Real Estate Broker · Hartsville, SC · Member since 2015 · 174 posts · 69 votes
After researching different retirement accounts, I've decided that a self directed solo 401k plan is a good fit for me. I have self employment income and no w2 employees. When I search for how to start an account, I get all sorts of information about how great they are... I got that already! Lol. How do I ACTUALLY set one up?
A provider will create the legal framework and put you in control of the plan. The plan is a trust, you will be the trustee, and you will operate the plan out of a bank account at the financial institution of your choosing. It is fully self-directed.
If the plan is setup before December 31st, you may make 2015 contributions to the plan. Whether you could max out with $18K on the Roth portion would depend on your situation and income and would be a matter to discuss with your tax advisor relative to your business tax filing. It is likely if you have decent income in your business.
One typically does not just "setup" their own Solo 401k plan.
There are firms that specialize in these plans with a focus on the plan being self directed as opposed to a Solo 401k offered by a brokerage firm that will be limited to publicly traded assets.
You can also work directly with a tax attorney or CPA who is familiar with these plans.
All 401k plans must remain current with changes to the tax code, so you will want to have an ongoing relationship with a legal resource that can provide periodic amendments.
The advantage of a quality firm (not just a document provider) that specializes in self-directed Solo 401k plans is that you will have access to training and consulting advice so that you can operate your plan within the framework of the IRS limitations.
So, it's self directed, but still requires other people to help manage it?
A separate question... if I can get set up before the end of the year, can I make a lump sum payment of $18,000 to max it out? And can that be on the ROTH side?
A provider will create the legal framework and put you in control of the plan. The plan is a trust, you will be the trustee, and you will operate the plan out of a bank account at the financial institution of your choosing. It is fully self-directed.
If the plan is setup before December 31st, you may make 2015 contributions to the plan. Whether you could max out with $18K on the Roth portion would depend on your situation and income and would be a matter to discuss with your tax advisor relative to your business tax filing. It is likely if you have decent income in your business.
Qualified Intermediary for 1031 Exchange" · Jacksonville, FL · Member since 2015 · 239 posts · 84 votes
10y
You should have a self directed Ira that will allow you to stock away More money annually and there are a few companies I've seen on this site that provide that service. I do not provide that service and I would be happy to pass a name along but you need to send me a private note because I do not think the rules allow us to recommend Someone publicly
You should have a self directed Ira that will allow you to stock away More money annually and there are a few companies I've seen on this site that provide that service. I do not provide that service and I would be happy to pass a name along but you need to send me a private note because I do not think the rules allow us to recommend Someone publicly
Hey Robert,
Are you saying that I should have a SDIRA in addition to the Solo 401k? Because I can't see a single reason why the SDIRA is better for me. I could see having both to contribute to, hence raising my contribution maxes (if it even works that way).
Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
10y
I am pretty sure a SOLO 401K maximum contributions are much higher than an IRA. Check with your tax guy of one of the knowledgeable posters here. I have an S corp and also the SOLO 401K. This gives the ability to maximize tax benefits. A sole proprietorship is probably the least effective as far as maximizing tax benefits. Since we are VERY close to year end, you might want to give your tax guy a call ASAP. BTW, I do hard money lending using my SOLO and have been quite happy with the results.
You should have a self directed Ira that will allow you to stock away More money annually and there are a few companies I've seen on this site that provide that service. I do not provide that service and I would be happy to pass a name along but you need to send me a private note because I do not think the rules allow us to recommend Someone publicly
Hey Robert,
Are you saying that I should have a SDIRA in addition to the Solo 401k? Because I can't see a single reason why the SDIRA is better for me. I could see having both to contribute to, hence raising my contribution maxes (if it even works that way).
If you have a Roth IRA, those funds can't be rolled over into a Solo 401K.....which is why I have both a Solo 401K and a Roth SDIRA. Agreed that the Solo 401K is a much better plan, too bad the IRS won't let me consolidate all my funds there.
