Solo 401k FAQs

Solo 401k puts you in control.

THIS WEEKS MOST POPULAR SOLO 401K FAQs

Real Estate Investor

QUESTION 1: Hi I am looking at solo 401k’s and SDIRAs.  Is a real estate investor with mostly passive but some active income from flips etc. considered self employed?

ANSWER:

It is unlikely as typically that type of income is reported as investment income (e.g., on Sched E) where you don’t pay self employment tax. If you are reporting active self employment income (eg on Sched c) with no full time employees, you would be eligible. For some examples of self-employment activity, VISIT HERE.

Removing Excess Contributions

QUESTION 2: I ended up over-contributing to my solo 401k (employee pre tax) for 2019. Can I remove it without any tax consequences to the solo 401k plan?

ANSWER: No reporting applies since you removed the contribution before April 15, 2020. Note that when determining if the removal of excess annual solo 401k contributions is reportable and/or taxable, you need to take into account the removal deadline and the contribution type (i.e., employee vs employer profit sharing). To learn more, CLICK HERE.

Contributions for W-2 Compensation

QUESTION 3: My solo 401k plan is sponsored by my S-corp. what is considered compensation for solo 401k plan purposes?

ANSWER: When the self-employed business is taxed as an S-corp or C-corp, both the employee and employer profit sharing contributions will be based on W-2 gross wages (line 1). Also, if your payroll company listed the the solo 41k employee contribution in box 12a, make sure to add this figure to line 1 when calculating the employer profit sharing contribution. VISIT HERE to learn more regarding calculating solo 401k contributions when the self-employed business is an S-corp or C-corp.

Bankruptcy & Creditor Protection for Solo 401k Plan

QUESTION 4: I am trying to better understand the protections of the solo 401k. I believe it qualifies for unlimited bankruptcy protection, but does it also have unlimited lawsuit protection under ERISA (or another law)?

ANSWER:

Solo 401k plans are not automatically granted protection from creditors: 
  • Bankruptcy: Solo 401K plans have creditor protection under the federal bankruptcy rules.
  • Creditors:  As far as protection from non bankruptcy creditors, the protection falls at the state level.  While solo 401K plans are not covered by the federal creditor protection rules of ERISA, they are generally protected under most state laws subject to certain carve outs (e.g., such as child support).

Green-card Holder

QUESTION 5: I’m a green card holder, originally from Germany.
I am self employed since 2016 but didn’t set up any retirement payments. Would you recommend going with the solo 401k? I might return to Germany many years down the road so I wonder how this would work out?
Looking forward to hearing from you.

ANSWER:  Green card holders can certainly open a solo 401k if they meet the solo 401k eligibility requirements. If you are self-employed with no full-time W-2 employees, you can certainly set up a solo 401(k).  Our solo 401(k) plan has many benefits including offering the highest contribution limits for any defined contribution retirement plan, the ability to take 401(k) participant loan, the ability to make broth contributions, the ability to invest in alternative investments such as real estate among many other benefits.

If you returned to Germany, you may be able to maintain the solo 401(k) (e.g. if you continue to report self-employment activity on your US tax return) or you could shut it down and transfer for the assets to an IRA (in which case we would guide you through the process as part of our services).

Last Week’s Most Popular  Solo 401k FAQs

Contribute to an IRA and Solo 401k plan

QUESTION 1: Can I make both solo 401k and Traditional IRA contributions for the same year?

ANSWER: Yes you can contribute to both your solo 401k plan and your IRA in the same year. However, the IRA contributions may not be fully tax deductible since you are also contributing to a solo 401k plan. It comes down to your modified AGI which means you may be able to deduct some of your IRA contribution. CLICK HERE for the AGI chart.

Solo 401k Plan for a Sole Proprietor

QUESTION 2: Can a sole proprietor open a solo 401k plan?

ANSWER: Yes a sole proprietorship can also sponsor a solo 401k plan. A sole proprietor files a Schedule C  to report the self-employment activity. We would list your name as the self-employed business on the solo 401k plan documents, and your contributions to the solo 401k plan would be based on line 31 of the Schedule C.

Please see the following link for more information regarding how the solo 401k contribution calculation is derived when the self-employed business is a sole proprietorship.

New Oregon Rule Solo 401k

QUESTION 3: A new Oregon law has gone into effect June 2020 that requires us to provide a retirement plan for even ONE part time employee after just 60 days with the company. Therefore I may have to do a SEP or something like that as well. I was trying to avoid a IRA, SEP or SIMPLE plan in case I want to do a Mega Backdoor Roth in the future. How does this new law effect my Solo401k?

ANSWER: The new Oregon rule requires offering IRA type accounts to existing W-2 employees, whether they work full-time or part-time.

Because an IRA is not a solo 401k plan, you can still open a solo 401k plan provided you don’t employee any full-time W-2 employees, as a solo 401k plan is for owner-only businesses.

Open a Solo 401k if I Also Participate in Day-Time Employer 401k Plan

QUESTION 4: If I already have a full-time job as an employee, can I still open a solo 401k plan for my side business?

ANSWER:  If you are self-employed or have income from freelancing, you can open a solo 401k plan. Even if you have a full-time job as an employee, if you earn money freelancing or running a small business on the side with no full-time W-2 employees, you could take advantage of the potential tax benefits of a solo 401k plan. While you won’t be able to make pretax or Roth solo 401k contributions if you have already maxed out these contributions to your day job employer 401k plan, you will still be able to make profit sharing contributions to the solo 401k plan.

Rules Change Regarding Offering Solo 401k Plan to Par-Time Employees

QUESTION 5: Have the rules changed for 2020 regarding whether I can still fund my solo 401k if I have two part-time employees that work less than 1000 hrs/year, but more than 500 hrs/year?  Would I have to open up retirement accounts for them?

ANSWER: In short yes resulting from the SECURE Act, but it would be for those part-time employees who satisfy the new rule by 2024. Effective for tax year 2021 (beginning January 1, 2021),  solo 401k plans will need to be offered to part-time employees who have three consecutive 12-month periods of 500 hours of service and who satisfy the plan’s minimum age requirement.  Hours of service during 12-month periods beginning before January 1, 2021, are not taken into account for this rule.  We are waiting for the IRS to release more guidance on this new rule in 2020. See Section 112 of the ACT for more information.   

Last Week’s Most Popular  Solo 401k FAQs

About the Self-Directed Solo 401k


What is a Solo 401k?
A Solo 401(k) is an effective way for a small business owner like you to speed up your retirement savings.

With tax-deferred savings of up to $56,000 for 2019 ($62,000 if you are age 50 or older) and $57,000 for 2020 or $63,500 because of the catch-up if you are age 50 or older, and the invaluable choice to pick your own investments, make pretax, roth and after-tax contributions, and take solo 401k participant loan, our solo 401(k) is the perfect retirement vehicle.

A Solo 401(k) is for owner-only businesses or those with only part-time employees. Self-employed businesses include sole proprietorships, closely held family businesses, LLC’s, partnerships and corporations.


How does a Solo 401k work?

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 $56,000 in 2019  or $62,000  if you are more than 50 years old, tax-deferred. The Solo 401k annual contribution limit increased by $1,000 for tax year 2020 to $57,000 and $63,500 for those 50 or older.


What are my responsibilities as to establishment and continuing to manage my Solo 401k?

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, no additional fees will apply. Remember, this form is only required if your Solo 401(k) balance reaches $250,000.

Are there any forms that I must file with the IRS?

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

Is there a deadline to establish a Solo 401k plan this year ?

For 2019, the deadline to establish your Solo 401(k) plan is December 31st. This means that as long as the solo 401k is adopted (i.e., the solo 401k establishment documents including the “Adoption Agreement”) by December 31, 2019 the plan will be effective for 2019. Therefore, if you wish, you can wait (take your time) to open the solo 401k bank or brokerage account in 2020 by your business tax return due date plus timely filed extensions, as well as make both the employer and employee solo 401k contributions for tax year 2019. See IRS publication 560 for more on the December 31 solo 401k plan adoption deadline.

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Is there a deadline to fund a Solo 401k plan?

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.

I would like to setup a Solo 401K. I filed a tax extension for 2019 tax returns. Can I setup the Solo 401K with effective date of 12-31-19 so I can contribute and take deduction for 2019 taxes?

Unfortunately, it is too late to open the solo 401k for making contributions for the previous tax year (in your case 2019), because it is now 2020, and pursuant to the solo 401k contribution rules (see IRS Publication 560), the solo 41k plan had to have been set up by December 31 of the prior year (in your case 2019) in order reserve the right to contribute to the solo 401k plan by your business tax return (in your case 2020) plus timely filed business tax return extension. The new solo 401k plan would be dated for 2020, so any contributions into the new plan would be counted for tax year 2020 and you would have until your business tax return due date plus timely filed business tax return extension in 2021 to make solo 401k contribution.

Getting Started

Exactly what will you do for me in terms of getting this started? Are you a custodian to my Solo 401K?

(1) At a high level, our services are two-fold: (i) We take care of everything required to set up our IRS-approved Solo 401k plan with checkbook control for your business including account setup, funds transfer, etc.; and (ii) going forward we provided all of the ongoing compliance support for your Solo 401k plan.  For more information on our services and pricing please click HERE.

While we handle the transfer, account set up, etc. to make the entire establishment process quick and easy, we never have access to your funds and are not the custodian. Instead, the bank account will be established at a bank, credit union, brokerage etc of your choice.  For example, a popular option is Fidelity & if you wish to open the account at Fidelity, we would prepare all of the documents that Fidelity needs to open a free brokerage account (i.e. no account opening or maintenance fees – only $4.95 trading and wire transfer fees).  The advantage of this setup is that you have checkbook control over your 401k funds with no need to direct your funds via a custodian that will charge fees and take critical time to process your requests.
 
Based our experience it is important to take a longterm view in choosing a Solo 401k provider with superior expertise and service as you will be setting up of 401(k) plan for your business which needs to be kept in compliance. As part of our ongoing services, we handle all of the ongoing compliance support for the solo 401(k) plan including mandatory plan updates and amendments, helping you respond to IRS compliance checks, tax reporting and filing, etc.   All of this is included at no additional charge. Please see the following link for list of our services: https://www.mysolo401k.net/solo-401k/solo-401k-pricing/
Moreover, based on our experience we field the questions every day (even on Saturdays) from our existing clients ranging from helping them determine how much they can contribute to the plan to how to invest their solo 401(k) funds in real estate or other alternative investments in accordance with the solo 401(k) rules.  There is no minimum balance and there is no additional charge for the support.
 
