Posted over 5 years ago

Solo 401k: Achieve checkbook control without a custodian or LLC

Background on IRA and 401k

While some self directed IRA investors utilizing LLC structure to achieve “Checkbook Control” of their retirement accounts, many may find this article about Self-Directed Solo 401k as great news.

Solo 401kSolo 401k retirement plans provide checkbook control without the use of an LLC or custodian.  The concept of custodian comes from Internal Revenue Code (IRC) Section 408(a)(2) and is defined in Section 408(n). This entire IRC section 408 is devoted to Individual Retirement Arrangements, or IRAs.  The code explains that an IRA is normally a trust, and the trustee must be a bank.  Then it defines bank as a bank, trust company, or any company specifically approved by the IRS. This capacity of trustee to an IRA is known as “Custodian”. This trustee role is simply that of investing the plan as directed by the account holder.

A Solo 401k plan is a type of 401k that is designed for self employed individuals or small business owners whose businesses have no full time employees. All 401k plans are qualified plans and qualified plans do not have any special restrictions on who can serve as trustee.

The significant difference is that with a Solo 401k provided by Sense Financial, the participant can actually be the trustee and handle the investment transactions themselves. This can serve to simplify operating the plan because no third party is introduced. This arrangement eliminates third party Custodian fees.

Checkbook Control – “The Drawback”

You may hear about potential problems of checkbook control, such as recordkeeping and legal compliance. The fact is that the only reporting required for a Solo 401k is annual filing of Form 5500-EZ, which is only required after plan assets exceed $250,000 in value.  An accountant can prepare this form for a nominal fee.  The issue of checkbook control legal compliance is quite simple. All self directed accountholders and participants must avoid prohibited transactions. This requirement and responsibility rests solely on you, the trustee of the plan, regardless of whether you have checkbook control and regardless of whether you are using and IRA or Solo 401k.  The facts are that when using a self-directed, self-administered, self-trusteed Solo 401k meeting the reporting requirements is simple, and it’s inexpensive to have Form 5500-EZ prepared for you, there is no unique risk of legal noncompliance that would otherwise be eliminated by using a custodian.

Titling of Assets

When making an offer, as trustee of your Solo 401k Plan, make sure to list your Solo 401k as the buyer. Remember that your Solo 401k is a separate investor from you, and therefore its name needs to be listed on all purchasing and contracting documents. The Solo 401k’s title should read as follows for example:

XYZ Solo 401k Trust FBO John Smith, Trustee

When your self-employed 401k purchases property, your Solo 401k is required to fund any necessary deposit or earnest funds.

At closing, you, as trustee of the Solo 401k, will approve and sign all documents and then submit them to the closing agent along with check or wire funds for purchase.

Vesting of all documents

XYZ Solo 401k Trust FBO John Smith, Trustee

Purchases should be transacted under Solo 401k’s own EIN

In Closing

Solo 401k plans are much easier and less expensive to operate compared to Self-directed IRA.  A client can serve roles of employer, employee, plan participant, plan administrator, and plan trustee. Serving the role of employer and employee allows him to contribute up to $50,000 per year to his account (or $55,500 if he’s over age 50). If client’s wife works in his business, she can participate as well and contribute to the plan.

In my opinion, a Solo 401k where the same person serves all roles involved is the simplest, most effective and direct way for that person to self direct their retirement account. It opens doors to the most flexible options possible. This allows for investment into residential and commercial real estate, tax deeds and tax liens, precious metals, start-up business and many other investments that some custodians will not allow.
So if you’re self employed (through your own Corporation, LLC, or even Sole Proprietorship) and you have no full time employees, you qualify for a Solo 401k – The Ultimate Retirement Account for the Self-Employed!

Comments (11)

  1. Tiny 1437764057 avatar phbalance0904
    Profits, not proxies. Spellchecker gone wild

    1. Tiny 1448386164 avatar sensefinancial

      Heather, a Solo 401k is a Qualified Retirement Plan (QRP) with the trust being used as a vehicle to hold assets of the plan. Multitude of investments can be made with the plan, including single-member or multi-member LLC. And yes, when 401k trust is part-owner of the LLC which owns real estate investments the profits will be split according to the ownership percentage. 

      One thing that you need to be careful about and be aware of is that if the LLC is engaging in an active business (such as property flips for example) the gains from such activity will be subject to Unrelated Business Income Tax (UBIT) inside of the 401k.

  2. Tiny 1437764057 avatar phbalance0904


    I know this is a really old post but I was curious - if a Solo 401K is a trust, and a trust can be a member of an LLC, is there a way to set up the solo 401K as a member of a multi member LLC? A multi member LLC offers more protection than a single member LLC, the 401K is a federally protected entity in and of itself, and the real estate investment proxies would be split equally among members. 



  3. Tiny 1448386164 avatar sensefinancial

    You can call me before noon (Pacific time) or after 3PM.

  4. Tiny 1399394057 avatar barbsellsinpa

    Hi Dmitriy, Let me know when you are available, I look forward to speaking with you.

  5. Tiny 1448386164 avatar sensefinancial

    Barbara, In order to establish Self Directed Solo 401k you need to be self-employed or business owner with no full time employees. If this is the case, then your business is eligible to adopt the Qualified Plan (Solo 401k). The Solo 401k does not own the LLC, if your business is set up as an LLC, then that LLC is the "Plan sponsor". The Solo 401k is set up as a trust and is separate entity. Please feel free to give me a call and I'll be happy to walk you through the entire process: 949-228-9393.

  6. Tiny 1399394057 avatar barbsellsinpa

    I am trying to figure how to set everything up. I recently applied for an EIN # for my Invetment business (real estate). I was next going to file my LLC forms. But I would like to Open a SD solo 401k with checkbook control. Does the 401k need to own the LLC? Or can I open the 401k and have 2 seperate EIN #'s? Do I need to file the LLC forms before or after the 401k? Thank you.

  7. Tiny 1399380412 avatar rodbone

    Do you set up solo 401ks

    1. Tiny 1448386164 avatar sensefinancial

      Rod, my company, Sense Financial offer to our clients Retirement accounts with checkbook control, and one of them is Solo 401k, so yes, we do.

  8. Tiny 1448386164 avatar sensefinancial

    Yes, Jon, you can rollover any type of retirement account into SD Solo 401k except Roth IRA.

  9. Tiny 1399315588 avatar jonk

    If I have an existing SD solo 401k, can I roll over other IRAs into the solo K?