Opening a solo 401k can be confusing—from changes in contribution limits, distribution rules, investment rules to filing deadlines. In an effort to keep our clients informed, we have put together this FAQ page and add to it frequently as the IRS solo 401k rules change and field questions from our clients.
About the Self-Directed Solo 401k
The Solo 401(k) retirement plan allows for salary deferrals found in 401(k) plans, and employer contributions found in profit-sharing plans. You can make annual contributions of both salary deferral and profit-sharing contributions, empowering you to save up to $61,000 in 2022 or $67,500 if you are more than 50 years old, tax-deferred. The Solo 401k annual contribution limit increased by $5,000 for tax year 2023 to $66,000 and $73,500 for those 50 or older.
The process starts by us collecting information via our on-line application to draft the solo 401k plan documents, obtain the EIN for the solo 401k and draft the transfer forms.
You have the option to fund the Solo 401(k) plan with annual contributions or transfers from other retirement accounts. You will have the freedom of investing those contributions through the investment vehicle of your choice. You can use any bank or brokerage account of your choice to establish a checking account for your Solo 401(k), and we will assist you in completing the paperwork for the solo 401k checking account.
Since we never have access to your funds, you are responsible for monitoring the balance in your Solo 401(k) account and notifying us when the balance reaches $250,000 at any year-end.
Reason being, you are required to complete an IRS Form 5500-EZ, which we can assist you with, once your balance reaches $250,000.
If you would like us to complete the form for you and to file it, no additional fees will apply. Remember, this form is only required if your Solo 401(k) balance reaches $250,000, or if you terminate the solo 401k plan regardless of value.
Also, if you process conversions or distributions from the solo 401k plan, Form 1099-R reporting also applies which we will also prepare and file at no additional cost upon your timely request.
No annual tax reporting is applicable until your assets reach $250,000. At that point, you must file a Form 5500-EZ. Form 5500-ez support is included in our annual fee for those who notify us of their solo 401k balance.
However, you must always file a Form 1099-R with the IRS should you take a distribution of your plan assets upon plan termination or during participating in the plan. Form 1099-R also applies to in-plan Roth solo 401k conversion of both after-tax and pretax funds. Form 1099-R preparation is included in our annual fee.
Deadlines
While the 2019 SECURE Act extended the deadline to adopt a Solo 401k plan from the end of the year to the business tax return deadline including any timely filed extension, the SECUR Act which was enacted in 2019 changed the solo 401k setup deadline but it caused confusion because the new rules pertaining to the deadline to establish a solo 401k plan only changed for making profit sharing (aka employer contributions) not employee contributions (aka salary deferral contributions). As a result, if a solo 401k is adopted by December 31, 2022, the self-employed business owner will be able to make both employee and employer contributions for 2022 in 2023 by his or her business tax return due date including business tax return extensions. However, if the solo 401k is not adopted until January 1, 2023 or after but by the self-employed business tax return including the business tax return extension deadline, the business owner can at minimum make employer profit sharing contributions, and voluntary after-tax contributions.
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For Sole Proprietors:
Employee and profit-sharing contributions must be funded by your tax-filing deadline plus timely filed business extension, provided your plan was adopted by December 31.
For Incorporated business:
Employee and profit-sharing contributions must be funded by your business tax-filing deadline, provided the plan was established by the end of the previous year. To learn more about the various funding deadlines, CLICK HERE.
While the 2019 SECURE Act extended the deadline to adopt a Solo 401k plan from the end of the year to the business tax return deadline including any timely filed extension, business owners had to setup/adopt the solo 401k plan by 12/31/2022 in order to qualify to make tax year 2023 Roth and pretax employee contributions in 2023 by the business tax return plus extension. However, you can still open the solo 401k in 2023 by the business tax return including business tax return extension and make voluntary after-tax contributions in 2023 for 2022.
