn more about the rollover and direct rollover rules.

Eligibility

If your spouse performs services and is compensated from the business, this person can participate in the same Solo 401(k) plan. The maximum amount your spouse can save also depends on his or her income, salary and age. A solo 401(k) is for business owners and their spouses.

Since Solo 401(k) is for owner-only businesses, partners are eligible to participate as well as family members if they are also partners in the same business. In other words, solo 401k plans are only for owner-only businesses with no full-time W-2 employees who are not owners of the business sponsoring the solo 401k plan.

 

Yes, a 501(c)(3) entity may have a solo 401(k) plan, provided the business does not employ any full-time, common-law employees because a solo 401k is for owner-only businesses.  Contributions to the solo 401k plan would be based on W-2 wages generated through the 501(c)(3) corporation.

 

No – the Solo 401k Must be sponsored by your self-employed business. However, some clients list their living trust as the beneficiary of the solo 401K in the event of death. Of course, you would want to discuss this with your estate tax adviser.  One of the solo 401k plan documents that we provide is the beneficiary election form where you can list your plan’s beneficiaries.

Unlike an IRA where one spouse can contribute to the other spouse’s IRA (spouse IRA) based on the contributing spouse’s earned income if certain rule are satisfied (e.g., both spouses file a joint tax return-Form 1040), the same rule does not apply to a solo 401k plan. However, if you both work for the same self-employed business that sponsors the solo 401k, you can participate in the same solo 401k plan and make contributions to the solo 401k plan based on your respective net self-employment income. I would check with your CPA as you may be able to to get creative in allocating earned income if you both  work for the same business.

Prior to hiring any full-time employees, we recommend that you get in touch with us by e-mail at [email protected] to find out how we can assist you with additional retirement plan services that will support your company’s growth.

Note that once you hire a full-time employee, you will no longer be eligible to maintain a Solo 401(k). It is very important that you get in touch with us at that time to discuss your options.

Yes the S-corp can sponsor a solo 401k plan since the 1% shareholder is not a W-2 employee. Click here for additional information.

 

 

Your wife can still  participate in the solo 401k plan even if she works for another W-2 employer since she is still also doing part time self-deployment activity.  In addition to the IRS rules allowing for participation in both a full-time employer 401k with another employer (one not owned by the individual with the owner-only business) as well as a solo 401k plan for the individual’s owner only business, The IRS rules even allow for contributions to both plans provided certain contribution rules are met.

 

While some states do recognize the existence of an oral trust, a solo 401k plan will not be considered qualified by the IRS unless unless it is established in written form. See  Treas. Reg. 1.401-1(a)(2). The  solo 401k plan document must include specific provisions essential for qualification. See Rev. Rul 74-466, 1974-2 C.B. 131. The plan document for the solo 401k plan defines the obligations for the plan sponsor and the participant. Lastly, the solo 401k plan document must be reviewed and approved by the IRS and considered qualified once the IRS determination letter has been issued.

Contributions

No because a solo 401k is for owner-only employees not common-law employees.

No, there is not. You are not required to contribute to the plan every year.

If you are age 50 or older, you can contribute an additional $6,500 (for 2022) into your Solo 401(k) plan. The catch-up contribution increased to $7,500 for tax year 2023.

For details of how much more you can stash away this year, please contact us at [email protected], or visit our on-line solo 401k contribution calculator.

No, the profit sharing contribution limits apply separately to each employer plan. The profit-sharing contribution cannot exceed 25% of gross income from a corporation, or 20% of net earned income for sole proprietors/partners. To learn about the rules surrounding making profit sharing contributions to multiple plans, VISIT HERE.

Unfortunately, retirement payments, Social Security, and investment income are not considered earned income. Self-employment income is what is needed in order to make solo 401k contributions.

 

No. A roth 401k contribution is an employee contribution (salary deferral) and before being able to transfer to a Roth IRA there must be a trigger event (e.g., age 59 1/2 or over).

 

 

No. Pretax solo 401k contributions do not reduce social security tax or Medicare tax. However, the solo 401k contributions will grow on a taxed deferred basis and social security taxes won’t apply when you later distribute (at retirement age) the funds from the solo 401k plan.