Our track record is tremendous as demonstrated by the fact that we have over 105 reviews on the Better Business Bureau and all of them are five-star reviews with no negative reviews whatsoever. To learn more about our company, CLICK HERE.  


How do I proceed with opening a Solo 401k?
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.

How long until my account is established and ready to be funded?

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.

If I am a sole proprietor, can I use my Social Security number for the Solo 401(k) EIN?

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.

Rollovers

Can I roll over/transfer my current retirement plan into the Solo 401k account?

This depends on the type of plan or account from which you are intending to roll/transfer the funds.

If the funds are in a rollover or conduit IRA,  Traditional IRA, SEP IRA, TSP, 457b, pension, a profit-sharing or  a former employer 401(k) plan, they can be rolled into the Solo 401(k) as long as you did not make any after-tax contributions to those IRAs.

While SIMPLE IRAs can also be transferred to a solo 401k plan, if you have a SIMPLE IRA that has been in existence for less than 2 years, please e-mail us at info@MyISolo401k.net or call us at 800-489-7571 to discuss what you can do.

IMPORTANT: if you have contributed to a SIMPLE plan this year, you can only establish a Solo 401(k) for the next calendar year, as regulations do not allow you to contribute to a SIMPLE and establish a 401(k) in the same year. Call us and we can shed more light on this.

Can I transfer my non-deductible IRA to a solo 401k plan?

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.

How long do I have once my previous 401k is terminated to roll those funds into my new Solo 401k plan?

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.
I received a Form 1099-R from the self-directed IRA custodian for the movement of the IRA to my self-directed solo 401k but it has codes K and G in box 7, is this correct?
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.
I have a self-directed Traditional IRA that holds a private investment and want to know if I have to liquidate it or can I transfer it to a solo 401k plan ?

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.

Other than making annual contributions, is it possible to rollover other retirement assets to the Solo 401k?

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.

In terms of the rollover, do they have to be done at the time of opening the solo 401k account or can they be done any time?

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.

Do I have to liquidate my stocks or alternative investments in my IRA or previous 401(k) to roll them over to a Solo 401(k)?

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.
I was told by Merrill Lynch that because my employer did not establish my simple IRA account with Merrill Lynch until January 27, 2017, I have to wait until January 28, 2019, to be able to transfer or ROLL OVER the simple IRA funds into the solo 401k account. Is this true?

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]

I recently had a previous employer contact me about my retirement there. They gave me multiple c139,hoices for it. Cash it out, roll it over into a qualifying account or roll it into annuities. I gave them the information for my solo 401k plan, so they are sending a check for the solo 401k plan in the amount of 339,401.77. Is there any paper work to file with the solo 401k?
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.
Are there any issues with me rolling over funds from another old retirement account (IRA) into my solo401k account via an indirect rollover where the check gets sent to me first, I have 60 days in which to deposit it into my solo401k account?
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

Can I sign up for a Solo 401k if my business has employees?

You can sign up for a Solo 401(k) only if all of your employees are working part-time (that is,. fewer than 1,000 hours per year).

If you have full-time employees, you can contact us at info@MySolo401k.net or 800-489-7571.

Can my spouse who works for my company participate in a Solo 401k ?

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.

Can a business partner who is not related to me participate in a Solo 401k?

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.

My wife and I intend to start our own 501(c)(3) that will be based in Oregon. Can we setup a solo 401k plan?

Yes, a 501(c)(3) entity may have a solo 401(k) plan, provided the business does not employee 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.

I have a Family Trust which includes all of my property and assets. Can this solo 401K be put under the same Family Trust?

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.

Can I piggyback of my wife's self-employment income in order to make higher contributions to my solo 401k plan?

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.

What happens if my company hires one or several full-time employees?

Prior to hiring any full-time employees, we recommend that you get in touch with us by e-mail at info@MySolo401k.net or by phone800-489-7571 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.

I know that an S Corp can create a solo 401(k) for it’s shareholder/employee and I know the rule that the corp can have no other full time W-2 employees, other than the owner/shareholder. If an S Corp has two shareholders, one a 99% holder (and the sole employee/sole officer), and the other a 1% shareholder (non-employee/non-officer), can the S Corp still create a solo 401k for the benefit of the 99% shareholder/officer/employee? I searched around for an answer on this and came upon your website. I’m hoping that you can give me the answer. The question arises because in order for the S Corp to be able to get a group health plan, there must be at least two shareholders. The 1% shareholder can waive health care. Then the 99% holder can get a group health plan. But, if we do that, can the S Corp still create a solo 401k? The 1% shareholder would NOT be a spouse.?

Yes the S-corp can sponsor a solo 401k plan since the 1% shareholder is not a W-2 employee nor a contractor. Click here for additional information.

My wife is taking another W-2 job as a part time employee of another company, outside of our company that hosts our solo 401K and outside her 1099 consulting business. Wondering if it affects her solo 401K eligibility?

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.

Doe the IRS required an approved plan in order for the self-employed business to sponsor a solo 401k plan?

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

How much can I contribute to a Solo 401k?

You can contribute up to $56,000 in 2019 and $57,000 for tax year 2020 (including an additional catch-up contribution of $6,000 for 2019 or $6,500 for 2020 if you are age 50 or older). The maximum amount you can contribute depends on your income or profit in any given year.

Contact us at info@MySolo401k.net or 800-489-7571 and we can help you calculate the contribution amount.

If two people participate in a Solo 401k , do both have to make contributions?

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

Is there a required annual minimum contribution?

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

Does the catch-up contribution apply to me?

If you are age 50 or older, you can contribute an additional $6,000 (for 2019) into your Solo 401(k) plan. The catch-up contribution increased to $6,500 for tax year 2020.

For details of how much more you can stash away this year, please contact us at info@MySolo401k.net, or visit our on-line solo 401k contribution calculator.

Are there limits on total profit-sharing contributions if I have more than one qualified retirement account?

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.

Can I make solo 401k contributions based on my social security payments?

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.

I know I can make an after-tax contribution then flip to a Roth IRA but want to know if I can go from my Roth 401K to Roth IRA. I plan on making a contribution to my Roth 401K and want to know if after I make the contribution to my Roth 401K if this plan allows for me to then send it to my Roth IRA?

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).

Do pretax solo 401k contributions reduce social security tax ?

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.

Do I need to make my Solo 401k contributions by December 31st?

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.

My business did not previously sponsor a retirement plan. My business, an LLC taxed as an S-corp, employed a W-2 employee who separated from service in March 2017. I then opened a solo 401k plan for the same LLC in May 2017. I am the only employee of the LLC. Can I make contributions for 2017 to my solo 401k plan without having to make contributions to the separated w-2 employee?

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.

I have a cash account at Fidelity and want to know if I can transfer the equivalent dollar amount of securities into my Solo401K account for my 2018 contributions. Or do I have to contribute in cash?

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).

Our son is a PhD graduate who does a variety of professional work and receive 1099-MISC so he contributes to a solo 401k plan. Can my wife and I gift my son funds for hims to use toward making contributions to his solo 401k plan?

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.

Can alimony payments be used to make annual solo 401k contributions?

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.

Would contributions to this solo 401k reduce my income tax exposure to a) all income, b) just earned income, or c) just self employment income? Juts the earned income from self employment activity?

Just earned income from self-employment activity.

If my husband does not want to contribute to our solo 401k plan can I still make contributions to it?

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.

For 2019, if I pay myself $25,000 and contribute the entire amount to my solo 401k plan as an employee contribution which is sponsored by an S-corp., do solo 401k annual contributions reduce my obligation to pay FICA taxes?

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.

If I just fund my solo 401k plan with a direct-rollover from an IRA, am I required to make annual solo 401k contributions?

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.

My self-employed business will change from sole proprietorship to S-corp, so will this impact my solo 401k contributions?

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.

I receive a limited amount of self-employment income at the moment but expect the amount to increase in the coming years. What is the best way to approach contributions given that the amount of self-employment income is somewhat of a moving target until taxes are filed in April or later?

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.

Can I make annual solo 401k contributions in form of Bitcoin?

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

What can my Solo 401k invest in?

A solo 401k also referred to as Solo 401k Real Estate or, 401k Real Estate, allows you to invest in any security or alternative investment such as real estate, private investments, private loans, metals, tax liens, equities and much more. For a sample list of solo 40k investments, VISIT HERE.
Does it matter (since it is not my Social Security number) that I received a 1099-INT from a trust deed investing company despite the fact that the account is in the name of the 401K, or should I try to get them to withdraw the 1099?

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.

I am poised to purchase a multi-family (2 unit) property but will fall short on the rehab costs. Can the solo 401k Trust borrow funds via a promissory note to complete rehab?

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.

What are the events that allow for this activity (real estate investing, solo 401k loans, and both roth and voluntary after-tax contributions) to take place in the eyes of the IRS, without penalty?

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.

Can the Solo 401k invest in domain names and resell them with proceeds back into the account?

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.

I am considering investing in a Real Estate Syndicate equity fund (or an REIT, if this does not pan out). Is it okay to do that from Solo 401K Account?

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.

What do I do with the K-1 issued to the solo 401k plan for investments?

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.

Is it possible for me to invest Solo 401k funds into a new startup LLC where I’m the only member?

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:

When I want to make an investment, do I need to run this by you, and are there documents required for said investments from your end?

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.

Are taxes due when I place investments through the solo 401k bank account?

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.

Can a solo 401k plan be invested in a private company investment?

(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.

I know that my solo 401k can invest in promissory notes, but can I lend money to my Solo 401k - with my own after-tax-money for investing?

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.

My solo 401k trust owns 3 properties in Ohio.Fix and Flips I have had to fire 2 contractors, now I have another and I need to get the houses done, however, I am low on money. Can a friend give the solo 401k a short term hard money loan?

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.

The property I am going to invest in is a commercial building; I am buying a portion only...my solo 401k trust is not required to wholly own the building, correct?

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.

I have a question regarding using a solo 401k in combination with purchase of real estate; can my husband's solo 401k and him invest in the same property and use seller financing?