Essentially, for making tax year 2022 employer profit sharing contributions in 2023 by the business tax return including extension the SECURE Act only extended the adoption due date to 2023. This means that those who did not establish the solo 401k plan by December 31, 2022 will not be able to make employee pretax or Roth contributions in 2023 for the 2022 tax year.
Getting Started
(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.
Step 1: We need to collect information to draft the solo 401k plan documents and to get the tax identification number for the solo 401k trust. Complete our on-line application by CLICKING HERE, or call us to walk you through the on-line application.
Step 2: Once we receive your solo 401k on-line application, we will start the solo 401k establishment process by drafting the solo 401k establishment documents, and we will e-mail them to you the next business day for your signature.
Step 3: Once we receive copy of your signed Solo 401(k) plan establishment documents, we will obtain the tax identification number (EIN) from the IRS for your new solo 401k trust, prepare the transfer forms if you plan to transfer IRA and/or former employer funds to the new solo 401k. We will also proceed with assisting you in establishing the bank or brokerage account for the Solo 401(k) so you can start making investments right away.
NOTE FOR FUNDING BOTH ROTH, AND AFTER-TAX CONTRIBUTIONS: If you plan to make both Roth, and after-tax contributions, you MUST open up additional identical checking accounts. Reason being, this is an IRS requirement, plus this will help in segregating pre-tax vs after-tax, and Roth contributions.
We can usually adopt your solo 401k plan by the next business day that you decide to sign up. This will allow for immediately commencing the bank or brokerage account setup as well as the completion of the transfer forms for your IRA or former employer plan transfers.
No, we will need to help you obtain a separate EIN (Employer Identification Number) for the solo 401k from the IRS since a solo 401k is a retirement trust not a business. To learn more, visit here.
Rollovers
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 [email protected] 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.
IRC Section 408(d)(3)(A)(ii) states that after-tax IRA funds cannot be transferred to a qualified plan such as a solo 401k plan. However, yes you can transfer the gains in the non-deductible IRA to the pretax bucket of the solo 401k plan. See following language on page 21 of IRS Pub 590.
Finally, once you have transferred all the gains from the non-deductible IRA(s) to the solo 401k plan, you can then convert the IRA basis to a Roth IRA. No taxes will be owed on the Roth IRA conversion because it only consists of basis.
If you receive the funds in the form of a rollover instead of a direct-rollover, you have 60 days from the day you receive your rollover check to roll your funds over. To learn about a rollover vs a direct-rollover, CLICK HERE.
If the individual is self-employed with no full-time W-2 employees, he or she can set up our solo 401(k) plan which allows for alternative investments such as private placements, syndicated real estate financing transactions, etc. provided that the investment is a passive investment (e.g. the person is not otherwise involved with the investment provider such as working for the provider nor involved with the underlying real estate in the case of a real estate fund such as using the underlying real estate property).
Moreover, our Solo 401k would allow the person to rollover an asset from a traditional IRA to the solo 401(k) (i.e. in-kind direct rollover). Specifically, to complete the rollover the investment provider would need to update its records to show that the investment is held in the name of the solo 401(k) and under the employer identification number for the solo 401k (we obtain an EIN for the plan as part of the establishment process). In addition, the existing IRA provider would report this transfer as an in-kind direct rollover by issuing the 1099R with a code G in box 7. Please note that we would guide the client through transfer process as part of our services for no additional charge. In addition, please note that the client (not us) would hold the investment documents as the trustee of the Solo 401k plan.
You can transfer other qualified plans such as former employer 401k plans as well as pretax IRAs to the solo 401k plan. Click here for a list of retirement accounts that can be transferred to a solo 401k plan.
Funds can be transferred to the solo 401k from IRAs and former employer plans at account opening or at a later date. Also, partial transfers can be processed. Please just let us know and we can assist you in the transfer process as part of our services.
No, your stocks and alternative investments (e.g., real estate, notes, etc.) can be transferred in-kind, which means that they will be transferred as is to your new plan.
