Solo 401k

23 Replies

I have two questions:

  1. My wife and I are forming an LLC. Can we both have a solo 401K?
  2. Can a portion of a standard 401k be rolled over into a solo 401K?

Thanks for the help

Jon,

What is the purpose of the LLC? Will this be a real operating business?

This will be a real estate business. We would like to be able to finance our own flips

It sounds like you're looking to personally benefit from the use of your retirement dollars by using the funds for start-up, right? The plan assets (cash) should really only be used to grow the retirement plan, not your own business. Yes, you can utilize the 401k structure for your business if it's already established and producing income.

Do some research on Rollover Business Start-ups.

Others may disagree but I personally believe the above structure is highly questionable with regard to the rules. There is an IRS field advisory notice dated Oct 1, 2008 that discusses the topic on more detail. The final conclusion even states that the structure may be illegal - and that's the IRS talking.

I'm NOT an investment advisor so this is simply for informational purposes.

I have a solo 401K and I love it. Your solo 401K, or "plan" as experts call it, can have both you and your wife on it and each can have their own traditional and roth, for a total of 4 separate accounts. You would have to set up four accounts within your same banking relationship. I use Wells Fargo. So create 4 checking accounts for example.

Your wife would HAVE to be an employee of your LLC in order to get her own. She would have to get a salary, etc. Which may cause additional things to happen from a tax standpoint.

IRA custodians don't like solo 401Ks because it cuts them out of the deal. They get fees each year on your assets held with them, whether you do anything with them or not. Meanwhile, with the solo 401K, you are your own plan administrator so you call the shots and don't have to pay extra fees to anyone.

Plus, you can borrow up to $50,000 out of it, which can come in handy.

NOTE: You can't be your own bank with a solo 401K. You can BUY the real estate in your solo 401K but you can lend money out of your solo 401K to yourself. That's a prohibited transaction.

I personally just choose wisely the deals I do in my solo 401K versus the ones I do outside of it.

Loren,

Thanks for the responses. What we want to do is use the solo 401k for loan purposes. The money would be paid back with interest.

@Phil Pustejovsky

Nice summary Phil!

Not all SDIRA providers dislike solo 401k structures. Some of us offer them as well as IRAs and other plans.

@Jon Gallops

You'd be fine lending from the plan but educate yourself on 'disqualfied persons'. Certain parties cannot engage the retirement plan across the table in transactions or services. These persons' include yourself, wife, direct lineal family members (up and down the tree), and businesses owned*/controlled* by those individuals. Make sense?

As to whether or not your current 401(k)s can be rolled into a new Solo(k), it would depend if you and your wife are still employed by the companies that sponsor the 401(k)s. If you are, you need to check with the company's Plan Administrator to see if you can take what is called an "In Service Distribution".

Also keep in mind that any 'profit sharing' and 'salary deferrals' for your new Solo(k) can only come from the income you earn from the LLC that sponsors the Solo(k). You cannot funnel earnings from any other jobs you may have into the Solo(k).

Keep in mind that when you own an operating company with a Solo(k) or an IRA, 100% of the net income generated by that operating company, after exemptions and deductions, is subject to UBIT tax. A Real Estate Operating Company, set up to buy and flip properties, is considered an operating company. I'd suggest you work with a knowledgeable attorney when structuring your investment and check with the IRS or your own state's taxing authority regarding the threshold at which passive investing status switches to "dealer status", making your LLC an operating company.

That does make sense. Thank you both for the guidence.

@Jon Gallops

you and your wife both could participate in the Solo 401k plan sponsored by your LLC. You can rollover/transfer any qualified retirement plan into your new Solo 401k except Roth IRA. The employer sponsored plans such as 401k can be rolled over if you are no longer employed there just like @Doreen Chaisson mentioned above.

You can use Participant Loan feature of the Solo 401k to access up to $50K from your account, the funds can be used however you wish. The plan however can not lend funds to the LLC directly - this would be prohibited transaction.

You can check out one of my recent BP Blog articles about features and benefits of the Solo 401k plan HERE.

Our attorney is not in favor of ROBS @Loren Whitney

I am in the process of completing a robs now. I am working with a reputable CPA firm in Houston that does these routinely. Once the money is rolled over from my old employer plan into the new c-corp's plan, I can issue shares to the 401K from the c-corp in exchange for the funds in the 401K and use it to run the c-corp, including salaries for employees (my wife and I) and real estate investments. We have to conduct a share valuation every year, submit a 5500 to the IRS, put up with the payroll taxation, etc, but definitely worth not paying distribution taxes and early withdrawal penalties. It requires some diligent management, but everything is above board as long as you follow the guidelines and are actually running a viable business. Our CPA claims to have never failed an audit, and guarantees this as part of our contract. I realize there are risks associated with this due to some gray areas in the tax code, but we feel confident in the process and outcome.

