Setting Up Solo 401k

Setting Up Solo 401k

Investor · Encinitas, CA · Member since 2013 · 83 posts · 18 votes

Today I'm working on taxes and finalizing my Solo 401k set up, yes tons of fun...not my favorite way to spend a sunny 75 degree Saturday in San Diego!

That said, I need some guidance on next steps.

Step 1) Have had sole propriatorship for a couple of years (unprofitable)

Step 2) Applied for and received my Tax EIN

Step 3) Gave self-employment info to foxnfox.com's Bruce Fox (great guy, most affordable) who processed the paperwork, and sent me a binder of legalise; this is for a solo 401k only, they do not act as custodians, or admin

Step 4) Acting as custodian, I will need to set up a bank account somewhere (any recommendations on which bank is best?); bank account will be exclusively for Solo 401K. (Will I need a bookkeeper if all transactions are tracked in/out of this bank account?)

Step 5) Roll over my previous employer's IRA and my wife's IRA (is that allowed since she and I are the only 2 employees?) into this new bank account (Hopefully the bank will help me do this?)

Step 6) Can I simply start investing in approved assets/transactions with checkbook control? (Mortgage Notes, and Turn Key SFR's)

Step 7) Can depreciation from properties be accounted on the standard schedule (straight-line, or accelerated)?

For all tax experts, accountants or attorneys, am I missing any steps? Also, I thank you all in advance for answering my "Bolded Questions".

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Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
12y

@Josh Rich

The bank account for the Solo 401k can be set up at any bank, however, it must be established following proper procedure, we found that most bankers are not educated enough to do it correctly that is why we have relationship with couple people that are trained and know how to do it properly. If you use a bookkeeper or not is up to you, but yes, you have to account for every single transaction. This is quite simple to do with the help of numerous accounting software available (many free) or even excel spreadsheet.

Your wife would be allowed to have an account under Solo 401k is she is also participating/working in the business. In which case she can have an account under the plan, but you can't just lump all together, you need to account for those funds separately - therefore you will need a separate bank account.

As soon as your account is funded, you can start investing out of your Solo 401k checking account.

Please consult a tax professional regarding an tax consequences when using 401k for investing.

See this reply in the discussion

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  • Justin WindhamPro Member
    Banker · Nationwide · Member since 2015 · 4k+ posts · 1k+ votes
    9y

    I would recommend @Kreighton Reed with Solera Bank.

  • Brian EastmanPro Member
    Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes
    9y

    @Evan Salvador

    I'll second Solera National Bank.  They realize that banks are confused any time you ask for anything not on their standard checklist and have put together a team specifically trained in this area.

    The company that established your Solo 401(k) should be able to assist you with this process.

  • Evan SalvadorPro Member
    Investor · Roseville, CA · Member since 2015 · 35 posts · 20 votes
    9y

    @Justin Windham @Brian Eastman Thanks! They're not local for me though right?  How would I deposit checks to them from California if they're in CO?

  • Brian EastmanPro Member
    Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes
    9y

    @Evan Salvador

    Give them a call.  They have both mobile deposit and the ability to use US Bank ATM's at no charge.

    Comerica bank is also able to establish Solo 401k accounts easily, but their closest banks will be in the Bay Area.

  • Kreighton ReedPro Member
    Specialist · Denver, CO · Member since 2016 · 45 posts · 59 votes
    9y

    @Evan Salvador we open accounts for clients around the country. We make it easier to use us than your local bank. We have a high limit on mobile deposit and an easy wire service. Give me a call and we can discussing 

  • Gordon CuffePro Member
    Investor · Roseville, CA · Member since 2009 · 1k+ posts · 583 votes
    9y

    @Evan SalvadorYou can check polycomp ira services at https://www.polycomp.net/. they are in roseville.

    you can also ask a @Dmitriy Fomichenko he provides 401k services.  If you get it all set up, maybe we can do a deal together within our ira's

  • Justin WindhamPro Member
    Banker · Nationwide · Member since 2015 · 4k+ posts · 1k+ votes
    9y

    @Gordon Cuffe

    I think all Evan is looking for is a checking account.

  • Lakeville, MN · Member since 2018 · 9 posts · 0 votes
    8y

    Trying to resurrect this thread....

    I'm looking to start my own llc or s corp in the state of Minnesota fairly soon to technically be self-employed. Currently I do not have any retirement plans as I'm a young guy. However, if I'm understanding this correctly, you can only contribute to a solo 401k from the income received as being self-employed. My difficulty with that is I may not be making as much as I do now as a W2 employee. 