That is in line with the two year SIMPLE IRA rule. The two-year period starts on the day the employer makes the first contribution to the individual’s SIMPLE IRA, and ends exactly two years later. See [Notice 98-4, Q&A I-2, 1998-1 C.B. 269]
Eligibility
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 [email protected].
If your spouse performs services and is compensated from the business, this person can participate in the same Solo 401(k) plan. The maximum amount your spouse can save also depends on his or her income, salary and age. A solo 401(k) is for business owners and their spouses.
Since Solo 401(k) is for owner-only businesses, partners are eligible to participate as well as family members if they are also partners in the same business. In other words, solo 401k plans are only for owner-only businesses with no full-time W-2 employees who are not owners of the business sponsoring the solo 401k plan.
Yes, a 501(c)(3) entity may have a solo 401(k) plan, provided the business does not 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.
No – the Solo 401k Must be sponsored by your self-employed business. However, some clients list their living trust as the beneficiary of the solo 401K in the event of death. Of course, you would want to discuss this with your estate tax adviser. One of the solo 401k plan documents that we provide is the beneficiary election form where you can list your plan’s beneficiaries.
Unlike an IRA where one spouse can contribute to the other spouse’s IRA (spouse IRA) based on the contributing spouse’s earned income if certain rule are satisfied (e.g., both spouses file a joint tax return-Form 1040), the same rule does not apply to a solo 401k plan. However, if you both work for the same self-employed business that sponsors the solo 401k, you can participate in the same solo 401k plan and make contributions to the solo 401k plan based on your respective net self-employment income. I would check with your CPA as you may be able to to get creative in allocating earned income if you both work for the same business.
Prior to hiring any full-time employees, we recommend that you get in touch with us by e-mail at [email protected] to find out how we can assist you with additional retirement plan services that will support your company’s growth.
Note that once you hire a full-time employee, you will no longer be eligible to maintain a Solo 401(k). It is very important that you get in touch with us at that time to discuss your options.
Yes the S-corp can sponsor a solo 401k plan since the 1% shareholder is not a W-2 employee. Click here for additional information.
Your wife can still participate in the solo 401k plan even if she works for another W-2 employer since she is still also doing part time self-deployment activity. In addition to the IRS rules allowing for participation in both a full-time employer 401k with another employer (one not owned by the individual with the owner-only business) as well as a solo 401k plan for the individual’s owner only business, The IRS rules even allow for contributions to both plans provided certain contribution rules are met.
While some states do recognize the existence of an oral trust, a solo 401k plan will not be considered qualified by the IRS unless unless it is established in written form. See Treas. Reg. 1.401-1(a)(2). The solo 401k plan document must include specific provisions essential for qualification. See Rev. Rul 74-466, 1974-2 C.B. 131. The plan document for the solo 401k plan defines the obligations for the plan sponsor and the participant. Lastly, the solo 401k plan document must be reviewed and approved by the IRS and considered qualified once the IRS determination letter has been issued.
Contributions
You can contribute up to $61,000 in 2022 and $66,000 for tax year 2023. An additional catch-up contribution of $6,500 can also be made for 2022, and $7,500 for 2023 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 [email protected] and we can help you calculate the contribution amount.
No because a solo 401k is for owner-only employees not common-law employees.
No, there is not. You are not required to contribute to the plan every year.
If you are age 50 or older, you can contribute an additional $6,500 (for 2022) into your Solo 401(k) plan. The catch-up contribution increased to $7,500 for tax year 2023.
For details of how much more you can stash away this year, please contact us at [email protected], or visit our on-line solo 401k contribution calculator.
No, the profit sharing contribution limits apply separately to each employer plan. The profit-sharing contribution cannot exceed 25% of gross income from a corporation, or 20% of net earned income for sole proprietors/partners. To learn about the rules surrounding making profit sharing contributions to multiple plans, VISIT HERE.
Unfortunately, retirement payments, Social Security, and investment income are not considered earned income. Self-employment income is what is needed in order to make solo 401k contributions.
No. A roth 401k contribution is an employee contribution (salary deferral) and before being able to transfer to a Roth IRA there must be a trigger event (e.g., age 59 1/2 or over).