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.

Can my self-directed 401k enter into a lease/option agreement?

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.

My brother and I are both self-employed in separate businesses, so can we open separate solo 401k plans and invest in the same LLC for investing in real estate?

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.

If my wife and I both participate in the same solo 401k plan, can we purchase real estate using both of our solo 401k funds and would the rental income flow to both accounts?

  • 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.

The company that I am investing with wants to know what type of account is making the investment. Should I say it is a 401k or a trust?
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.
I had a question about options trading. I know that options trading on stocks are allowed in solo401k but would like to know if there are any limitations/restrictions I should be aware of such as UBIT?
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.)
Do you know if the UBIT applies if I only do covered trades inside my solo 401k plan? (Covered by stock or cash?) Often brokerages will require margin to be available for options but if I never use it, would UBIT still apply?
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.
My property manager gave me a 1099 for the rental property I hold inside of my solo 401k trust. Do I need to file a return for it, or what do I do?
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.
You helped me setup a Solo 401(K) plan in the past. Since this is a tax-deferred account, I’m assuming the wash sale rule does not apply (as opposed to a regular taxable account). So, I’m assuming I can sell a stock at a loss and then buy it back without having to wait for at least 30 days. Can you please confirm?
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.
I've been researching opening up a Solo401k account or a SDIRA in order to transfer some of my money from my current employer 401k to invest in RE, particularly some syndication deals through a friend. The issue I am trying to understand is the ability to use depreciation from these deals. Many of these syndication deals use bonus deprecation calculations and though the properties are leveraged, I am still under the impression that I cannot use any depreciation if I am investing in these deals with money from a Solo401k, is that correct?
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.
Can I loan my solo 401k to my mom and dad so that they can pay of their home mortgage?
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.
I'm planning to buy treasury bills directly from Treasury direct site using my solo 401k funds is this possible?

Yes the solo 401k plan can be invested in T bills.  Click here for guided tour by Treasury Direct on how to do invest a solo 401k plan in treasury bills. You’ll need to select the Account type for a  “Trust”. You will be apply for the Entity/Trust using the tax id of the  solo 401k plan.

Is my understanding correct that just like a self-directed IRA or IRA LLC, I cannot deduct expenses in connection with real estate owned by 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.

Roth 401k and Voluntary After-Tax Contributions

Does your solo 401k plan allow for the mega back door Roth solo 401k?

Yes, our Solo 401(k) plan allows for voluntary after-tax contributions. Following are some of the rules regarding this type of contribution:

  • Voluntary after-tax solo 401k contributions fall under the employee (salary deferral) contribution umbrella.
  • This type of contribution is not considered employer (profit sharing) contributions, so the contribution is not tax deductible because it is considered made with post-tax dollars.
  • When voluntary after-tax solo 401k contributions are converted to a Roth IRA or the Roth Solo 401k, the conversion has to be documented in writing by completing a conversion Form ( the IRS will expect to see a copy of this form upon request), and a Form 1099-R has to be issued to report the conversion whether taxable or not.  This reporting is covered by our annual service and fee.
  • Voluntary after-tax solo 401k contributions can be distributed and thus converted at any time. This is why the conversion of voluntary after-tax solo 401k contributions has been dubbed the “mega-backdoor Roth solo 401k.”
  • There is a lesser known rule called the “overall 415 limits.” The overall 415 limit for 401(k) plans including solo 401k plans. For 2020, the overall limit is $57,000. The overall limit looks at the total annual additions to all of a participant’s accounts in plans maintained by one employer and includes not just their salary deferrals, but also matching contributions, allocations of forfeitures and other amounts. Voluntary after-tax solo 401k contributions are subject to the overall annual limit (“The 415 Limit) $57,000 for 2020.

I have provided the following links for more information and examples: https: https://www.mysolo401k.net/mega-back-door-roth-using-solo-401k-plan/ https://www.mysolo401k.net/roth-solo-401k-contributions-vs-voluntary-after-tax-solo-401k-contributions/

What is a Roth 401k plan?

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 $18,500 ($24,500 if age 50 or older) in the 2018 tax year versus just $5,500 ($6,500 if age 50 or older), for a Roth IRA.

Can I contribute both regular (pre-tax traditional contributions) and Roth contributions in the same year?

Yes, you can make contributions to both; however, the combined amount contributed in any one year is limited to $18,500 for 2018 (plus an additional $6,000 in catch-up contributions if you age 50 or older).

Are there any limits as to how much I can contribute to my Roth 401k account?

Yes, the combined amount contributed to all Roth accounts and traditional, pre-tax accounts in any one year for any individual is limited to $18,500 for 2018 (plus an additional $6,000 in catch-up contributions if you are age 50 or older).

How do I communicate how much I want to contribute to my Roth 401k account?

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.

Do I have any record keeping or reporting obligations?

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.

Can distributions from a Roth account be rolled over?

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.

Can I roll over my voluntary after-tax contributions to a Roth IRA and the earnings on my voluntary after-tax contributions to a traditional IRA?

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.

I would like to know in case of a Roth solo 401k, could the contribution be greater than the net income generated from the business? For example, if my self employment income from the LLC is only $10,000, then could I still contribute up to $18,500 of my personal after tax money to the solo 401k?

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 $18,500 in 2018, or $24,500 in 2018 if age 50 or over. Therefore, since your earned income is $10,000, you will not be able to contribute the full $18,500 to the Roth solo 401k plan.

When is the conversion deadline for an employee/owner of an S-corp to convert their solo 401K to a ROTH solo 401K in 2018?

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.

Does a separate account have to be opened under my Solo 401k plan to deposit my Roth contributions?

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

Can I borrow from my Solo 401k?

Yes. Solo 401k allows for participant loans.

You can borrow up to 50% of the account balance from your Solo 401(k) just no more than $50,000 (minimum of $1,000).

For example, Earl has a vested account balance of $150,000. Fifty percent of his account is $75,000, however the maximum loan that can be taken from a plan is $50,000.

The interest and principal is paid to the Solo 401k and payment is required to be made at least quarterly. There is a five-year term for a general loan. The interest rate used is prime plus 1%.

It is recommended that when funding your approved loan, you ONLY take the proceeds from either the pre-tax or Roth (after-tax) account. This will make it easier to track the loan and repayment amounts more easily, especially when reporting account activity to the government.

IMPORTANT: you will be responsible for tracking all distributions and payments made back to the loan on either a Pre-tax or Roth (after-tax) basis. Please consult with your tax professional for more information.

How quickly can the participant loan be processed?

It takes about two business days to process the loan.

Can I take multiple solo 401k participant loans?

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.

Can I use the solo 401k participant loan funds to buy my primary residence through an LLC where my brother and I will both be members of the LLC?

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.

If the Fed reduces the interest rate, can that lower the interest rate on the outstanding solo 401k participant loan?

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.

I know that when making a hardship withdrawal from an IRA, one of the permissible reasons is the purchase or remodeling have a purchased residence. Can I repay the loan out of my solo 401K over longer than five years if the funds are used to renovate a residence that I purchased a few years ago and have been doing a multi year long renovation on?

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.

Is the solo 401k participant loan amount based on the cash value of the solo 401k plan ?

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%.

I have a solo 401k participant loan; are the interest payments tax deductible?

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.

Do I need to file any federal forms for a participant loan from a solo 401K?

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.

Do you know where I can find answers to frequently asked 401k participant loan questions?

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.

Termination


What if I want to terminate my account?

If you are terminating your solo 401k plan, a final Form 1099-R and Form 5500-EZ will need to be filed with the IRS. Both of these reports are included in our annual fee.


What happens if my self-employed business hires employees?

(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.


I'm planning on shutting down the LLC that originally sponsored my solo 401k. I am going to retain a small amount of sole proprietorship income, however. Do I need to shut down the plan or amend it in any way?

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:

What if I later want to remove the solo 401k owned real estate from the solo 401k and into my personal name?

Distributions from a solo 4o1k are not required to be in the form of cash; therefore, provided you meet a solo 401k distribution triggering event, the solo 401k owned property can be distributed in your name and taxes will apply on the value of the property at time of distribution.

Here are some quick items to consider when taking distributions from a solo 401k plan including in-kind distributions of real estate owned under the solo 401k plan.
  • Distributions including in-kind distributions of real estate from a solo 401k plan are taxed at earned income tax rates.
  • Any taxable in-kind distribution distributed to you is subject to mandatory withholding of 20% of federal taxes, even if you intend to roll the distribution over later.
  • A 10% early distribution penalty also applies if you are under age 59 1/2.
  • A triggering event must be satisfied in order to make a solo 401k distribution. A triggering event is the attainment of age 59 1/2, for example.
  •  If you are over age 59 1/2, you can distribute any amounts.
  • If you are not over age 59 1/2, you can generally only distribute any amounts that were transferred/rolled over to the solo 401k from other retirement plans and/or IRAs.
  • In the case of an in-kind distribution of solo 401k real estate, the property will first need to be appraised by a third-party (not the solo 401k participant/trustee) to ensure the correct tax amount is paid.
  •  Whether a partial or full distribution of the real estate property, the property will need be assigned from the solo 401k to your personal name.
  • If a full in-kind distribution, the full property is assigned from the solo 401k to your name.
  •  If a partial in-kind distribution of real estate, that portion is assigned from the solo 401k in your name so the solo 401k will still remain a partial owner. As a result, you still cannot use the property for personal use since the solo 401k plan still owns part of the property.
  • In the event the property is now owned by your and your solo 401k plan, all income and expenses will need to be allocated based on the ownership percentages.

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

When processing an in-kind distribution of land owned by my solo 401k plan into my name, can I use the assessed value?

No.  The taxes owed on the in-kind distribution of the land will be based on the fair market value of the land. As such, it would not necessarily be appropriate to use the assessed value (as this may not reflect the fair market value).  The most conservative approach would be to obtain a third party valuation such as an appraisal or at least an assessment from a professional such as an experienced realtor based on comps, etc. Ultimately, the government’s concern is the underpayment of taxes especially from the distribution of property owned inside a solo 401k plan or a self-directed IRA.

In-kind Distribution of Promissory Note QUESTION:

If I wanted to start now to transfer promissory notes (not cash) to my personal account how is this done?