 

No you do not need to deposit your Solo 401k contributions by year-end.  Per the IRS publication covering the rules for Solo 401k plans and other owner-only retirement plans (IRS Publication 560), both employee and employer contributions can be made by the due date of the tax return for your self-employed business including timely-filed extensions.  Specifically, the chart titled “Key Retirement Plan Rules” on page 3 the publication states that both employee and employer contributions can be made up until the tax return is due (including extensions). VISIT HERE, to learn more about this often misunderstood rule.

 

Since the solo 401k plan was opened after the w-2 employee separated from service and the company did not already sponsor another 401k plan, the business is not required to make any contributions on the separated employee’s behalf.
Therefore, you can make both your employee and profit sharing contributions to the solo 401k plan based on your W-2 wages since your self-employed business is and LLC taxed as an S-corp. and you don’t employee any full-time W-2 employees without having to take into account the previous w-2 employee.

Good question, but annual solo 401k contributions have to be based on self-employment income and have to be in cash form not assets (e.g., stocks, mutual funds, real estate, etc).

 

Unlike a Roth IRA where if their child works, the parents can contribute to their son or daughter’s Roth IRA, the same rule is not afforded to 401k plans including solo 401k plans, whether  Roth solo 401k contributions or pretax solo 401k contributions. Contributions to a solo 401k plan can only be based on earned income from self-employment activity, and gifted money is not considered income from self-employment activity.

 

In order to make annual solo 401k contributions, you must be self-employed with no full-time W-2 employees and the contribution has to be based on earned income generated from your self-employed business; therefore,  no alimony payments can not be used to make annual solo 401k contributions. On a side note, taxable alimony payments will no longer be deductible or considered eligible compensation for IRA contribution purposes beginning in 2019.

 

Just earned income from self-employment activity.

 

Yes. Solo 401k plans are for owner-only businesses (i.e., businesses with no common law employees), equal contributions do not apply; therefore, just one spouse can contribute while other does not.

 

In terms of tax benefits, profit-sharing plan contributions are exempt from FICA tax because the corporation, not you (the W-2 employee), makes contributions on your behalf.  See the following for more.  The employee contribution (salary deferral) does not reduce FICA, however.  In your example the $25,000 would be subject to FICA taxes whether applied as a  pretax contribution or a Roth solo 401k contribution because it falls under the employee contribution umbrella. On a side note,  pretax contributions reduce the amount of income tax due for the year whereas Roth solo 401k contributions do not.

As long as you are self-employed when you fund your solo 401k plan via a transfer of former employer retirement funds or IRA funds, no the IRS does not require that you make annual contributions to your solo 401k. In fact, in years that you end up with a net loss from self-employment activity performed, you cannot make contributions to a solo 401k plan.

While the solo 401k contribution limits will now change as a result of your self-employed business changing from being taxed as a sole proprietorship to now a S-corporation, the solo 401k contributions will now be based on W-2 wages under the S-corp instead of line 31 of your Schedule C.  Also, your solo 401k annual contributions will now need to be made by March 15, or September 15 if tax return extension is timely filed instead of April 15, or October 15 if tax return extension is timely filed.

The conservative approach would be to wait until you know the total self-employment income figure for the year before making annual solo 401k contribution since the contribution rules allow the participant to wait until his or her business tax return due date plus timely filed business tax extension to make solo 401k contributions.

 

While you don’t have to pay additional social security or Medicare (FICA) taxes on your self-employment income if you have already satisfied the due amount through your W-2 job, you still have to reduce 1/2 of FICA when performing the solo 401k contribution when the self-employed business is taxed as a sole proprietorship or partnership.

 

 

The 401k regulations allow for annual contributions to a solo 401k in the form of virtual currency (such as Bitcoin) if it resulted from self-employment services performed under the self-employed business. The regulations further state that you must include the FMV of the currency in your income, and that the FMV of virtual currency paid as wages are subject to federal income tax withholding.  Notice 2014-21, 2014-16 I.R.B.