No. Pretax solo 401k contributions do not reduce social security tax or Medicare tax. However, the solo 401k contributions will grow on a taxed deferred basis and social security taxes won’t apply when you later distribute (at retirement age) the funds from the solo 401k plan.
No you do not need to deposit your Solo 401k contributions by year-end. Per the IRS publication covering the rules for Solo 401k plans and other owner-only retirement plans (IRS Publication 560), both employee and employer contributions can be made by the due date of the tax return for your self-employed business including timely-filed extensions. Specifically, the chart titled “Key Retirement Plan Rules” on page 3 the publication states that both employee and employer contributions can be made up until the tax return is due (including extensions). VISIT HERE, to learn more about this often misunderstood rule.
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).
As long as you are self-employed when you fund your solo 401k plan via a transfer of former employer retirement funds or IRA funds, no the IRS does not require that you make annual contributions to your solo 401k. In fact, in years that you end up with a net loss from self-employment activity performed, you cannot make contributions to a solo 401k plan.
While the solo 401k contribution limits will now change as a result of your self-employed business changing from being taxed as a sole proprietorship to now a S-corporation, the solo 401k contributions will now be based on W-2 wages under the S-corp instead of line 31 of your Schedule C. Also, your solo 401k annual contributions will now need to be made by March 15, or September 15 if tax return extension is timely filed instead of April 15, or October 15 if tax return extension is timely filed.
The conservative approach would be to wait until you know the total self-employment income figure for the year before making annual solo 401k contribution since the contribution rules allow the participant to wait until his or her business tax return due date plus timely filed business tax extension to make solo 401k contributions.
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
A solo 401k allows you to invest in any security or alternative investment such as real estate, private investments, private loans, metals, tax liens, cryptocurrency, equities and much more. For a sample list of solo 40k investments, VISIT HERE.
Just make sure the Form 1099-INT lists the solo 401k trust name and the plan’s EIN, and keep it for your records. As long as the note payments flow back to the solo 401k plan the payments will maintain their tax deferred status until you commence taking distributions from the solo 401k plan.
The Solo 401(k) plan can obtain a non-recourse loan but the borrowed funds have to be used toward the purchase of the real-estate property. Any remaining funds in the solo 401k plan after the purchase can be used to rehab the property.
Click here for a list of banks that will loan funds a Solo 401(k) plan.
Contributions, investing in alternative investments such as real estate, and taking 401(k) participant loans are all allowed under the 401(k) rules provided that the plan documents allow for such. We have an IRS approved plan document which does allow for all of these transactions.
We are not aware of any specific prohibition on purchasing a domain name via a Solo 401k. As such, this is acceptable provided that (i) the domain name is purchased from an unrelated person; (ii) the title is issued in the name of the Solo 401k (e.g. your name as trustee of Solo 401k) – which you should confirm that this is possible; and (iii) the domain name is not operating as an active business.
Yes as long as you are not otherwise involved in the fund & the investment is titled in the name of the Solo 401k, the funds flow in and out of the Solo 401k, etc.
I understand that the K-1 is issued to the Solo 401k for investments made via the Solo 401k. In that case, any gains are on a tax-deferred basis since in the Solo 401k. Please simply keep the K-1 in your records.
While a solo 401k cannot be invested in your own LLC business without running afoul with the solo 401k prohibited transaction rules, the solo 401k may be invested in a LLC for passively placing investments that can also be placed through the solo 401k directly. These passive investments include real estate, promissory notes, and tax liens, to name a few.
While you can also serve as the manager of the solo 401k owned LLC, you may not receive any type of compensation for managerial services. Please CLICK HERE for more on the Solo 401k LLC.
However, our solo 401k plan allows for solo 401k participant loans and the loan proceeds can be used in any way you want, such as putting the loan proceeds towards your startup LLC. You can borrow up to half of your Solo 401k balance, not to exceed 50,000.