The value of the promissory note at the time of the distribution would get assigned from the solo 401k to your name, and you would pay taxes at earned income tax rates on the value of the note.

A mandatory 20% of federal taxes would need to be paid by the 15th of the month following the month in which the distribution took place. For example, if you process the in-kind distribution on February 13, the 20% federal tax would need to be paid to the Department of the Treasury by March 15.
As the solo 401k provider, we would issue a Form 1099-R by February of the following year to report the taxable distribution to the IRS.  You will need to fill out a distribution form prior to the distribution.

Under Age 59 1/2 Distributions QUESTION:

I am under age 59 1/2. There's a chance I may need to take some money out of my solo k. What is the procedure for taking money out of my solo k?

Because you are under age 59 1/2, specific IRS rules apply in determining if you can take distributions or transfer money out of the solo 401k to an IRA, for example.
Please see the following:
Different distribution rules apply based on contribution types and the Solo 401k participant’s age.

Types of Solo 401k Contributions and Distribution Rules

  •      After-Tax Contributions and Rollover Contributions. The solo 401k plan participant may withdraw at any time (after completing a distribution form), all or any portion of her account balance attributable to “rollover contributions” and/or “after-tax contributions.”
  •    Employer Contributions: Employer contributions are subject to more stringent distribution rules and may be distributed upon the solo 401k participant’s severance from employment, death, or disability. In addition, employer contributions may be withdrawn upon the occurrence of any of the following events:

1) The occurrence of a Hardship,

2) The attainment of age 59 ½

3) The employer contributions being withdrawn have been accumulated in the solo 401k plan for at least 2 years; or

4) The participant has participated in the solo 401k plan for at least 5 years.

  •   Salary Deferrals (employee contributions): Any employee contribution (including any earnings on such amounts) may not be distributed prior to the solo 401k participant’s severance from employment, death, or disability. However, the solo 401k plan permits an in-service distribution of such amounts upon attainment of age 59 ½ or upon a hardship.

Once you are ready to take distributions, we can assist in providing the necessary distribution forms and in issuing the required 1099-R.  Please VISIT HERE to read our full distribution page guide.

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

I have had a Roth IRA for over 5 years and my Roth solo 401k for only 3 years, so can I apply the Roth IRA 5-year clock to my Roth solo 401k distributions?

No. The 5-year clock on a Roth solo 401k account runs separately from the 5-year clock on a Roth IRA. Also, Contributions to a Roth solo 401k are after-tax contributions, so only the accumulated earnings would be subject to tax. If that Roth solo 401k account isn’t five years old, or if you haven’t met the age 59 ½, death, or disability rule, the earnings in your account will be subject to tax upon distribution.

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

What if your Roth solo 401k account is less than five years old and you roll it over to a Roth IRA?

The earnings rolled over from the Roth solo 401k, along with any earnings accumulated after the rollover are subject to tax if you take a distribution until the Roth IRA is at least five years old. This means the rolled over money takes on the 5-year clock of the Roth IRA.

If your Roth solo 401k account is at least five years old when you roll it over to the Roth IRA, only the earnings accumulated after the rollover are subject to tax if distributed prior the Roth IRA being at least five years old. The earnings from the Roth solo 401k that are rolled over to the Roth IRA retain their original clock.

In all qualified distributions, not only must the account be at least 5 years old, you must also meet the age 59 ½, or death, or disability rule.

Partial Rollover/Transfer QUESTION:

Can I rollover IRAs into the solo 401k plan in piecemeal (partial IRA rollovers)?

Yes the solo 40k rules allow for incoming partial rollovers and/or direct rollovers. The same is true for transfers from other 401k plans or qualified plans–that is, they can be fully or partially transferred to the solo 401k plan.

First Age 72  RMD  QUESTION:

This year I turned 72. I took the RMD prior to April 15 th based on the solo 401K balance at end of last year. I must take RMD distribution by Dec. 31 st of this year. This is also based on last years ending balance, right?

Since you turned 72 this year and already took the RMD this year, your next RMD won’t be due until next year and it will need to be distributed by 12/31 of next year.  The RMD will be calculated using this years 12/31 ending solo 401k account value. Lastly, you could have waited to take this years RMD by April 1 of next year since your turned 72 this year. However, by taking it this year your are effectively spreading your tax liability.

Bank or Brokerage Firm Role QUESTION:

What is the role of bank or brokerage firm as it relates to my self-directed solo 401k?

With our Solo 401k plan, the role of the bank or brokerage firms is to simply provide a holding account for the solo 401k & not to provide any tax reporting/record-keeping nor oversee the account.

Types of Real Estate QUESTION:

Are we able to utilize the money from the solo 401k funds to buy investment real estate, to include: commercial, industrial, multi family and single family home.?

Yes the solo 401(k) rules allow for these types of investments. Therefore, our solo 401(k) plan also allows for these types of real-estate investments. To learn more CLICK HERE.

Alternative Investment Types QUESTION:

Are we able to utilize the money to buy physical gold and silver, stocks, bonds, tax liens, hold mortgages and purchase auction properties

Yes the solo 401(k) rules allow for these types of alternative investments. Therefore, our solo 401(k) plan also allows for these types of alternative investments.

RMD QUESTION:

When it is time to take required minimum distributions (RMDs), how will my solo 401k investments in real estate facilitate the RMD? Do I have to sell assets in order to make the solo 401k RMD? If cash flow from the real estate investments are adequate, I prefer to simply draw from the cash flow without liquidating the assets, if possible.

When taking the RMD, Uncle Sam simply cares that you are paying taxes on the required RMD amount. In other words, the required minimum distribution can be in the form of cash, cash and assets, or just assets. If satisfied by distributing in-kind part of an asset such as real estate, the property will need to be appraised by a third-party to determine that value, then the whole or part of the property gets assigned in your name and you pay taxes on that amount.

Unwind if Hire Employees QUESTION:

Eight months ago I started my own engineering business - an S corporation which I own 100% . I am the only employee of the corporation. In a few weeks, I will hire a technician on an hourly basis using a W-2. I am pretty sure that this employee will work under 1000 hours per year but I am not absolutely sure. I am very interested in the benefits of a solo 401k even if they last a couple of years but I don't know how difficult it will be to unwind if the employee works more than 1000 hours or if I end up hiring other employees.

In that scenario, you would either have to amend the plan to a 401k plan that supports non-owner employees or shut down the 401k.

Shutting Down Solo 401k QUESTION:

How difficult/costly is it do this conversion or shut down the solo 401k?

The difficulty in shutting down the solo 401k plan depends on the circumstances. If you have alternative assets (e.g. real estate), those would need to be transferred to an IRA that allows you to hold such assets. If you have a solo 401k loan, the loan would need to be either paid back in full or the outstanding amount would be considered a distribution.

Converting the plan would include amending the plan documents & making the plan available to eligible W-2 employees.

We offer an IRA LLC that would allow to hold real estate (in the even that you need to transfer alternative assets as described above).

Specific Bank or Firm QUESTION:

If I do this through your firm, do you work with a specific bank or do I choose my own institution to hold the Solo 401k funds?

The account will be opened at the financial institution of your choice (e.g. bank, brokerage, etc.). If you go the brokerage route, we will prepare the required account opening documents as part of our services for no additional charge. If you go the bank route, we have a banking guide and will stand ready to assist and answer any questions for your banker. To learn more about the solo 401k bank account and the brokerage account similarities and differences (note that both come with checkbook control), VISIT HERE.

Pricing QUESTION:

You are little more expensive than your competition but you appear to provide a better service. I will sleep on it but I am fairly certain I will go with your firm. Thanks again.

As a fellow entrepreneur, I certainly understand the importance of providing excellent service at a fair price. We strongly feel that our solo 401k price is very competitive and the best value giving the level of service and expertise provided. For example, we have over 65 5-star reviews on the Better Business Bureau. https://www.bbb.org/sdoc/business-reviews/retirement-planning-service/my-solo-401k-financial-llc-in-carlsbad-ca-172008358/#bbbonlineclick

Bank Account and Brokerage Account QUESTION:

I do have a question or clarification on the bank or brokerage account. Can you have both or is it only one or the other. I was thinking of doing a fidelity account with checkbook option but would also like to have a local bank account set up too.

Good question. Yes you can since they would be for the same solo 401k plan. A solo 401k can have multiple holding accounts and funds can be freely moved between the holding accounts without triggering reporting.

Affect Financial Aid QUESTION:

Does having money in my solo 401k plan affect how much financial aid my daughter can receive for college?

No balances in IRAs and solo 401k plans (whether owned by the parent or the student) are not included in the financial aid calculation like balances in non-retirement accounts such as checking, savings, CDs, etc.  HOWEVER, any contributions to a solo 401k plan or IRA for the tax year of which asset information is gathered are counted. According to the Federal Student Aid worksheets, “2018-19 Completing the FAFSA” and “The EFC Formula, 2018-2019,” contributions to pension, profit-sharing, 401(k), 403(b), SEP, and SIMPLE IRA plans and Traditional and Roth IRAs are viewed as untaxed income, and must be added back to the parent’s or student’s adjusted gross income portion of the calculation.

Any distributions from solo 401k plans or IRAs during a year that is referenced for the FAFSA are counted as income and are reportable assets, according to www.savingforcollege.com. Therefore, from a solo 401k distribution planning perspective, it is best not take distributions during years in college.  Even distributions taken to pay for higher education expenses are counted as part of the student’s income for the next financial aid eligibility year.

Can a Writer Open a Solo 401k QUESTION:

I am a writer, so my self-employment income varies each year. However, I always declare that income on Schedule C on my tax return. Is writing considered self-employed work for opening a solo 401k?

Yes writing is considered self-employment activity and thus a solo 40k plan can be established. The IRS actually confirms such in IRS Publication 560, the publication for self-employed plans including a solo 401k plan.

Rollover My IRA QUESTION:

What do I need to do to roll my IRA over into the solo 401k account? Are the rollover rules different for any of the other kinds of retirement plans?

As part of our solo 401k account opening service as well as ongoing support, we will draft the IRA or former employer transfer forms to ensure the IRA or former employer funds are directly rolled over to the solo 401k without causing any adverse reporting consequences. The institution the currently holds the IRA or former employer funds will generally provide a transfer form but we can also draft one for those who do not provide one. The rollover/transfer rules are generally the same for all retirement accounts. To learn more, CLICK HERE.