 

Investments

Just make sure the Form 1099-INT lists the solo 401k trust name and the plan’s EIN, and keep it for your records. As long as the note payments flow back to the solo 401k plan the payments will maintain their tax deferred status until you commence taking distributions from the solo 401k plan.

 

The Solo 401(k) plan can obtain a non-recourse loan but the borrowed funds have to be used toward the purchase of the real-estate property. Any remaining funds in the solo 401k plan after the purchase can be used to rehab the property.

Click here for a list of banks that will loan funds a Solo 401(k) plan.

Contributions, investing in alternative investments such as real estate, and taking 401(k) participant loans are all allowed under the 401(k) rules provided that the plan documents allow for such.  We have an IRS approved plan document which does allow for all of these transactions.

 

 

We are not aware of any specific prohibition on purchasing a domain name via a Solo 401k.  As such, this is acceptable provided that (i) the domain name is purchased from an unrelated person; (ii) the title is issued in the name of the Solo 401k (e.g. your name as trustee of Solo 401k) – which you should confirm that this is possible; and (iii) the domain name is not operating as an active business.

Yes as long as you are not otherwise involved in the fund & the investment is titled in the name of the Solo 401k, the funds flow in and out of the Solo 401k, etc.

 

 

I understand that the K-1 is issued to the Solo 401k for investments made via the Solo 401k.  In that case, any gains are on a tax-deferred basis since in the Solo 401k.  Please simply keep the K-1 in your records.

 

While a solo 401k cannot be invested in your own LLC business without running afoul with the solo 401k prohibited transaction rules, the solo 401k may be invested in a LLC for passively placing investments that can also be placed through the solo 401k directly. These passive investments include real estate, promissory notes, and tax liens, to name a few.

 

While you can also serve as the manager of the solo 401k owned LLC, you may not receive any type of compensation for managerial services. Please CLICK HERE for more on the Solo 401k LLC.

However, our solo 401k plan allows for solo 401k participant loans and the loan proceeds can be used in any way you want, such as putting the loan proceeds towards your startup LLC. You can borrow up to half of your Solo 401k balance, not to exceed 50,000.

If you are looking to use more than than the allowable solo 401k participant loan limit, you can also explore the business financing 401k also known as the rollover business startup which would allow you to invest your retirement money in your own business provided the entity is a C corporation that offers goods or services. To learn more about this plan, please see the following.

401k Business Financing Plan – Learn More:

No. You don’t have to submit the investments for our approval since we are not the trustee of your solo 401k plan.  At the same time, we are here if you have questions. We also have free investment forms located here for your internal use as it is important to fully document your solo 401k alternative investments.

 

When a solo 401k invests in allowed alternative investments directly or through an LLC where the solo 401k is the sole member, it is not considered a distribution unless you violate the prohibited transaction rules outlined in the following pages.

(1) This is acceptable provided that (i) neither of you (nor any closed related persons) are working for the entity in which you intend to invest retirement funds; (ii) neither of you (nor any closed related persons) hold any ownership position personally in the entity in which you intend to invest retirement funds; and (iii) neither of you (nor any closed related persons) otherwise do not have a relationship with this entity either in your own name or through an entity that you control (e.g. you are not a landlord, lender, vendor, etc.).

(2) The investment must be titled in the name of the Solo 401k with funds flowing from the Solo 401k account(s) and any return on the investment flowing back to the Solo 401k account(s).  If both solo 401k participants will invest in the investment, the investment would simply be titled in the name of the Solo 401k listing both participants as the trustees with funds flowing from your respective accounts at the time that the investment is made.  For administrative ease, it is acceptable if the return flows back to one account and then subsequently allocated and reconciled between the two accounts.

(2) If the investment is structured as equity (e.g. stock in a corporation, membership interest in an LLC, etc.) the investment may be subject to unrelated business income tax if (I) the entity is an active business (e.g. providing goods or services) and (ii) the entity is NOT taxed as a C Corporation. For more on investing a solo 401k plan in private equity, VISIT HERE.