If you are looking to use more than than the allowable solo 401k participant loan limit, you can also explore the business financing 401k also known as the rollover business startup which would allow you to invest your retirement money in your own business provided the entity is a C corporation that offers goods or services. To learn more about this plan, please see the following.
No. You don’t have to submit the investments for our approval since we are not the trustee of your solo 401k plan. At the same time, we are here if you have questions. We also have free investment forms located here for your internal use as it is important to fully document your solo 401k alternative investments.
When a solo 401k invests in allowed alternative investments directly or through an LLC where the solo 401k is the sole member, it is not considered a distribution unless you violate the prohibited transaction rules outlined in the following pages.
(1) This is acceptable provided that (i) neither of you (nor any closed related persons) are working for the entity in which you intend to invest retirement funds; (ii) neither of you (nor any closed related persons) hold any ownership position personally in the entity in which you intend to invest retirement funds; and (iii) neither of you (nor any closed related persons) otherwise do not have a relationship with this entity either in your own name or through an entity that you control (e.g. you are not a landlord, lender, vendor, etc.).
(2) The investment must be titled in the name of the Solo 401k with funds flowing from the Solo 401k account(s) and any return on the investment flowing back to the Solo 401k account(s). If both solo 401k participants will invest in the investment, the investment would simply be titled in the name of the Solo 401k listing both participants as the trustees with funds flowing from your respective accounts at the time that the investment is made. For administrative ease, it is acceptable if the return flows back to one account and then subsequently allocated and reconciled between the two accounts.
(2) If the investment is structured as equity (e.g. stock in a corporation, membership interest in an LLC, etc.) the investment may be subject to unrelated business income tax if (I) the entity is an active business (e.g. providing goods or services) and (ii) the entity is NOT taxed as a C Corporation. For more on investing a solo 401k plan in private equity, VISIT HERE.
No, you cannot loan money to your own solo 401k for investing as the solo 401k rules do not allow for it. Reason being, the solo 401k participant/trustee falls under the “disqualified party” umbrella and thus is not allowed to loan funds to his or her solo 401k trust.
No, the rules do not allow for the solo 401k to get a loan for improving an existing solo 401k owned property. Other options to obtain liquid funds include making an annual contribution to the solo 401k plan based on net self-employment income, transferring other retirement funds to the solo 401k from former employer plans and/or pretax IRAs, or liquidating some of your solo 401k investment holdings.
Correct that the Solo 401(k) plan is not required to be the sole investor in the real-estate property. However, specific rules (e.g., the TIC rules) may apply if you or certain family members (e.g., your spouse, parent, grandparent, child, and grandchild) will also invest personal funds.
Please VISIT HERE for more information on the tenants in common rules.
Yes a solo 401k may invest in a lease with the option to purchase, and the contract paperwork will need to be titled in the name of the solo 401k plan. Also, the rental income will need to flow to the solo 401k account. Lastly, The renter cannot be a disqualified party. Examples of disqualified parties include your children, parents and spouse, to name a few.
It is also important to understand the definition of a lease option in the context of reals estate. In real estate, the lease-option is a legal instrument between the investor/seller and a tenant/buyer. It involves a lease with a monthly rental amount due, but it also includes an option to buy — for a pre-determined price — at any time during the agreement.
Both you and your brother can invest funds from your respective Solo 401k plans into a new LLC which then uses the funds to purchase real estate. If financing is used, financing can’t be guaranteed by you or your brother personally and must be non-recourse to the Solo 401k plans. This means that the LLC will file a partnership tax return (e.g. 1065 at the federal level and issue a K-1 to each Solo 401k). See more at the following link: https://www.mysolo401k.
- 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.
Yes, the solo 401k plan may be invested in T bills. Click here for a guided tour by Treasury Direct on how to invest a solo 401k plan in treasury bills. You’ll need to select the account type for a “Trust”. You will apply for the Entity/Trust using the employer identification number (EIN) of the solo 401k plan.