I Already Have a Solo 401k QUESTION:

I am looking to a move my yearly monitoring of my solo 401k to your company from a different company. I am trying to see if I can get the initial 795$ fee waived. I have already had the initial work done by another company. Please advise if you are able to accommodate this request.

Our solo 401k setup fee of $795 would still apply because you would now fall under our IRS approved solo 401k plan which allows for 401k participant loans, investing in alternative investments such as real estate as well as both Roth and after-tax contributions.  Your existing solo 401k plan would be “restated” to our solo 401k plan which is how the IRS would expect such change to occur, CLICK HERE.

Make Solo 401k Distributions QUESTION:

I would plan on moving my TSP to my Solo 401k. At age 59 1/2 can I take distributions from my Solo 401k?

Yes solo 401k distributions can commence at age 59 1/2 which would result in not having to pay the 10% early distribution penalty, but federal taxes would still apply. To learn more about the solo 401k distribution rules, CLICK HERE.

Contribute to Multiple 401k Plans QUESTION:

I have been able to generate some money by buying/selling houses for my clients. I have made about $9000.00. As you are aware, I also have a full time job and have been contributing to work 401K as maximum allowed by IRS. Can I max out my work 401k and in addition contribute to my solo 401k?

Employee contributions are capped at $18,000 (plus a $6,000 catch-up if age 50 or older) between all 401k plans. Therefore, if you have already maxed out your day-time job 401k, you cannot make any more employee contributions to the solo 401k plan. However, the employer profit sharing contributions are not aggregated between all plans. Therefore, even if your employer has maxed out the profit sharing contributions to your day-time job, you can still max out the profit sharing contribution to your self-employed solo 401k plan. For example, if your self-employed business is a sole proprietorship and you have $9,000 of net self-employment income (line 31 of Schedule C), for tax year 2017 you can contribute $1,762 as a profit sharing contribution. I used our on-line solo 401k contribution calculator to calculate this figure.

Employee QUESTION:

I have a questions about my plan. Can my business hires someone for a period of 3 months temporary assignment? Will the company have to meet the 401K matching requirements for such employee?

I remember when I started the plan I had selected an option for Eligibility Service Requirement as One Year of Service. Does this mean that before my business offers someone a 401K benefit, the person has to be employed for one year prior?

Contractors can be be excluded from participating in the solo 401k plan. With respect to W-2 employees, those who work less than 1,000 hours during the year can also be excluded from the plan.

Promissory Note Investment QUESTION:

I'm looking to fund a hard money loan via the solo 401k and I will probably be wiring the funds out. Any specific paperwork needed from your end? Thanks.

While we don’t require any forms since we are not the trustee of the plan (you are the trustee of the solo 401k plan), you will need to make sure to document the promissory note investment. For example, a promissory note is required (i have attached a sample copy). You can also use the note investment form located on the following link to further document the note investment, as it is important to properly document all solo 401k investments. https://www.mysolo401k.net/learn/forms/

The following promissory note investment sample procedure may be helpful.

https://www.mysolo401k.net/solo-401k/secured-notes/

Also, the following link explains more how a promissory note works.

https://www.mysolo401k.net/buying-promissory-notes-trust-solo-401k/

And the following link is a good Q and A on the promissory note investment rules.

https://www.mysolo401k.net/solo-401k/promissory-note-faqs/

Industry Practice for Transfers/Rollover QUESTION:

Is it the industry practice not to transfer funds electronically when transferring funds from an IRA or former employer 401k plan to a new employer plan such as a solo 401k plan?

Excellent question. We have found that most former employers will not transfer employer plans such as 401k plan’s, TSP’s, 457b’s, 43b’s and Pensions electronically. Instead, they will issue the transfer check made payable in the name of the solo 401k trust. We suspect that they proceed in this fashion because they want to further affirm the transfer was processed correctly since the check is made payable in the name of the solo 401k. We have also found the same to be true for transfers from IRAs unless the funds can be transferred internally (that is, the IRA funds are transferred internally to the solo 401k bank or brokerage account).

Note Investment to My Parents QUESTION:

Can I loan my solo 401k funds to my mom and dad so that they can pay off their home mortgage?

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

Solo 401k Friends QUESTION:

Quick questions. Most of my friends have a full time job and do not have their own businesses. Is there a way for them to setup a self-directed solo 401k account? The primary purpose is to be able to invest in real estate.

Good question. In order to participate in a self-directed solo 401k plan, part-time self-employment activity at minimum is required. Note that participating in your day-time employer 401k will not preclude you from also opening a solo 401k for your self-employed business.

Invest in Friend’s Real Estate LLC QUESTION:

The question I wanted to ask that I couldn't remember was about the private company investment that I want to do. As I mentioned, my friends formed an LLC last week to invest in real estate properties. So my Solo 401K will be a 5th investor in the LLC with a 20% share. They haven't established an Operating Agreement yet. Is there anything to prevent my Solo 401K from being added as a member of the LLC, and be included in the Operating Agreement?

Good question. The solo 401k rules allow for investing in a private entity such as a LLC.
Here are some of the rules that apply when investing solo 401k funds in a LLC the also includes other investors.
1. Generally it is prohibited for a solo 401k plan to own a 50% or more interest in a LLC.
2. The above 50% or more test also encompasses your personal investment in the LLC as well as certain relatives.
3. The solo 401k will need to be listed as a member of the LLC.
4. The employer identification number for the solo 401k trust will need to be used for K-1 reporting purposes.
5. When funding the LLC investment, the funds must flow from the solo 401k bank account directly to the bank account of the LLC..
For more regarding a solo 401k investing in a LLC, please see the following.

UDFI QUESTION:

I saw you write that Solo 401k's get an exemption from section 514c(9) of the tax code....I was wondering about how far that goes....Do we pay tax on income that is generated from a leveraged purchase of real estate within my 401k or is the income from the property also deferred from the 514c exception as well.

You appear to be describing UDFI, which does not apply to solo 401k plans, but does apply to IRAs. See the following:https://www.mysolo401k.net/ubit-and-udif-differences/

Publication Where UDFI is Cited QUESTION:

Can you direct me to the IRS pub that speaks about the use of debt when investing with retirement money (401ks specifically)?

Please see the discussion on page 17 of Publication 598

Here is some of the language found in the above publication.

Real property debts of qualified organizations. In general, acquisition indebtedness  doesn’t include debt incurred by a qualified organization in acquiring or improving any real property. A qualified organization is:
1. A qualified retirement plan under section
401(a),
2. An educational organization described in
section 170(b)(1)(A)(ii) and certain of its
affiliated support organizations,
3. A title-holding company described in section 501(c)(25), or
4. A retirement income account described in section 403(b)(9) in acquiring or improving real property in tax years beginning on or  after August 17, 2006. This exception from acquisition indebted

UBIT QUESTION:

My invest group members are questioning whether passive investment using a Solo401k can avoid UBIT or not. Do you know if UBIT applies to a private investment?

Is the fund engaged in operating a business, if not then UBIT would not apply as UBIT only applies if a solo 401k or an IRA invest in an active business.
It is important to draw a distinction between Unrelated Business Income Tax (which generally applies in a scenario where a Solo 401k holds an equity investment in an entity that derives income from a trade or business and which entity is taxed as a pass-through entity) and Unrelated Debt-Financed Income (which generally does not apply in a scenario where a Solo 401k acquires real estate with non-recourse financing).

Private Equity Investment QUESTION:

I wrote a check to purchase an equity interest in a private investment. Does there need to be a record of this transaction made by the solo 401k trust?

While we don’t require any forms since we are not the trustee of the plan (you are the trustee of the solo 401k plan), you will need to make sure to document the private equity investment by the solo 401k trust.
For example, the investment sponsor will require that you fill out their “Private Placement Memorandum”, “Accredited Investor Questionnaire”, and “Operating Agreement or Partnership Agreement.” To further document the private investment, you can also use the ” general investment” form located on the following link of our website.  https://www.mysolo401k.net/learn/forms/
You can also reference our sample private investment procedure listed on the following link:

Use Business Bank Account for Solo 401k QUESTION:

I currently have a business checking account that is in my name as a sole proprietor, can I use this account for the Solo 401K or do I need to use a new checking account? This account is new and has so far only been used for depositing some money.

Good and important question. No you cannot use your business bank account to hold the solo 401k funds. Reason being, the solo 401k is required to have a bank account where just the solo 4o1k funds are held; therefore, the solo 4o1k bank account cannot be commingled with your business or personal funds. Also, the solo 401k bank account will need to be titled in the name of the solo 401k and the plan’s EIN (employer identification number) must be used by the bank for reporting purposes.

Remitting the 20% Mandatory Federal Tax QUESTION:

I'm contemplating taking a distribution from the my solo 401k. Am I responsible for remitting the 20% Federal withholding or will your company initiate that for me?

Because we don’t have access to our client funds, the client is responsible for submitting the 20% mandatory federal tax to the Department of the Treasury by the 15th of the following month.

See the following for more information: https://www.mysolo401k.net/making-solo-401k-distributions/

Also, statutory rules apply when taking distributions from a 401k including a self-employed solo 401k. Please see the following.

  • If you are over age 59 1/2, you can distribute any amounts.
  • If you are not over age 59 1/2, you can generally only distribute any amounts that were transferred/rolled over to the solo 401k from other retirement plans and/or IRAs.

Will You Issue the Form 1099-R QUESTION:

Will you also produce the Form 1099-R in January to report the taxable distribution from my solo 401k plan?

Yes we will prepare the Form 1099-R once you submits our solo 401k distribution form.

No Paycheck QUESTION:

My self-employed business is set up as an S-corporation, can I make a contribution from my business to the solo 401k without taking a paycheck?

You have to take a paycheck in order to make employer contributions as both the employee and profit sharing contributions are based on net self-employment income.

Beneficiary IRA QUESTION:

Can I transfer retirement plans I INHERITED from my SPOUSE into a SD IRA LLC and/or Solo 401K, to gain checkbook control and primarily invest in real estate.