No, you cannot loan money to your own solo 401k for investing as the solo 401k rules do not allow for it.  Reason being, the solo 401k participant/trustee falls under the “disqualified party” umbrella and thus is not allowed to loan funds to his or her solo 401k trust.

 

No, the rules do not allow for the solo 401k to get a loan for improving an existing solo 401k owned property. Other options to obtain liquid funds include making an annual contribution to the solo 401k plan based on net self-employment income, transferring other retirement funds to the solo 401k from former employer plans and/or pretax IRAs, or liquidating some of your solo 401k investment holdings.

 

 

Correct that the Solo 401(k) plan is not required to be the sole investor in the real-estate property. However, specific rules (e.g., the TIC rules) may apply if you or certain family members (e.g., your spouse, parent, grandparent, child, and grandchild) will also invest personal funds.

Please VISIT HERE for more information on the tenants in common rules.

While tenants-in-common is allowed, the Solo 401(k) participant/trustee cannot provide seller financing because his or her Solo 401(k) is also investing in the same property.
When investing in real-estate under a tenants-in-common arrangement using solo 401k funds and non disqualified party funds, seller financing can be utilized as long as it is not provided by the Solo 401(k) participant/trustee.
On the other hand,  if the Solo 401(k) participant/trustee is also investing personal funds alongside his or her  solo 401(k) under a tenants-in-common arrangement, no seller financing is allowed even if provided by a third-party.
 Please VISIT HERE for more information on tenants-in-common transactions.

Yes seller financing may be used as long as the buyer of the currently owned solo 401k property is not a disqualified party (e.g., you, your spouse, children, parents, etc.).  The note would need to list the solo 401k as the beneficiary (lender), an interest rate that benefits the solo 401k must be charged, and the note/loan payments must flow back to the solo 401k plan.

 

 

Yes a solo 401k may invest in a lease with the option to purchase, and the contract paperwork will need to be titled in the name of the solo 401k plan. Also, the rental income will need to flow to the solo 401k account. Lastly, The renter cannot be a disqualified party. Examples of disqualified parties include your children, parents and spouse, to name a few.

It is also important to understand the definition of a lease option in the context of reals estate. In real estate, the lease-option is a legal instrument between the investor/seller and a tenant/buyer. It involves a lease with a monthly rental amount due, but it also includes an option to buy — for a pre-determined price — at any time during the agreement.

Both you and your brother can invest funds from your respective Solo 401k plans into a new LLC which then uses the funds to purchase real estate.  If financing is used, financing can’t be guaranteed by you or your brother personally and must be non-recourse to the Solo 401k plans.  This means that the LLC will file a partnership tax return (e.g. 1065 at the federal level and issue a K-1 to each Solo 401k).  See more at the following link: https://www.mysolo401k.net/new-llc-creation-for-solo-401k-and-my-husbands-ira/  Of course, you will have to follow the rules regarding investing in real estate (no personal use, can’t work on the property, etc.). Also,  a solo 401k is a tax-deferred vehicle which means that the gains are tax-deferred.  This also means(which that the property may not be depreciated.

  • Yes you each would have separate sub accounts for your respective solo 401k funds.
  • I understand that you are seeking to buy real estate from an unrelated person with both of your funds in the solo 401(k).
  • In this case, the funds to purchase the property will flow from each of the respective sub accounts (i.e. you each write a check or wire funds to the title or escrow company).
  • Please note that for administrative ease it would be acceptable for the rental income and real estate expenses to flow in and out of one of your Solo 401k accounts provided that there is reconciliation to allocate income and expenses between your accounts in accordance with each of your respective investments in the real estate (e.g. if 2/3 of the funds to purchase the property came from one account then this same account would be entitled to and responsible for two thirds of the income and expenses).
  • It is a good practice to perform this reconciliation at least annually provided that the reconciliation is done prior to any distributions or transfers out of either of your respective accounts.

Either will be in compliance. A Solo 401(k) plan is a retirement trust, so I would say a 401k plan or a retirement trust.

Our plan does implicitly allow for margin trading and specifically references the ability to trade on options under Article III Section 3.01 of the Trust Agreement.
While a Solo 401k can invest on margin, income derived from margin trading is subject to UBIT (please see the links below for additional information.)