Investor/Landlord · Farmington Hills, MI · Member since 2011 · 1k+ posts · 1k+ votes
10y
@Cameron Price, there are many firms that assist with starting Solo 401k's. They provide the IRS approved paperwork and the investor need only open the accounts. In my case I opened a checking and a savings account at my local bank for my new Solo 401k trust. This is not a SD IRA where one must have a custodian and use their forms when you wish them to make an investment for you. I write the checks from my account as the trustee of the account. I have an ongoing relationship with the firm whose forms I used to start the Solo 401k so that the account paperwork will be updated if there are any changes in the IRS rules.
As to your question about entity structuring and establishing a Solo 401k, that is a good question that likely gets beyond what could easily be covered on a web forum.
The 401k plan is established by an employer. The employer is your sole proprietorship if you setup the plan today, and you would then need to have the plan updated to reflect the S-Corp if you make a change - with the caveat that contributions need to be made from the plan employer and that creates a potential timing issue. It is possible to establish a multi-employer plan, which might make sense in your case.
Changing to S-corp status would most likely make sense at the beginning of the year relative to 2016.
Contributions calculations are somewhat different in a sole proprietorship situation as vs once you start taking a w-2 from your corporation - though the amounts end up being pretty similar.
Bottom line is that you will want to sit down with both your CPA and a quality plan provider and put together a strategy that will help you maximize the tax efficiency of your business as linked with a Solo 401k.
Wholesaler · Santa Cruz, CA · Member since 2014 · 79 posts · 12 votes
10y
I am liking all this dialogue...
I have an LLC that is taxed as an S Corp and a SOLOk that allows my company to match my SOLOk contributions. I used an entity called Nevada Corporate Headquarters in Las Vegas that makes it pretty simple... They have Provident Trust that is the custodian if I want to borrow from my own SOLOk but I have the money in a checking account and just write a check for rental properties when I find the ones I want to buy for cash. I also have a good Non Recourse Lender that has good rates for being a lender for rentals when I find ones that I want to have a mortgage on.
I agree with comments above that if you qualify for the Solo 401k plan I don't see any reason why SD IRA would be more beneficial (unless you have funds in a Roth IRA like Chris). Solo K give you ability to contribute significantly higher amount (up to $59K/yr per participant), eliminates the custodian and give you checkbook control, gives you the ability to access up to $50K in your account tax-free and penalties-free via participant loan feature should you have a need, not subject to UDFI tax on leveraged real estate, ability to contribute pre-tax or post-tax into Roth sub-account, and more.
The decision to incorporate should be discussed with a qualified tax professional. Incorporating can certainly save you on taxes depending on your income level. @Brandon Hall is the expert in this field and an active participant in the forum might help shed some light on this.
As others have mentioned, the Solo 401k will likely serve your needs better than an IRA (whether just a custodial self directed IRA or an IRA LLC).
To setup a Solo 401k, you'll complete an application with the provider of your choice so they can get the information they need to create the plan and trust documents for you. From there, they will likely deliver those documents to you, help you setup a bank account for the trust, and support you in any transfers or rollovers of existing retirement funds into the new Solo 401k.
The solo 401k plan also allows for after-tax contributions in addition to Roth 401k contributions. Those that want to supercharge their Roth contributions also make after-tax contributions and then immediately convert the funds to a Roth IRA or the Roth solo 401k designated account.
Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
9y
@Jerry Miller, you are referring to participant loan then this is a personal loan, meaning that only you as plan participant can take the loan. The loan is limited to 50% of your account balance or $50,000, whichever is less. This is a 5 year loan (unless used to purchase a residence in which case it can be extended to 15 years) and the interest rate is set typically to prime + 1%. The loan can be taken for any reason. Once you take the loan you can do whatever you want with those funds, including transactions that might be prohibited otherwise.
I typically warn my clients to think twice before taking the loan out. Because once you pulled the loan out you are depleting your 401k of the funds that could be invested and producing much better yield, for example: if you take personal loan from your 401k you pay it back at 5% over 5 years. However, you could invest same funds into a trust deed and earn 10% tax deferred. The loans from 401k are not designed as a go to place whenever you need funds and this option must be carefully evaluated before exercising it.