Yes you can transfer retirement plans and/or IRA to  a Solo 401k or a self-directed IRA since you inherited the retirement plan or IRA from your spouse. This option is only afforded to spouse’s. The following link is useful in describing the similarities and differences between a solo 401k and an IRA.

https://www.mysolo401k.net/self-directed-solo-401k-vs-self-directed-ira/

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

I have additional funds in a 401k with my current employer, but half the funds there were rolled-in from a former employer 401k. If I want, can I also request that the FORMER employer funds be moved from the current employer's 401k, into the Solo401k ? What would you need to facilitate that transfer?

Good question, and yes those funds from the former employer 401k that are currently held in the existing employer 401k can certainly be transferred to the solo 401k plan as long as the current employer’s plan allows for it. It is a tricky situation because even though the rules allow for it, the current employer can restrict the transfer of funds transferred into the plan from a former employer 401k plan. We strongly recommend getting a copy of the existing employer’s 401k plan Basic Plan Document or Summary Plan Description Agreement as specific language will be embedded in these documents regarding this topic. We will gladly review those documents for you once you obtain them from your current employer 401k provider.

Rollover to IRA QUESTION:

Can a Solo 401(k) be rolled over into IRA if I ever shut down my business? I don't know if I'm using the right terminology.

Yes the solo 401k can be transferred to an IRA once you shut down the self-employed business that sponsors the solo 401k plan. In fact, an IRA is where most transfer their former employer 401k plan including a solo 4o1k plan.

IRA or Solo 401k QUESTION:

I assume Solo 401(k) is the better option in my case, as opposed to a Self-directed IRA, as I would like the ability to make alternative investments such as real estate, private businesses, etc... is this a valid assumption?

They both allow for investing in alternative investments including real estate, but the solo 401k is generally  more advantageous. For example, the contributions limits are higher for a solo 4o1k plan, you can borrow from a solo 4o1k plan, and the ongoing fees are also generally much less. See the following link for more on this.https://www.mysolo401k.net/self-directed-solo-401k-vs-self-directed-ira/

Pursuing Self-Employment Activity QUESTION:

I do not have a solo 401k nor self employment income. My plan is to generate some self employment income, create a solo 401k, then roll my previous 401k over into the solo 401k.

In order to participate in a self-directed solo 401k plan, part-time self-employment activity at minimum is required. You also must continue to perform self-employment activity in order to continue with the solo 401k plan. 
 
In the year that you open the solo 401k plan, you simply need to be pursuing self-employment activity. The entity type does not determine if you are self-employed, but rather the underlying activity. Therefore, you can perform self-employment under a sole proprietorship instead of an LLC– of course, you can also perform it under an LLC, Partnership, S-corp or C-corp. Click Here to learn more about self-employment activity.

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

Can I just take my required minimum distribution from my pretax solo 41k funds and leave the Roth solo 401k funds alone?

With respect to taking the RMD from the solo 401k plan, the standard practice is to take a separate RMD amount from each account (i.e. a distribution from the pre-tax account and a second distribution from the Roth account). In that case, two separate calculations would need to be performed–one on each source (Roth and pretax).  If the plan allows you to do so, however, the amount of the distribution may be aggregated across account balances meaning that the total required minimum distribution amount can be satisfied in any combination between the two accounts.  Please note that our Solo 401k plan would allow for this approach to satisfy the RMD requirement.  A scenario where this approach may be preferable would be one where the requirements to make a qualified Roth distribution have not been satisfied (e.g., you have had the Roth account for less than 5 years).

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

I had a few questions about your solo 401k offering that will help me in my decision making. How easy is it to amend/restate a plan from a brokerage house (either ETrade or TD Ameritrade), if I establish my individual 401k there.

We regularly restate 401(k) plans from brokerage firms such as E*TRADE and TD Ameritrade. The process is the same in terms of timing (i.e. we will email the restatement documents within one business day of you signing up). With the restatement, please note that a new account will need to be established and the assets transferred to the new account.

S-Corp Election Impact on Solo 401k QUESTION:

My accountant is suggesting that I change my LLC election to an S corp. Does this affect my solo 401k in anyway?

It simply impacts how the contribution limit is calculated. For an LLC taxed as a disregarded entity, you determine the amount you contribute based off of the line 31 of schedule C (after reducing by one half of the self-employment tax). For an LLC that is taxed as an S corporation, you determine the amount you contribute based off of the W-2 income that you receive from the S corporation.

Switching from Sole Proprietorship to LLC QUESTION:

I'm considering switching to an LLC for 2018 and was wondering whether I can keep using my current solo401k plan (setup when I was operating as a sole proprietor) or whether I will have to setup a new one for the LLC.

Yes you can certainly keep your plan as is (i.e., same plan name same brokerage/bank account, for example). We will just need to process a 4 page amendment to list the new business. When ready, pleas provide the new business name and address.

Schedule E QUESTION:

Most of my income comes from schedule E properties. Can this income be used to fund a Solo 401k? I also have a small amount of income from a schedule C, but I don't want to maximize this as it incurs self employment taxes.

Schedule E income is not a basis to make contributions to a solo 401(k) plan. The purpose of a solo 401(k) is to allow a self-employed individual to save his or her earned income (not investment income such as investment income reported on schedule E).

IRA Transfer QUESTION:

I created my solo 401k through you guys earlier this year and did a direct rollover into it from an IRA. I understand the custodian of that IRA will send a 1099R to the IRS. Is there any form I need to send to the IRS on the solo 401k side to let the IRS know the roll was into it? I understand it that you guys will file Form 5500 when my balance is above $250K, but since it is not now, how does the IRS know the roll was into the 401k and doesn’t need to be taxed?

There is no form issued by the Solo 401k with respect to the rollover (i.e. this is an IRA but not a 401k requirement). Besides a 1099r (which should have been issued with a code G with box to report the non-taxable direct rollover), you could show that the transfer check was deposited into the 401k account & the check was made payable to the Solo 401k.

Primary Residence/House QUESTION:

Can I take a distribution from my solo 401k without having to pay the 10% early distribution penalty to purchase a primary residence/house.

The maximum penalty free distribution exemption of $10,000 for the first-time homebuyer only applies to IRAs not 401k plans including solo 401k plans. Please see chart listed on the IRS page for more on this. Note that taxes would still apply to the IRA distribution just not the 10% early distribution penalty if you are under age 59 1/2.

1099-INT from Citi Bank QUESTION:

I received a 1099-INT (which I’ve attached) for my solo 401k bank account – do I need to file anything, or does this suggest that the trust tax status was not set up properly with citi bank?

This will have no tax consequences since a solo 401k plan is a tax shelter vehicle until distributions commence. What is more, the bank issued the 1099-INT in the name of the solo 401k trust and used the plan’s EIN for reporting purposes. You simply need to keep the 1099-INT in your records.

Not Run Own Company QUESTION:

Can a person who does not run his own company open a Solo 401K account with you to invest in real estate?

No as you have to be an owner-employee to participate in a solo 401k plan.

Solo 401k for Author QUESTION:

I wrote a book and receive royalty income which I report on Schedule C. Do I qualify to open as self-employed solo 401k plan?

Yes that qualifies as long as no full-time, W-2 employees. key is that income is ultimately income attributed to work done (e.g. writing a book) vs. passive royalty income.

Mom and Brothers Participation QUESTION:

Can a solo 401k be set up if an S corp is owned: 40% dad, 20% Brother #1, 20% Brother #2; 20% Brother #3?

Yes provided they are all owner-employees in the S-corp with not other full-time W-2 common-law employees. The S-corp would sponsor the solo 401k plan and all 5 (five) would participate in the same solo 401k plan. Each participant would separately hold their retirement funds in participant accounts. Lastly, when it comes time to determine if a Form 5500-EZ will need to be filed for the plan, all of the participants balances will need to be added up and if the combined value exceeds $250,000, a Form 5500-ez will need to be filed each year by 07/31.

ERISA QUESTION:

Is a solo 401k plan subject to ERISA? If not, why is it exempt?

While a Solo 401k plan is exempt from Title 1 of ERISA (because it is a one-participant plan), it is subject to the prohibited transaction rules and as such falls within the ERISA definition of a “benefit plan investor.”

IRS Solo 401k Plan QUESTION:

Is a tailored IRS approved Solo 401K plan different from what others refer to as a prototype plan?

For all practical purposes, there is no difference. What is important is whether the plan has been approved by the IRS (i.e. which means it’s a qualified plan) and whether the plan would allow you to hold Roth funds (which our plan certainly does).

Gift Solo 401k QUESTION:

I would like to Gift my daughter money from my SOLO 401K for a down payment and closing. I'm figuring 15-20 K area. Can you please tell me the process needed?

  • Neither the IRA nor the solo 401(k) regulations allow for gifting (the “Gift Tax Exemption”) retirement money.
  • The rules do not allow for transferring, assigning or gifting of solo 401k funds during the account owners lifetime.
  • The only exception to the no transfers during life rule is for transfers due to divorce where the solo 401k funds are transferred to the ex-spouse to satisfy a QDRO.

1099-MISC QUESTION:

I had a contractor perform some repairs on my solo 401k owned real-estate rental property. Do I issue the 1099-MISC in my name or the name of the solo 401k plan?
Good question. The 1099-MISC for the repairs performed on the solo 401k owned real-estate property would list the solo 4o1k trust name as the “Payer” and the solo 401k trust EIN would be listed as the “Payer’s TIN.”

Another 1099-MISC QUESTION:

Do I need to send out 1099s for vendors and subcontractors that I paid amounts over $600 out of my solo Roth 401k?
Per the IRS regulations (i.e. 26 CFR § 1.6041-1(b)(1) which is available here: https://www.law.cornell.edu/cfr/text/26/1.6041-1) and 1099-MISC instructions (see page 1 of the Instructions which are available here: https://www.irs.gov/pub/irs-pdf/i1099msc.pdf), a Solo 401k is deemed to be “a person engaged in a trade or business” and therefore subject to the filing requirement for amounts greater than $600.

Form 1099-B QUESTION:

Since on the Interactive Brokers end the brokerage account that they set up for the self-directed solo 401k through you guys is labeled as a Trust Account type and not a solo 401k plan, will they issue a 1099-B for stock sales?
No, they won’t generate a 1099-B because just like all 401k plans and IRAs, a solo 401k is a retirement trust. The funds grow on a tax deferred basis. If they do generate one, it will be issued in the name of the solo 401k plan using the plan’s EIN and you will simply hold on to it for your records.