Option strategies such as covered calls and covered puts have no margin requirement since the underlying stock is used as collateral. If the solo 401k brokerage account has been approved for margin but the margin account is not being used then Unrelated Business Income Tax (UBIT) would not apply. UBIT is triggered when the margin account is being utilized.

Provided that they issued  the 1099 in the name of the solo 401k and used the plan’s EIN, you just need to keep it for your records since the rental income flowed back to the solo 401k which is a tax deferred vehicle.

Wash sale rules do not apply to retirement accounts such as IRAs and solo 401k plans; therefore, the wash-sale rule does not apply when the stock is bough back in the solo 401k plan or IRA. Under the IRS rules, the sale of the stock in your taxable account and the repurchase of it in your solo 401k plan is considered separate and unrelated transactions. When the stock is bought back in your solo 401k, it does not create basis because distributions from a solo 401k (assuming not a Roth solo 401k) are fully taxable regardless of how much the stock was purchased for within the solo 401k plan. What is more, the wash-sale rule does not apply because solo 401k plans do not receive capital gain tax treatment on solo 401k distributions.  Solo 401k distributions are taxed at ordinary income tax rates not capital gain tax rates.

Depreciation attributable to an investment held in a solo 401k is not applicable to the solo 401k because the income attributable to the solo 401k is tax-deferred, or tax free in the case of a Roth solo 401k.  Moreover, you are certainly not able to claim the depreciation personally.

No as the would result in a prohibited transaction. Both the IRA and solo 401k rules prohibit the lending of solo 401k funds to certain family members including parents and children, for example.

 

Yes, the solo 401k plan may be invested in T bills.  Click here for a guided tour by Treasury Direct on how to invest a solo 401k plan in treasury bills. You’ll need to select the account type for a  “Trust”. You will apply for the Entity/Trust using the employer identification number (EIN) of the  solo 401k plan.

 

 

Your understanding is correct that any depreciation with respect to real estate owned by your solo 401(k) would not be reported on your personal tax return nor would it applied to the solo 401(k) because the income attributable to the solo 401(k) is tax-deferred.

 

 

The retirement account rules do not allow the account holder to contribute or otherwise transfer personal assets (including cryptocurrency that you own in your own name) to a Solo 401k.

 

Roth 401k and Voluntary After-Tax Contributions

A solo 401(k) allows for both Roth and after-tax contributions. While a Roth IRA also allows for Roth contributions, a solo 401(k) allows for sharply higher annual Roth contribution amounts for the employee deferral election than a Roth IRA of up to $20,500 ($27,000 if age 50 or older) in the 2022 tax year versus just $6,500 ($7,500 if age 50 or older), for a Roth IRA. The Roth solo 401k contribution limit for 2023 raised to $20,500 ($27,000 if age 50 or older).

Yes, you can make contributions to both; however, the combined amount contributed in any one year is limited to $20,500 for 2022 (plus an additional $6,500 in catch-up contributions if you age 50 or older). For 2023, the limit of both employee pretax and Roth contributions increased to $22,500  or $30,000 for tax year 2023.

Yes, the combined amount contributed to all Roth accounts and traditional, pre-tax accounts in any one year for any individual is limited to $20,500 for 2022 (plus an additional $6,500 in catch-up contributions if you are age 50 or older). For 2023, Roth contributions increased to $22,500  or $30,000 for tax year 2023.

Our solo 401k plan already allows for all three types of contributions: pretax, Roth and after-tax. Therefore, when we setup your solo 401k plan, you will simply need to open separate bank or brokerage accounts  for each solo 401k contribution component. A separate holding account is required for reporting purposes.

Also, since you have already been taxed on Roth contributions, it is imperative that you record these contributions. At year-end and upon distribution, you will want to disclose to the government what contributions have already been taxed.

You should track all deposits made into your pre-tax (profit-sharing), Roth and after-tax accounts for reporting purposes on year-end tax filings and at the point of distribution. We can assist you with this.