Now, if you are talking about using your Solo 401k to lend to some money to someone else as an investment, then you would have to follow IRA rules when doing such loan. The terms are negotiated between the lender and the borrower, the borrower can not be "Disqualified Person" and disqualified person can not receive any direct or indirect benefit as a result of such transaction.
No a solo 401k cannot invest in a promissory note to your mother because she is a disqualified party. For more on disqualified individuals, see the following.
In addition to Dmitriy's great response, the terms on the loan are set by your plan's loan policy. Your Solo 401k provider may allow you to select certain options within that policy. Examples are whether payments are going to be made monthly or quarterly, and what the interest rate will be within the commonly accepted "reasonable" range.
While your mother would not be a disqualified person to your wife's 401k (at least not based on that family relationship), it is still important to make sure that plan investments are still in the best interest of the plan and not the plan participant or others with whom you have relationships. It is interesting to note that your wife would be a disqualified person with respect to your mother's 401k even though your mother would not be disqualified relative to your wife's plan.
Again, these prohibited transaction rules and the avoidance of disqualified persons does not apply to funds that you have borrowed from your 401k via the participant loan feature. These funds can be used for any purpose.
yes, if you are eligible for it. You need to have legitimate self-employment activity or own a small business which produces 'earned' income and does not have any full time common law employees other than the owner and his/her spouse.
If you have a 401k with the previous employer - yes you can roll that over into self-directed IRA or 401k. If 401k is with the current employer you are most likely not going to be able to do the rollover. Your current plan administrator will not allow you to do so until you are either no longer with the company or reach a retirement age. There are exceptions so you can inquire with your plan administrator - this is the only way to get the accurate answer.
San Leandro, CA · Member since 2017 · 55 posts · 5 votes
9y
@Dmitriy Fomichenko Thanks. I saw another of your post saying that if you work for existing employer and have a side business, you can have both 401K and Solo 401K as long as total is 18,000 (for 2016). If my side business produce only profit of $500, can I contribute $1000 to 401K and $17,000 to Solo 401K? Or I can only do $17,500 with 401K and $500 with Solo 401K?
Also, fidelity charges no fee for solo 401K right?
Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
9y
@Kin Lay, you can have both: the Solo 401k (again, if you are eligible for it) and the employer 401k. The contributions to a Solo 401k consist of two parts:
1) Employee elective deferrals, which are limited to $18K (plus $6K catch up if you are over 50). The limit is per person across all of the plan you may be part of. You can not contribute more than your earned income.
2) Employer Profit Sharing: up to 20% of your net self-employment earnings in a case of sole-proprietorship.
The combined maximum is $54,000 (or $60K if you are over 50).
If your side business produces only $500/yr I have a question if this is really a business or just a hobby. You need to have a legitimate business in place in order to sponsor the 401k plan.
Fidelity does not offer self-directed Solo 401k, they limit investment options to stocks and mutual funds only.
In a nutshell, the employee contributions have to be aggregated between all defined contribution plans.
However, profit-sharing contributions(employer contributions) are not subject to this aggregate rule provided you don't own both businesses (controlled group rules) that sponsor the retirement plans.
Investor · Coppell, TX · Member since 2008 · 2k+ posts · 646 votes
9y
Hello and welcome to BP! I think you gotten allof from the people who have responded before me. What they tended not to give location of where do you go to set one up. I have been doing some researching SD-IRA's and 401k's for about the last 6 months. Two of the ones that you can check-out are Entrust and UDirect Services. A few things you need to make sure you know is this is a retirement account and not for any income to you that is current until retirement age. Any income that account makes goes back into that account. You cannot depreciate any improvments on the property. Only un-secured loans are allowed and require a larger down payment, typically. Things like that is why is did not open an account yet. I have seen several people try to get around the obstacles so they could get with that type of account. They always failed. Just in case you did not catch-it most of the people that are commenters are in that business and are hoping to make money off you. Beware of all the bad people are on the internet to take advantage of gullible people.