Form 1098-QUESTION:

Does the 401k need to issue 1098’s for the interest received from the promissory note loans made to a third-party?

A Form 1098 “Mortgage Interest Statement” is not required from a 401k reporting perspective, as Form 1098 only pertains to lending money as part of a “trade or business” which does not apply to a retirement trust such as a 401k as the 401k is a passive investor. However, you are not prohibited from issuing a Form 1098 to the  promissory note borrower if they are requesting such documentation to file with their personal tax return. Here is a link to the Form 1098 instructions for your reference: https://www.irs.gov/instructions/i1098

If the borrower requests a Form 1098, make sure to provide them with the solo 401k plan name an EIN for the plan.

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:

I am 58 and retired. I have a TSP account with a balance of $64,000. I own a studio apartment, generating $850 a month in income. I manage the studio myself. Can I pay myself a management fee for that; I can be a sole proprietorship? How much should I pay myself?

Good question. While it may be murky territory, it would be best not to open a solo 401k on the basis that you manage just one property that you also own, as the IRS may challenge that you are not self-employed since it is only one property. On the other hand, if you manage properties owned by third-parties, you could justify that activity as self-employment activity. Also, if you own multiple properties and manage them, it would be more justifiable that you are performing self-employment activity.

Protected by ERISA QUESTION:

Is the solo 401K protected by ERISA?

Solo 401K plans have creditor protection under the federal bankruptcy rules.  While solo 401K plans are not covered by the federal creditor protection rules of ERISA, they are generally protected under most state laws subject to certain carve outs (e.g., such as child support).

Funding Account Help QUESTION:

Do you provide any assistance in finding a bank who will open a checking account for the Roth Solo 401k?

Absolutely. Not only do we have clients at hundreds of banks across the country, we also have helped our clients open thousands of accounts at brokerages such as Fidelity and Schwab just to name a couple. At the beginning of the process, we will draft all of the establishment documents which create the plan and email them to you within one business day after you sign up. Included with that email will be a banking guide that you can take with you to your local bank & and bring us on the phone to answer any questions that your banker may have regarding the account set up.

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

I currently have a self-directed checkbook IRA with an IRA LLC for investments. I also own a small SEP IRA and a small traditional 401k. How would these work with the solo 401k?

Thank you for reaching out. If you are self-employed, which appears to be the case, then you could transfer the existing SEP IRA and traditional 401(k) (assuming it is a former employer 401k plan) to the solo 401k plan. With respect to the existing IRA LLC, it can be transferred in-kind to the solo 401k plan. The IRA LLC would be assigned to the solo 401k plan, resulting in the solo 401k plan becoming the new and sole member of the LLC. We would assist with the transfer of the IRA and other retirement plans into the solo 401k.

Solo 401k as Sole Member of LLC  QUESTION:

Can I open a disregarded LLC entity that will be owned by the solo 401k trust and invest the solo 401k in the LLC?

While not required since a solo 401k already comes with checkbook control and  alternative investments can be placed under the solo 401k plan, you can certainly invest your solo 401(k) funds via an LLC for passively investing in alternative investments.  As described at the link below, this would entail the following:

  • Setting up a brand-new LLC.
  • Your solo 401(k) would be the sole member of the LLC.
  • There will be a separate bank account in the name of the LLC and under the employer identification number for the LLC.
  • You will be the manager of the LLC and as such will have checkbook control over the funds.
  • You will then be able to invest in the name of the LLC.
CLICK HERE to learn on about the process of investing a solo 401k in a single member LLC.

Deposit Properties into My Living Trust QUESTION:

My attorney is recommending that I deposit the solo 401k owned real estate (about 5 rental properties) into my living trust. I would like to know if this is required or not?

Your attorney may not know that a solo 401k is a retirement trust and therefore specific rules apply. The solo 401k rules do not allow for the transfer of the solo 401k property to your living trust unless it is upon your death assuming the living trust is the primary beneficiary of the solo 401k plan. Therefore, you can discuss with your attorney as to whether you should name your living trust as the primary beneficiary of the solo 401k plan. Following are some good links to share with you attorney.

Naming trust as beneficiary of Solo 401k Plan

Solo 401k beneficiary distribution questions

Charitable Donation QUESTION:

Can I make a charitable donation directly from my solo 401K?

No. Qualified charitable distributions only apply to IRAs not self-employed plans such as solo 401k plans, SEP IRAs or SIMPLE IRAs.

Also, in order for the IRA holder to treat the distribution as a “charitable distribution,” he or she must be age 70 1/2 or older and a dollar exemption applies. CLICK HERE to learn more about these rules.

Severance Package QUESTION:

I am receiving a severance pay currently from my previous employer. I am going to be a full-time realtor. Do I have to wait til my severance pay is finished before converting my former employer 401k to a solo 401k

From a solo 401k eligibility perspective, no you do not have to wait until your severance pay seizes in order to open a solo 401k plan as long as you are pursuing self-employment which appears to hold true for you. However, you will need to check with your former employer as they may have included language in the severance agreement stating that you cannot transfer your former employer 401k funds until the severance pay has concluded.

Leased Employee QUESTION:

I'm thinking about hiring a personal assistant trough a leased employee agency. Will this have any impact on my solo 401k plan eligibility?

The leased employee rules are complicated. Essentially, if the leasing organizational offers a Money Purchase Plan that makes contributions of at least 10% of compensation for the leased employees, they they can generally be excluded from the recipients employer 401k plan. 
 
See the following IRS publication starting at the bottom of page 2 for more on thishttps://www.irs.gov/pub/irs-pdf/p7003.pdf
 
 
Also, in order to qualify as a leased employee, the individual must satisfy the following. 
 
  • The recipient employer (in your case, the owner-only business) must be  paying for the individual’s services; 
  • the services must be pursuant to an  agreement between the recipient employer (in your case your owner-only business) and a leasing organization; and 
  • the  individual must perform services on a substantially full-time basis for at least one year.

Substantially full-time basis means that within a 12-month period, the individual completes the lesser of:

  • 1,500 hours of service or
  • 75% of the number of hours that are customarily performed by a  regular employee in the specific position. (If this method is used, an individual must be credited with at least 500 hours to be considered substantially full-time, even if 75% of the number of hours customarily performed would be less than 500.)

In addition, services must be performed under the primary direction or control  of the recipient employer, and the individual must be a common-law employee of the leasing organization.

 Bankruptcy QUESTION:

Are solo 401k plans protected in bankruptcy ?

Yes  solo 401k plan are fully protected in bankruptcy. This matches the protection given to other  self-employed plans such as SEP IRAs and SIMPLE IRAs.

Divorce, QDRO QUESTION:

I am handling an Iowa divorce where one party has a Solo 401k. We need to divide the funds in this account as part of the divorce. Does Solo 401k require a QDRO (Qualified Domestic Relations Order) or what mechanism would be used to transfer/divide those funds incident to a divorce?

Transfer of IRA Funds Stemming from Divorce QUESTION:

My husband and I separated, and I was awarded half of his IRA account. Can I transfer the IRA funds to my self-employed solo K?

Yes. You will want to follow the terms outlined in the divorce decree document as the rules do allow for the transfer of IRA funds stemming from divorce to the former spouse’s IRA or qualified plan such as a solo 401k plan.

Solo 401k for Expat US Citizen QUESTION:

Can a non-resident US citizen living in Australia working as a sole proprietor open a Solo 401k?

A solo 401k plan is for owner-only businesses and their spouses. Therefore, as long as you are self-employed and pay US taxes, a US expatriate can participate in a self-employed solo 401k plan. Contributions to the solo 401k plan have to be based on earned income not investment or passive income. If you have no earned income or if you’ve excluded all earned income from U.S. tax using the foreign earned income exclusion (FEIE) and the foreign housing exclusion (FHE), you cannot contribute to a solo 401(k).

Multiple Solo 401k Plans QUESTION:

Can I open more than one solo 401k? Can I have two? i.e. one self-directed solo 401k with you and another with TDameritrade or vanguard?

While theoretically you can set up multiple solo 401(k) plans, it is not a good idea because it can be an audit red flag and will provide no benefit – for example, it will not allow you to make any additional contributions, take a loan, etc. Also, the Form 5500-ez filing requirement is aggregated across all solo 401k plans.

Change in Self-Employed Business QUESTION:

I am changing my employment situation and am possibly shutting down my current self-employed business later this year. Going forward, I will receive limited 1099 income but it will be in a different entity which is a C-corp. Will I need to open a new solo 401k plan?

We can update the existing solo 401k plan to list the new self-employed business and all other information regarding the plan would remain the same including the same plan name and same solo 401k employer identification number (EIN). This is possible because you are still doing self-employment activity  on a full or part-time basis and don’t employee any full-time W-2 employees.

Re-Organizing your Self-Employed Business QUESTION:

Can I reorganize my self-employed business from one state to another and what affects does this have on my solo 401k plan?

  • If you re-organize the entity through which you operate your self-employed business (e.g. cease operating the business via the Delaware entity and operate via a California entity), please let us know so that we can update the plan documents to reflect the new entity.
  • The new entity that does not need to be a corporation.
  • There will be no change to the name of the plan, the Plan EIN or the Solo 401k bank/brokerage accounts.

IRS CP2501 QUESTION:

I received an IRS CP2501 notice for my solo 401k plan, can you assist in respond?

It is not unusual for the IRS to want to confirm certain transactions such as direct-rollovers were in fact processed within the solo 41k bank or brokerage account.

As part our our ongoing annual support, we will assist our clients in preparing a letter response in connection with the IRS inquiry notice.

Defined Benefit and Solo 401k Plan QUESTION:

To further increased my tax-deferred savings, would there be any incompatibilities in establishing an additional qualified defined benefit plan with another provider while retaining my mysolo401k plan ?

While we don’t offer DB Plans yes you could establish one with another provider while still maintaining the solo 401k plan with us. When an owner-only business contributes to both a solo 401k plan and a defined benefit plan, this is commonly known as a DB(K) or Eligible Combined Plan, which sprouted from the Pension Protection Act of 2006.

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

The assets of the solo 401k plan did not exceed 250K as of 12/31/17. The year before they did and I filled a 5500-EZ form by July 31, 2017. Question. Do I need to file a 5500EZ form because I filed one last year, even though my assets on 12/31/2017 did not exceed 250,000?