Your understanding is correct that any depreciation with respect to real estate owned by your solo 401(k) would not be reported on your personal tax return nor would it applied to the solo 401(k) because the income attributable to the solo 401(k) is tax-deferred.
account can be funded with the taxable account with the existing cryptos?
The retirement account rules do not allow the account holder to contribute or otherwise transfer personal assets (including cryptocurrency that you own in your own name) to a Solo 401k.
Roth 401k and Voluntary After-Tax Contributions
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 2022, the overall limit is $61,000. The overall limit increased to $66,000 for 2023. 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) $61,000 for 2022, and $66,000 for 2023.
I have provided the following links for more information and examples: https: https://www.
A solo 401(k) allows for both Roth and after-tax contributions. While a Roth IRA also allows for Roth contributions, a solo 401(k) allows for sharply higher annual Roth contribution amounts for the employee deferral election than a Roth IRA of up to $20,500 ($27,000 if age 50 or older) in the 2022 tax year versus just $6,500 ($7,500 if age 50 or older), for a Roth IRA. The Roth solo 401k contribution limit for 2023 raised to $20,500 ($27,000 if age 50 or older).
Yes, you can make contributions to both; however, the combined amount contributed in any one year is limited to $20,500 for 2022 (plus an additional $6,500 in catch-up contributions if you age 50 or older). For 2023, the limit of both employee pretax and Roth contributions increased to $22,500 or $30,000 for tax year 2023.
Yes, the combined amount contributed to all Roth accounts and traditional, pre-tax accounts in any one year for any individual is limited to $20,500 for 2022 (plus an additional $6,500 in catch-up contributions if you are age 50 or older). For 2023, Roth contributions increased to $22,500 or $30,000 for tax year 2023.
Our solo 401k plan already allows for all three types of contributions: pretax, Roth and after-tax. Therefore, when we setup your solo 401k plan, you will simply need to open separate bank or brokerage accounts for each solo 401k contribution component. A separate holding account is required for reporting purposes.
Also, since you have already been taxed on Roth contributions, it is imperative that you record these contributions. At year-end and upon distribution, you will want to disclose to the government what contributions have already been taxed.
You should track all deposits made into your pre-tax (profit-sharing), Roth and after-tax accounts for reporting purposes on year-end tax filings and at the point of distribution. We can assist you with this.
Please note: Due to the pre-tax vs. after-tax component of the different source types, pre-tax and employer profit-sharing contributions should be deposited into the same bank account and tracked each year. The Roth 401(k) contributions, and after-tax contributions must be held in separate bank accounts and tracked separately.
However, if you roll over a distribution from a designated Roth account to a Roth IRA, you should keep track of the amount rolled over in accordance with the instructions to Form 8606, Nondeductible IRAs.
If you receive a distribution from your Solo 401(k) account, you may be responsible for filing a Form 1099-R to report the distribution to the government. When you request the distribution from your investment company, confirm whether they are going to file the 1099-R or not.
Yes, you can roll your Roth 401(k) account over, but only to Roth 401(k) account of another employer, or to your personal Roth IRA.
If you do not roll your Roth account over as described above, the previously unntaxed earnings will be treated as an early distribution from a qualified plan (and consequently subject to the taxes and penalties for any such early distribution) UNLESS you had this Roth account for more than five years.
Yes. Earnings associated with solo 401k voluntary after-tax contributions are pretax amounts in your account. Thus, voluntary after-tax contributions can be rolled over to a Roth IRA without also including earnings. Under Notice 2014-54, you may roll over pretax amounts in a distribution to a traditional IRA and, in that case, the amounts will not be included in income until distributed from the IRA.
Good question but the answers is no because the Roth solo 401k contribution is considered an elective deferral and is made up of 100% of compensation (“earned income” in the case of a self-employed individual) up to the annual contribution limit of $20,500 in 2022, or $27,000 for 2022 if age 50 or over. Therefore, since your earned income is $10,000, you will not be able to contribute the full $20,500 to the Roth solo 401k plan for tax year 2022.