    So one option I'm considering is opening up a traditional 401k with Fidelity, vanguard, etc. And making continuous transfers from that traditional 401k to my self-directed Roth Solo 401k, this way my Solo 401k continues to grow as quickly as possible until my self-employment compensation builds. Is there anything illegal or wrong with this transaction? Which tax forms would I need to fill out? What happens if my business doesn't generate profit within a number of years, would the IRS come after me for having this solo 401k? 

    Thanks for educating us young guys

  • Retirement Accounts Attorney · Southfield, MI · Member since 2017 · 3k+ posts · 1k+ votes
    8y

    @Evan Salvador

    Many of our clients use Bank of America and Wells Fargo. We will also speak to the local banker and then they are able to setup the bank account in the name of the solo 401k.

  • Lakeville, MN · Member since 2018 · 9 posts · 0 votes
    8y
    Originally posted by @Derek Grue:

    Trying to resurrect this thread....

    I'm looking to start my own llc or s corp in the state of Minnesota fairly soon to technically be self-employed. Currently I do not have any retirement plans as I'm a young guy. However, if I'm understanding this correctly, you can only contribute to a solo 401k from the income received as being self-employed. My difficulty with that is I may not be making as much as I do now as a W2 employee. 

    So one option I'm considering is opening up a traditional 401k with Fidelity, vanguard, etc. And making continuous transfers from that traditional 401k to my self-directed Roth Solo 401k, this way my Solo 401k continues to grow as quickly as possible until my self-employment compensation builds. Is there anything illegal or wrong with this transaction? Which tax forms would I need to fill out? What happens if my business doesn't generate profit within a number of years, would the IRS come after me for having this solo 401k? 

    Thanks for educating us young guys

    I guess I should clarify. Instead of a traditional 401k can I make ongoing transfers from traditional IRA to self directed roth solo 401k?

  • Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
    8y

    @Derek Grue,

    If you have a 401k with your current employer - they will not allow you to rollover those funds into Solo 401k while you are employed there. When you leave that employer however - you should be able to rollover the entire balance. 

    If you have funds in an IRA - you should be able to roll those funds over into Solo 401k, unless it is Roth (IRS does not allow Roth IRA rollover into 401k).

    Contributions to the Solo 401k can only be made from the earned self-employment earnings. And in order to setup a plan like this - you must have (and maintain) legitimate self-employment business. 

  • Brian EastmanPro Member
    Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes
    8y

    @Derek Grue

    There is no need to maintain separate plans for traditional and Roth 401k holdings.  A single Solo 401(k) may hold both.

    Your Solo 401(k) would be limited to contributions based on income from your self-employment - and can be made on a Roth or tax-deferred basis. If that ability to contribute will be nominal, you could also establish a Traditional IRA somewhere (bank/brokerage) and make a $5,500 / year contribution from other income. Once contributed, that IRA contribution could be rolled over to the Solo 401(k).

    I would question setting up and administering a self-directed Solo 401(k) if you will not have capital to begin with.  It may be simplest to just go somewhere like Fidelity, Schwab, Vanguard, etc. and setup a conventional market-based Solo 401k.  Those plans are inexpensive and they do the admin for you.  Once you have some capital to work with, a self-directed Solo 401K would provide greater flexibility to invest in non-traditional assets such as real estate, notes and the like.  It is easy to move from a market-based SoloK to a self-directed plan in the future.  

    Of course, you can also setup a brokerage component within a self-directed Solo 401(k).

  • Retirement Accounts Attorney · Southfield, MI · Member since 2017 · 3k+ posts · 1k+ votes
    8y

    @Derek Grue

    Yes the Traditional IRA can be transferred to a solo 401k with Fidelity; however, they don't offer solo 401k plans with Roth designated account the feature

    However, some solo 401k providers will offer a self-directed solo 401k that allows for Roth solo 401k conversions and  Roth designated account contributions.

    Please also note that you can open up the brokerage account at Fidelity investments for the solo 401(k) plan offered by a different self-directed solo 401(k) provider. 

    In other words while Fidelity also offers their own solo 401(k) version, they will also open a brokerage account for  self-directed solo 401(k) plans offered by a third-party plan provider that allows for Roth solo 401(k) conversions and Roth solo 401k contributions.

  • Lakeville, MN · Member since 2018 · 9 posts · 0 votes
    8y

    Thank you gentleman. This is getting down to what I was intending. Essentially I can have an open traditional IRAs, even multiples to reach a contribution limit similar to a solo 401k, and then make on going rollovers from the IRA to contribute to the solo 401k. Effectively this allows me to contribute W2 income to a solo 401k via on going rollovers or transfers until my self employment income can contribute the fullest amount to the solo 401k. Is that correct?