Correct that you are not required to file the Form 5500-EZ in any year the total value is under $250,000 as of 12/31 unless you are terminating the solo 401k plan. however, it may be a good idea to file since you have filed for prior years. Reason being, the IRS will mail you a notice asking to confirm why a Form 5500-EZ was not filed.

For more Form 5500-EZ FAQs, VISIT HERE.

Form 5500-EZ Multiple Owners QUESTION:

We are a three person LLC, all founders, no employees, who file as an S-Corp for tax purposes. In 2016 we set up an individual 401k with Vanguard. We have recently been told by our accountant that we need to talk to a pension consultant about this. The pension consultant is saying that we need to go back and file a Form 5500 for 2016, and one for 2017 (which is still open, we are on extension.) He then voiced some doubt (I would call it flat out confusion, when I pointed some documentation out to him) that we were able to have an individual 401k (solo 401k) setup. Our understanding was that yes, obviously, we can have an individual 401k setup, and that we did not need to file a Form 5500 until we met the $250k threshold. So I'm basically looking for a second opinion on the matter. I'm happy to pay for your time to give it, I'm don't like asking for free-bees. Can you please assist with this question?

Correct that Form 5500 does not apply because the 401k is a self-employed 401k since only partners (owners) are employed by the LLC.  You can find more regarding this exception on page 2 of Form 55oo-EZ Instructions.
Also, a Form 5500-EZ does not apply until the the plan exceeds $250,000 in value.

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

Can you please answer the following list of questions regarding the asset value for Form 5500-EZ reporting?

I have a question about the criteria for filing a 5500-EZ. I understand that this filing is required when “value of assets” in my solo (k) reaches $250k.

I’m not sure how to calculate the value of assets for this purpose. Is it simply how much I’ve contributed, even if some of the value has been lost. What if gains are hard to quantify.

Here are some specific examples

1) My solo (k) owns a triplex, and it has a mortgage on that triplex.

My equity is about $56k

I’ve probably spent about $80k on this property so far (and counting–it’s been a dog)

The current market value of the property is about $120k

What is the value of this asset for the purpose of determining when to file the 5500-EZ.

QUESTION: 2) I own shares in a private fund. My total contributions to that fund equal $95k. The fund pays distributions but also has an equity component. For the purpose of determining whether to file the 5500-EZ, do I need to account for equity appreciation of these shares?

ANSWER: It is the fair market value of all the assets as of the end of the plan year (e.g., the value of your Solo 401k investment in property, value of private equity investment, amount of cash if any in your account, etc). If the value is $250,000 as of end of year, please let us know so that we will prepare a Form 5500-EZ

QUESTION: My Solo 401k is invested in real estate as well as cash in a bank account.  Do I just list the cash in the bank?

ANSWER: If your Solo 401k plan includes cash and/or traditional investments (stock, mutual funds, money market, etc.) in a bank/brokerage account & alternative investments (e.g. real estate, notes, etc.), you will need to consider the total value of all plan assets as of December 31.

QUESTION: How do I determine the value for real estate or other alternative investments?

ANSWER: For alternative investments, you need to make a reasonable determination of the value of the solo 401(k)’s ownership interest in the investment as of December 31:

    • For real estate, you could work with your real estate agent to consider comps in the area;
    • For an interest in a partnership, this will not be the amount listed on the K-1 but rather the value of such partnership interest.

QUESTION: My wife and I each have a Solo 401k account (under the same plan). Do we include the total value of both accounts? I also have pre-tax and Roth funds.  Do I include the total value of all three accounts?

ANSWER: If there are multiple sub-accounts (e.g. pre-tax, Roth, etc.) and/or multiple participant accounts (e.g. accounts for spouses, partners), you will need to consider the total value of all sub-accounts.

Evidence of Registration with the State QUESTION:

Is there a requirement to register my solo 401k trust with the state in which it collects rental income?

A Solo 401(k) plan is a retirement trust and does not get registered with the sate like an LLC. The solo 401k indirectly falls on the IRS records when they issue the employer identification number (EIN) for the solo 401k plan.

1099-MISC for Solo 401k Setup Fees QUESTION:

Do I have to file a 1099 MISC on the fee I paid to mysolo401k?

Per the IRS, payments made with a credit card are not to be reported on Form 1099-MISC (See the instructions to the Form 1099-MISC).

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

When investing in real estate abroad do I have to do a W9 in the name of the solo 401k trust?

If you are referring to providing a Form W-9 Request for Taxpayer
Identification Number and Certification to a foreign real estate investment provider,  yes this would only be used by the investment provider to confirm the EIN for the Solo 401k in anticipation of filing a tax document with the IRS (e.g.,  Form 1099).  If the Investment Provider requests one, it is certainly acceptable to Provide a W-9 form for the Solo 401k which confirms the employer identification number for the plan.

Copies of Past Years Form 1099-R QUESTION:

In prior years I transferred IRAs to a solo 401k plan, so how do I get past filed copies of form 109-R with the IRS?

If you go to the following link you should be able to see the 1099 information reported to the IRS based on the social security number:

Retirement Trust is Not Registered with the State QUESTION:

Does the solo 401k trust trust need to be registered with the state you live in and what are the state tax implications, if any?

A solo 401k is a retirement trust, so it is a federal retirement trust that is regulated by the IRS so it is not registered in any state.  It is a qualified plan so the income is tax deferred. We will obtain an EIN from the IRS as part of the set up process that is specifically for qualified 401k plans (such that the IRS will know that this is a tax deferred vehicle).

Copies of Past Years Form 1099-R QUESTION:

In prior years I transferred IRAs to a solo 401k plan, so how do I get past filed copies of form 109-R with the IRS?

If you go to the following link you should be able to see the 1099 information reported to the IRS based on the social security number:

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

Who issues the Form 1099-R to report the mega back door after-tax solo 401k conversion?

You will need to let us know when you move funds from the after-tax solo 401k sub-account to the Roth solo 401k sub-account as this will be a reportable event and we will need to gather the information needed to prepare the 1099-R.

Invest in US Savings Bonds QUESTION:

Are we able to purchase US savings bonds (I bonds or EE) within a self-directed 401k?

You might be able to invest in savings bonds directly through Treasury Direct. When you fill out their on-line application, choose “trust” as the account type and enter the information for your solo 401k. Solo 401k plans fall under the truste umbrella.
Here is there on-line application: https://www.treasurydirect.gov/tdhome.htm
Once the account is open, it can be funded by instructing the bank or brokerage firm holding the solo 401k funds to send out a wire directly to Treasury Direct.

72(t) Substantially Equal Periodic Payments QUESTION:

Can I process 72(t)-equal periodic payments from a solo 41k plan?

Please note that under the substantially equal periodic payment rules distributions are not permitted from qualified plans such as a solo 401(k) until the participant separates from service, which in the case of a self-employed person means not until the self-employed business shuts down (i.e. practically speaking you cannot do it).  Learn more here: https://www.mysolo401k.net/substantially-equal-periodic-payment-rules/

Form 8621 QUESTION:

Is a self-directed solo 401k subject to Form 8621?

No. A solo 401k plan is tax exempt, so it is not subject to Form 8621 reporting.  See the following: https://www.irs.gov/instructions/i8621

SECURE Act Information QUESTION:

Do you guys have any latest information on the SECURE Act as it relates to solo 401k plans?

Yes. The Setting Every Community Up for Retirement Enhancement (SECURE) Act, was finally signed into law by President Trump on December 20, 2019. Most of the provisions in the new law are effective starting January 1, 2020 and later years.  Here are some of the impacts the new law will have on solo 401k plans in 2020 and going forward:

Inherited Solo 401k Plan Funds:  First, if the solo 401k participant passed away prior to January 1, 2020, the old rules still apply so no changes apply to those accounts. However, solo 401k  accounts where the solo 401k participant  passe away on January 1, 2020 or after will he subject to the new rules under the SECURE Act. Unless one of the exceptions listed below applies, nonsposue beneficiaries will be required to fully distribute inherited funds within 10 years. There are no required minimum distributions within those 10 years, but the entire balance must be distributed after the 10th year. Here are the exceptions if they occur at the time of the solo 401k or IRA owner’s death:

  • disabled individuals,
  • certain chronically ill individuals,
  • beneficiaries whose age is within 10 years of the decedent’s age,
  • minors (they would begin a 10-year payout period upon reaching the age of majority), and
  • recipients of certain annuitized payments begun before enactment of the SECURE Act.

VISIT HERE to learn how other provisions of the SECURE ACT will impact solo 401k plans.

Coronavirus Aid, Relief and Economic Security (CARES Act) Information QUESTION:

Have you published any information on the CARES Act impact on solo 401k plans?

The CARES Act was passed on March 27, 2020. The legislation affects required minimum distributions (RMD), the ability to take early distributions prior to reaching age 59 1/2, and the increase of solo 401k participant loans to $100,000. Here are some of the impacts the new law will have on solo 401k plans in 2020:

Coronavirus-Related Distributions:  It falls under its own distribution category so it is not subject to the 10% early distribution penalty that applies to distributions taken from solo 401k plans prior to the participant reaching age 59 1/2.  Also the 20% upfront federal tax withholding does not apply but will be due when you file your Form 1040 personal tax return. However, you can receive the taxes back if you pay  the funds back to the solo 401k over a three-year period.

The following conditions must be met in order for the distribution to fall under the Coronavirus-related distribution exception :

  • The participant is diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention,
  • The participant’s spouse or dependent is diagnosed with such virus or disease by such a test, or
  • The participant experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Secretary of the Treasury

The plan may rely on participant certification that those condition(s) are met.

The Deferral of Existing Solo 401k Participant Loan Payments: If you meet the COVID rules described above and have an outstanding solo 401k participant loan,  you can delay the scheduled repayments that are due through Dec. 31, 2020 for a year.

Increase of New Solo 401k Participant Loan Amount: The solo 401k participant loan limit has been doubled from $50,000 to $100,000 or 100% of the solo 401k balance, provided COVID rules listed above are satisfied.

The Waiver of Required Minimum Distributions For 2020: RMDs due in 2020 are waived. This waiver also applies to RMD payment to beneficiaries of decent accounts.

VISIT HERE to learn more about the CARES Act.

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