Effective September 27, 2010, the Small Business Jobs Act of 2010 allows participants in solo 401(k) plans to roll over (i.e., convert) non-Roth assets such as pretax tax funds to a designated Roth account within the solo 401k plan. Regardless of the self-employed business entity type, the Roth 401k including the Roth solo 401k conversion rules require the conversion processed (i.e., the funds and/or assets converted to the Roth designated account) by 12/31/2018 in order for it to be effective for tax year 2018.
Yes. At the time that you establish your Solo 401k checking account or when you are ready. The key is that you have to segregate the regular (pre-tax) contributions from the Roth (post-tax) contributions by establishing two checking accounts under the name of your Solo 401k. When you are ready just gives a call and we can assist you with this.
If you already have a Solo 401k plan with us, you will need to open up an additional checking account with your bank provider for your Roth contributions.
To find out how to set up a Roth account with us if you already have a Solo 401k account, please contact us.
Participant Loans
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.
It takes about two business days to process the loan.
Yes you can take multiple loans up to the 50% of your solo 401k account balance not to exceed $50,000 in aggregate. You can take multiple loans subject to the multiple loan rules. Under those rules, the sum of the balances of the outstanding loans (using the highest outstanding balance of each loan over the last 12 months) can’t exceed 50% or $50,00 whichever is less. Thus, if you took a $50,000 loan and paid it back within 6 months, you would need to wait another 6 months before you could take another $50,000 loan.To learn more about the solo 401k participant loan limits, CLICK HERE.
You can borrow for a maximum of 5 years because title to the property would need to be taken in your name not the LLC in order to fall under the primary residence exception which would allow for a 15 or 30 year pay back period.
No. The rate does not vary once the solo 401k participant loan has been processed. If the Federal Reserve reduces rates such that at a future point in time the Prime Rate is also reduced, then the rate for new participant loans will also be reduced on new loans as of that date. The current prime rate plus an additional 1% is how the rate for 401k participant loans is derived at time the solo 401k participant loan is processed.
In order to have a term longer than five years, the proceeds of the Solo 401k loan must be used to purchase your primary residence. Here, you would not be able to take advantage of the longer-term because you already purchased the property. In that case, the term of the loan would be limited to five years.
The solo 401k participant loan is based on the value of the plan assets (i.e. cash plus stock and any other investments in plan such as real estate) and not just cash – this means that it doesn’t matter whether you take the participant loan before or after the investment in stock or real estate, and you can take a 40k loan in both cases.
Solo 401k loan payments including the interest which all flow to the solo 401k plan are not tax deductible. This is one of the disadvantages of borrowing from a solo 401k plan.
No tax forms need to be filed on account of taking a solo 401k participant loan unless the loan goes into default. Also, the solo 401k participant loan balance as of the end of the year is reported on Form 5500-EZ once this return applies to the solo 401k plan.
Yes, you can find answers by visiting the IRS page on 401k loan rules.
You can also visit our solo 401k loan FAQ page by CLICKING HERE.
While the solo 401k plan can be adopted in 24 hours, what adds to time to the solo 401k establishment process is the transfer process from IRAs or former employer plans as the institution holding the existing retirement funds has their own processing times. As a result, you will want to easily allow 10 to 12 business days before your account is fully funded with transfers from IRAs for your former employer plan. The solo 401k participant loan documents can be drafted in one to two business days once the funds are available in the solo 401k plan.
Termination
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.
(i) First, your business may hirean 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.
MORE SOLO 401K FAQs
In-Kind Distributions QUESTION:
Distributions from a solo 401k 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.
- 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:
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:
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.
Distribution of cryptocurrency/Bitcoin QUESTION:
Possibly. Just like real estate, Cryptocurrency/Bitcoin is considered property; therefore, if you take a solo 401k distribution you first have to qualify for it (see the following: https://www.