Please note: Due to the pre-tax vs. after-tax component of the different source types, pre-tax and employer profit-sharing contributions should be deposited into the same bank account and tracked each year. The Roth 401(k) contributions, and after-tax contributions must be held in separate bank accounts and tracked separately.

However, if you roll over a distribution from a designated Roth account to a Roth IRA, you should keep track of the amount rolled over in accordance with the instructions to Form 8606, Nondeductible IRAs.

If you receive a distribution from your Solo 401(k) account, you may be responsible for filing a Form 1099-R to report the distribution to the government. When you request the distribution from your investment company, confirm whether they are going to file the 1099-R or not.

Yes, you can roll your Roth 401(k) account over, but only to Roth 401(k) account of another employer, or to your personal Roth IRA. 

If you do not roll your Roth account over as described above, the previously unntaxed earnings will be treated as an early distribution from a qualified plan (and consequently subject to the taxes and penalties for any such early distribution) UNLESS you had this Roth account for more than five years.

 

Yes. Earnings associated with solo 401k voluntary after-tax contributions are pretax amounts in your account.  Thus, voluntary after-tax contributions can be rolled over to a Roth IRA without also including earnings.  Under Notice 2014-54, you may roll over pretax amounts in a distribution to a traditional IRA and, in that case, the amounts will not be included in income until distributed from the IRA.

Good question but the answers is no because the Roth solo 401k contribution is considered an elective deferral and is made up of 100% of compensation (“earned income” in the case of a self-employed individual) up to the annual contribution limit of $20,500 in 2022, or $27,000 for 2022 if age 50 or over. Therefore, since your earned income is $10,000, you will not be able to contribute the full $20,500 to the Roth solo 401k plan for tax year 2022.

Effective September 27, 2010, the Small Business Jobs Act of 2010 allows participants in solo 401(k) plans to roll over (i.e., convert) non-Roth assets such as pretax tax funds to a designated Roth account within the solo 401k plan. Regardless of the self-employed business entity type, the Roth 401k including the Roth solo 401k conversion rules require the conversion processed (i.e., the funds and/or assets converted to the Roth designated account) by 12/31/2018 in order for it to be effective for tax year 2018.

Yes. At the time that you establish your Solo 401k checking account or when you are ready. The key is that you have to segregate the regular (pre-tax) contributions from the Roth (post-tax) contributions by establishing two checking accounts under the name of your Solo 401k. When you are ready just gives a call and we can assist you with this.

If you already have a Solo 401k plan with us, you will need to open up an additional checking account with your bank provider for your Roth contributions.

To find out how to set up a Roth account with us if you already have a Solo 401k account, please contact us.

Participant Loans

It takes about two business days to process the loan.

Yes you can take multiple loans up to the 50% of your solo 401k account balance not to exceed $50,000 in aggregate. You can take multiple loans subject to the multiple loan rules.  Under those rules, the sum of the balances of the outstanding loans (using the highest outstanding balance of each loan over the last 12 months) can’t exceed 50% or $50,00 whichever is less.  Thus, if you took a $50,000 loan and paid it back within 6 months, you would need to wait another 6 months before you could take another $50,000 loan.To learn more about the solo 401k participant loan limits, CLICK HERE.

 

 

You can borrow for a maximum of 5 years because title to the property would need to be taken in your name not the LLC in order to fall under the primary residence exception which would allow  for a 15 or 30 year pay back period.

 

 

No. The rate does not vary once the solo 401k participant loan has been processed. If the Federal Reserve reduces rates such that at a future point in time the Prime Rate is also reduced, then the rate for new participant loans will also be reduced on new loans as of that date. The current prime rate plus an additional 1% is how the rate for 401k participant loans is derived at time the solo 401k participant loan is processed.

 

 

In order to have a term longer than five years, the proceeds of the Solo 401k loan must be used to purchase your primary residence. Here, you would not be able to take advantage of the longer-term because you already purchased the property. In that case, the term of the loan would be limited to five years.

 

 

The solo 401k participant loan is based on the value of the plan assets (i.e. cash plus stock and any other investments in plan such as real estate) and not just cash – this means that it doesn’t matter whether you take the participant loan before or after the investment in stock or real estate, and you can take a 40k loan in both cases.