  • Brian EastmanPro Member
    Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes
    8y

    @Derek Grue

    It sounds like you have it, but you may only make one IRA contribution of $5500/year. You cannot double up as it seems you may be indicating.

  • Lakeville, MN · Member since 2018 · 9 posts · 0 votes
    8y

    @Brian Eastman

    I’ve read from another internet source that I can have multiple traditional IRAs (ex. One from fidelity and one from vanguard,etc if I wanted) the most I can contribute to one Ira in a year is $5500. So let’s say I had three IRAs (3x5500=$16500) that I can contribute to those IRAs in one year. Then is it still permissible for me to continually roll over or transfer those contributions each year into the solo 401k? Does that make sense?

  • Brian EastmanPro Member
    Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes
    8y

    @Derek Grue

    You are misunderstanding the concept. Yes, you may have IRA accounts with multiple institutions, but you are only allowed to contribute the maximum of $5500 total across all accounts.

  • Lakeville, MN · Member since 2018 · 9 posts · 0 votes
    8y

    Ah gotcha! So in other words there’s no back door to contribute the maximum to the solo 401k by transferring from IRAs because across all IRAs the maximum I can contribute is the $5500 a year. What have others done that aren’t making much being self employed? Any other suggestions to try to increase the dollar amount of contributions if my self employment career isn’t terribly profitable?

  • Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
    8y

    @Derek Grue,

    the maximum you can contribute to an IRA is $5,500/yr. Regardless if you have single IRA or multiple IRAs. You can never contribute more than $5,500 in a calendar year to all of your IRAs.

    Regarding contributions to Solo 401k: you can only use net profit from your self-employment earnings to contribute. If you don't have any self-employment income (or it is very little) you will not be able to take advantage of the large contribution limits Solo 401 has to offer. There is no back door Solo 401k contributions. 

  • Retirement Accounts Attorney · Southfield, MI · Member since 2017 · 3k+ posts · 1k+ votes
    8y

    @Derek Grue

    Here is what the following IRS website says regarding contributing to multiple IRAs. 

    https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits

  • Minneapolis, MN · Member since 2018 · 11 posts · 0 votes
    8y

    Ok here's another tough topic for me to wrap my head around...

    I've recently found out about the mega backdoor roth option for a solo 401k. If the plan allows for me to make after-tax contributions, and I can make roth contributions, I'd like to learn how to set up accounts within the solo 401k. 

    Much like this discussion on mysolo401k.net: 

    "QUESTION:

    Can we make after tax contributions into the Roth 401k account, or only the regular 401k account? If only the regular 401k account, can we move or convert the contribution from regular to Roth? I understand we can roll an after tax contribution to a Roth IRA, but I'd prefer to just leave it in the 401k as a Roth contribution.

    ANSWER:

    The after-tax contributions will have to be deposited into a separate holding account labeled after-tax. Since both spouses are participating in the same solo 401k plan, and both want to make after-tax solo 401k contributions, two separate brokerage/bank accounts will need to be opened to list their respective solo 401k after tax contributions, and will need to be labeled “after-tax.”

    Once the after-tax contributions have been made, the funds can then be converted internally into the Roth solo 401k brokerage/bank accounts for each participant. In sum, after-tax contributions can either be converted internally into the the Roth solo 401k 401(k) accounts or externally into a Roth IRAs." -https://www.mysolo401k.net/mega-back-door-roth-usi...

    So what I'm looking to do is make the normal employee contribution of $18K a Roth contribution and the rest would be after-tax contributions into a separate account. Then, if you can explain, how does it work if I want to "convert internally into the Roth solo 401k"? Stop me if I'm understanding this incorrectly. Feasibly, could I make my normal employee $18K Roth Contribution and then $36K of after-tax contributions and convert it interally so that the $36K would grow tax-free/deferred and I wouldn't pay taxes on it when I take distributions?? 

    As a somewhat related note... I notice that this backdoor roth option involves typically rolling over to a Roth IRA. What happens to your real estate assets in this rollover? If I'm avoiding the UBIT/UDFI tax in financing real estate with my solo 401k, do I incur penalties or taxes if those assets were moved to a roth ira?

  • Minneapolis, MN · Member since 2018 · 11 posts · 0 votes
    8y

    Oh and the plan allows for in-plan Roth conversions. If I didn't say that already

  • Retirement Accounts Attorney · Southfield, MI · Member since 2017 · 3k+ posts · 1k+ votes
    8y

    @Derek Gruening

    Who is your solo 401k plan provider?

    They will need to assist you with the calculation and the issuance of the 1099-R to report the conversion.

    Also, you generally want to convert the after-tax funds immediately so that cash not an asset is converted to the ROTH. The purpose of the after tax contribution is to convert it immediately before the funds get invested.

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