Under Age 59 1/2 Distributions QUESTION:
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:
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:
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 73 RMD QUESTION:
SECURE Act 2.0 changed the RMD starting age from 72 to 73 effective for 2023. Therefore, since you turned 73 this year and already took the RMD this year (the 2023 RMD), your next RMD won’t be due until next year and it will need to be distributed by 12/31/2024 of next year. The RMD will be calculated using this years 12/31/2023 ending solo 401k account value. Lastly, you could have waited to take this years RMD by April 1 of next year since your turned 73 this year. However, by taking it this year your are effectively spreading your tax liability. On another note, the SECURE Act 2.0 also changes the RMD starting age to 75 but not until 2033 so the new 73 RMD starting age applies now and until then.
Roth Solo 401k Forced RMD QUESTION:
In short, no. Starting in 2024 Section 325 of the SECURE Act 2.0 states that required minimum distributions (RMDs) will no longer apply to the Roth portion of the 401k including a solo 401k. This new rule is welcomed by Roth 401k holders including Roth solo 401k holders as they now won’t need to transfer their Roth solo 401k funds to a Roth IRA to indirectly avoid taking RMDs from their Roth Solo 401k since Roth IRAs are also not subject to pre-death RMDs. It is important to note, however, that these new rules don’t apply to post death Roth solo 401k required distributions (beneficiary distributions) as those are still subject to the 401k beneficiary distribution rules.
Bank or Brokerage Firm Role QUESTION:
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:
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:
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 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:
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:
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:
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:
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 100 5-star reviews on the Better Business Bureau. https://www.bbb.org/sdoc/
Bank Account and Brokerage Account QUESTION:
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:
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:
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:
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:
Our solo 401k setup fee of $525 + $125 annual fee 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:
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:
For tax year 2022, employee contributions are capped at $20,500 (plus a $6,500 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 2022 you can contribute $1,672 as a profit sharing contribution. I used our on-line solo 401k contribution calculator to calculate this figure.
Employee QUESTION:
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:
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.
Industry Practice for Transfers/Rollover QUESTION:
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:
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:
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:
UDFI QUESTION:
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:
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:
Private Equity Investment QUESTION:
Use Business Bank Account for Solo 401k QUESTION:
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:
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:
Yes we will prepare the Form 1099-R once you timely submit our solo 401k distribution form.
No Paycheck QUESTION:
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:
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:
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:
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:
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:
Taking RMD from Roth and Pretax Solo 401k Funds QUESTION:
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:
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:
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:
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 an amendment to list the new business. When ready, please provide the new business name and address.
Schedule E QUESTION:
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:
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:
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:
Not Run Own Company QUESTION:
No as you have to be an owner-employee to participate in a solo 401k plan.
Solo 401k for Author QUESTION:
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:
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:
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:
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:
- 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:
Another 1099-MISC QUESTION:
Form 1099-B QUESTION:
Form 1098-QUESTION:
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.
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:
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:
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:
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:
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:
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:
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.
Deposit Properties into My Living Trust QUESTION:
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.
Charitable Donation QUESTION:
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 72 or older and a dollar exemption applies. CLICK HERE to learn more about these rules.
Severance Package QUESTION:
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:
- 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:
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:
In short, yes a QDRO applies to a solo 401k plan. See the following.
https://www.mysolo401k.net/splitting-solo-401k-plans-at-divorce-qdro-court-cases/
https://www.mysolo401k.net/rules-of-processing-a-solo-401k-divorce-qdro/
Transfer of IRA Funds Stemming from Divorce QUESTION:
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:
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:
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:
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 employ any full-time W-2 employees.
Re-Organizing your Self-Employed Business QUESTION:
- 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:
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:
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:
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:
Calculate Value of Assets for Form 5500-EZ Reporting QUESTION:
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:
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:
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:
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:
Retirement Trust is Not Registered with the State QUESTION:
Copies of Past Years Form 1099-R QUESTION:
Form 1099-R for Voluntary-After Tax Conversion QUESTION:
Invest in US Savings Bonds QUESTION:
72(t) Substantially Equal Periodic Payments QUESTION:
Form 8621 QUESTION:
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