As far as the terms of the loan, you would need to pay it back on a monthly or quarterly basis (as you select) over a five-year term with payments of principal and interest at a rate of prime +1%.

Solo 401k loan payments including the interest which all flow to the solo 401k plan are not tax deductible. This is one of the disadvantages of borrowing from a solo 401k plan.

 

 

No tax forms need to be filed on account of taking a solo 401k participant loan unless the loan goes into default. Also, the solo 401k participant loan balance as of the end of the year is reported on Form 5500-EZ once this return applies to the solo 401k plan.

 

 

Yes, you can find answers by visiting the IRS page on 401k loan rules.

You can also visit our solo 401k loan FAQ page by CLICKING HERE.

While the solo 401k plan can be adopted in 24  hours, what adds to time to the solo 401k establishment process is the transfer process from IRAs or former employer plans as the institution holding the existing retirement funds has their own processing times. As  a result, you will want to easily allow 10 to 12 business days before your account is fully funded with transfers from IRAs for your former employer plan.  The solo 401k participant loan documents can be drafted in one to two business days once the funds are available in the solo 401k plan.

 

Termination

Termination

(i) First, your business may hire an independent contractor with no impact to the Solo 401k.  Your business may also hire w-2 employees who work less than 1000 hours per year with no impact to the Solo 401k.
(ii) If your business hires a w-2 employee who is working more than 1000 hours per year with 1 year of service, the plan will either need to be shut down (and the assets tranferred to an IRA) or the plan will need to be amended to allow for non-owner employees to participate (with the associated costs incurred).
(iii) If the plan is shut down, the investments do not need to be liquidated but rather can be transferred in-kind to an IRA.  Please note that if your Solo 401k is invested in alternative investments these investment will need to be tranferred to an IRA that will allow you to hold such investments (e.g. our IRA LLC plan).  Please note that if you have an outstanding loan, the loan will need to be paid back prior to shutting down the plan or the unpaid balance will be considered a taxable distribution subject to taxes and/or penalties.
(iv) If your plan is amended to allow for other non-owner employees to participate, it may be difficult to find an economical provider that allows for both additional employees and alternative investments.  As such, if you don’t want to liquidate the investments you may need to transfer the alternative investments to an IRA that will allow you to hold such investments & then amend the plan to allow for additional investments.

Yes you can still continue to participate in the Solo 401(k) plan provided you continue to be self-employed with no full-time W-2 employees.  Therefore, the solo 401k plan can be updated to list your new self-employed business entity from the LLC to the sole proprietorship. Please let us know when you’re ready to proceed and we will process the necessary plan update to reflect your new self-employed business.  All other information for the plan would remain the same including the plan’s name, EIN, bank/brokerage account, and title listed on the solo 401k owned investments. Otherwise, if you are no longer self-employed the solo 41k plan can be transferred to a self-directed IRA LLC.

MORE SOLO 401K FAQs

In-Kind Distributions QUESTION:

Use Assessed Value of Property for In-Kind Distribution Solo 401k QUESTION:

In-kind Distribution of Promissory Note QUESTION:

Distribution of cryptocurrency/Bitcoin  QUESTION:

Under Age 59 1/2 Distributions QUESTION:

Apply Roth IRA 5 Year Distribution Clock to Roth Solo 401k QUESTION:

Roth Solo 401k Less than 5 Years Direct-Rollover to Roth IRA QUESTION:

Partial Rollover/Transfer QUESTION:

First Age 73  RMD  QUESTION:

Roth Solo 401k Forced RMD QUESTION:

Bank or Brokerage Firm Role QUESTION:

Types of Real Estate QUESTION:

Alternative Investment Types QUESTION:

RMD QUESTION:

Shutting Down Solo 401k QUESTION:

Specific Bank or Firm QUESTION:

Pricing QUESTION:

Bank Account and Brokerage Account QUESTION:

Affect Financial Aid QUESTION:

Can a Writer Open a Solo 401k QUESTION:

Rollover My IRA QUESTION:

I Already Have a Solo 401k QUESTION:

Make Solo 401k Distributions QUESTION:

Contribute to Multiple 401k Plans QUESTION:

Promissory Note Investment QUESTION:

Industry Practice for Transfers/Rollover QUESTION:

Note Investment to My Parents QUESTION:

Solo 401k Friends QUESTION:

Invest in Friend’s Real Estate LLC QUESTION:

UDFI QUESTION:

Publication Where UDFI is Cited QUESTION:

UBIT QUESTION:

Private Equity Investment QUESTION:

Use Business Bank Account for Solo 401k QUESTION:

Remitting the 20% Mandatory Federal Tax QUESTION:

Will You Issue the Form 1099-R QUESTION:

No Paycheck QUESTION:

Beneficiary IRA QUESTION:

Transfer Funds from Current Employer 401k that We Rolled Over from Another Employer 401k QUESTION:

Rollover to IRA QUESTION:

[

IRA or Solo 401k QUESTION:

Pursuing Self-Employment Activity QUESTION:

Taking RMD from Roth and Pretax Solo 401k Funds QUESTION:

How Easy to Amend/Restate From Brokerage House/Firm QUESTION:

S-Corp Election Impact on Solo 401k QUESTION:

Switching from Sole Proprietorship to LLC QUESTION:

Schedule E QUESTION:

IRA Transfer QUESTION:

Primary Residence/House QUESTION:

1099-INT from Citi Bank QUESTION:

Not Run Own Company QUESTION:

Solo 401k for Author QUESTION:

Mom and Brothers Participation QUESTION:

ERISA QUESTION:

IRS Solo 401k Plan QUESTION:

Gift Solo 401k QUESTION:

1099-MISC QUESTION:

Another 1099-MISC QUESTION:

Form 1099-B QUESTION:

Form 1098-QUESTION:

Interest Income for Roth Solo 401k Contribution QUESTION:

All my sponsoring company's profit was interest income. What regulates what can be contributed to my Roth Solo K?

Whether making Roth and/or pretax solo 401k contributions, all solo 401k contributions are based on net self-employment income. Therefore, solo 401k contributions cannot be made based on passive or interest income. This is high on the IRS radar and it is covered in IRS Publication 560.

One Property Self-Employment QUESTION:

Protected by ERISA QUESTION:

Funding Account Help QUESTION:

Transfer Checkbook IRA / IRA LLC to Solo 401k QUESTION:

Solo 401k as Sole Member of LLC  QUESTION:

Deposit Properties into My Living Trust QUESTION:

Charitable Donation QUESTION:

Severance Package QUESTION:

Leased Employee QUESTION:

 Bankruptcy QUESTION:

Divorce, QDRO QUESTION:

Transfer of IRA Funds Stemming from Divorce QUESTION:

Solo 401k for Expat US Citizen QUESTION:

Multiple Solo 401k Plans QUESTION:

Change in Self-Employed Business QUESTION:

Re-Organizing your Self-Employed Business QUESTION:

IRS CP2501 QUESTION:

Defined Benefit and Solo 401k Plan QUESTION:

Form 5500-EZ Filed Last Year Not This Year QUESTION:

Form 5500-EZ Multiple Owners QUESTION:

Calculate Value of Assets for Form 5500-EZ Reporting QUESTION:

Evidence of Registration with the State QUESTION:

1099-MISC for Solo 401k Setup Fees QUESTION:

W-9 for Foreign Real Estate Solo 401k Investment QUESTION:

Copies of Past Years Form 1099-R QUESTION:

Retirement Trust is Not Registered with the State QUESTION:

Copies of Past Years Form 1099-R QUESTION:

Form 1099-R for Voluntary-After Tax Conversion QUESTION:

Invest in US Savings Bonds QUESTION:

72(t) Substantially Equal Periodic Payments QUESTION:

Form 8621 QUESTION:

Form 8621 QUESTION:

Direct Rollover from Solo 401k to Traditional IRA QUESTION:

Direct Rollover from Solo 401k to Traditional IRA QUESTION:

SECURE 2.0 Act Information QUESTION:

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