So the money that I can borrow personally, with interest from my solo 401k can be used to purchase RE in my own name as long as it's not through my LLC? Is this correct?

@Michael O'Byrne

Not to mention the IRS field service advisory from 2008 expressed concern about it being "possibility illegal" in their conclusion. Keep in mind that's the IRS talking.

Deriving a self-benefit through entity manipulation goes beyond my risk tolerance in my opinion but then again, I'm not a CPA or an attorney.

Glad I found this thread! Maybe someone can answer or comment on this question: Can funds from an inherited IRA (non-spousal beneficiary) be used to fund a Solo 401K - which is what I did.

The attorney did not ask what kind of IRA funds I would be using to set it up. I'm concerned now that I may have to pay taxes on the full distribution.

We have a solo 401k, my understanding is you cannot roll a current 401k plan where you still work into your new solo 401k. It must be from an old job. 

Originally posted by @Linda M. :

Glad I found this thread! Maybe someone can answer or comment on this question: Can funds from an inherited IRA (non-spousal beneficiary) be used to fund a Solo 401K - which is what I did.

The attorney did not ask what kind of IRA funds I would be using to set it up. I'm concerned now that I may have to pay taxes on the full distribution.

Linda, unfortunately the inherited IRA can not be rolled over into Solo 401k. Your situation proves the importance of using the correct expert when it comes to self-directed retirement accounts.

Here is what the IRS say about self-employment income for solo 401k qualifying purposes.

Earned income. Earned income is net earnings from self-employment, discussed later, from a business in which your services materially helped to produce the income. You can also have earned income from property your personal efforts helped create, such as royalties from your books or inventions. Earned income includes net earnings from selling or otherwise disposing of the property, but it does not include capital gains. It includes income from licensing the use of property other than goodwill. Earned income includes amounts received for services by self-employed members of recognized religious sects opposed to social security benefits who are exempt from self-employment tax. If you have more than one business, but only one has a retirement plan, only the earned income from that business is considered for that plan.  http://www.irs.gov/publications/p560/ch01.html

Self-employed individual. You can make contributions on behalf of yourself only if you have net earnings (compensation) from self-employment in the trade or business for which the plan was set up. Your net earnings mus be from your personal services, not from investments. See page 15 of 28:

http://www.irs.gov/pub/irs-pdf/p560.pdf

Originally posted by @Account Closed :

We have a solo 401k, my understanding is you cannot roll a current 401k plan where you still work into your new solo 401k. It must be from an old job. 

This is not necessarily true, the reason most people can't move from a current 401k to a solo 401k is because the plan administrator does not allow it, not because there is a rule against it. Always check with your plan admin.

Originally posted by @Linda M.:

Glad I found this thread! Maybe someone can answer or comment on this question: Can funds from an inherited IRA (non-spousal beneficiary) be used to fund a Solo 401K - which is what I did.

The attorney did not ask what kind of IRA funds I would be using to set it up. I'm concerned now that I may have to pay taxes on the full distribution.

You should definitely talk to a tax attorney, because I am not one, but inherited IRAs from non-spouse beneficiaries are subject to RMDs that must be taken by the end of the year using one of 3 IRS approved methods for determining RMDs in an inherited account. That being said if you were to roll that into a solo 401k I don't know how they would enforce the RMDs on the inherited amount because you don't need to file until you have over $250K assets in the plan.

Second step is to call your current solo 401k custodian and ask if the rollover denotes inherited IRA rollover. I'm not saying you can or can't do it roll inherited IRA into a solo 401k, but I think the IRS would take issue with it.

Originally posted by @Russelin Kisiel :

So the money that I can borrow personally, with interest from my solo 401k can be used to purchase RE in my own name as long as it's not through my LLC? Is this correct?

That sounds correct, additionally there's no reason why you couldn't use those funds to purchase property through your LLC as long as your LLC isn't held in your IRA or solo 401k. Does that make sense? The only LLC that is prohibited is if you have a "checkbook 401k" or the solo 401k LLC model. It is a personal loan so if you want to go on vacation or a shopping spree or buy real estate, there aren't any restrictions on what you use the money for.

I know this post is a few months old but wanted to comment on a small nuance to rolling funds to a solo 401k/SDIRA from a plan with a current employer (I apologize if this has already been mentioned... I was skimming).

Funds from an existing 401k with an existing employer CAN be rolled into a SDIRA or S401k if those funds came from a roll over from another company. In other words, if I left Company A with 50k in that 401k and rolled it into Company B's 401k, I can move that original 50k into another fund while employed with Company B. I can't however move any funds accumulated with Company B.

There may be particular plan restrictions on top of this but as far as my Wells Fargo 401k goes, this is allowed.

@Craig Leininger

Yes it is up to the current employer as to whether or not partial transfers can be processed unless the client is 59 1/2.

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