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Self-Directed Roth IRA & Self-Directed Solo 401k TIC

11/23/2020

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QUESTION:
Is it possible to establish a self-directed Roth IRA and have that Roth IRA invest alongside my solo 401(k) - e.g., by having the Roth IRA invest in a partnership with the solo 401(k) as a partner?  If so, do you help establish these arrangements?

ANSWER:

While theoretically possible, this would need to be structured as a tenancy in common (TIC) (where one tenant/owner is the Roth IRA and the other is the Solo 401k) and there are lots of compliance pitfalls - please see more below:

Considerations Re Tenancy in Common

While the rules do allow for TIC transactions, you would need to be able to prove to the government if you are ever challenged that you could have accomplished the transaction without the use of your solo 401k to avoid a PT for enabling. See DOL Opinion Letter 2000-10A.

For example, if you have additional investment vehicles or funds that could be used (e.g., home equity loan, an IRA, personal brokerage account, etc), but you decided to use your solo 401k plan to co-invest with because it was convenient or because it was a good investment for the solo 401k plan, you would have a strong argument to make such investment.

One “cannot” combine Personal funds and 401K funds into a Real Estate investment if there is any loan involved in the transaction.  


It is also important to note that a TIC arrangement involving a disqualified person such as the solo 401k participant is executed simultaneously. Your solo 401k plan can’t purchase a property with you a week later buying part of it from the solo 401k plan, for example.

One “can” combine Personal funds and 401K funds into a Real Estate investment if it is an all “cash” transaction, i.e. no loan involved. 

In such a transaction, the title would need to reflect the ownership interest of you and your Solo 401k (Ex. Chargers Solo 401k Trust, an undivided XX% interest, and Jane Do,an undivided XX% interest ).  Please note that the purchase would need to be all cash (i.e. no non-recourse debt financing is allowed).  Going forward, all of the expenses must be paid in accordance with the ownership percentages.  Please also note that rental income needs be paid to both owners (e.g. a rental property owned by tenants in common would require the tenants to write separate rent checks for each tenant in accordance with the ownership percentages).  See also in the 2nd link below the alternative option of investing in real estate via an LLC.
For more information on tenancy in common, please see the following link:
https://www.mysolo401k.net/tenancy-in-common-tic-vs-llc-real-estate-purchase-using-solo-401k-funds/  


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Does ERISA Creditor Protection Apply to Self-Directed Solo 401k?

11/14/2020

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In the wake of the Coronavirus (Covid-19) pandemic,more businesses are struggling and many are ultimately going under. As a result, many self-employed individuals with solo 401k plans are rightfully concerned if their plans are protected from creditors under the employee Retirement Income Security Act (ERISA).

While solo 401k plans are fully protected from bankruptcy creditors pursuant to the
Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, solo 401k plan are not protected from general creditors (lawsuits) under ERISA because solo 401k plans are for owner-only businesses. However, solo 401k plans are protected from creditors based on state law.  Therefore, if you live in a state that affords self-employed plans such as SEP IRAs, SIMPLE IRAs and solo 401k plans protection from general creditors, you won't need to consider an LLC.



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Why Seriously Consider Making Solo 401k Voluntary After-Tax Contributions

11/6/2020

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While not all solo 401k of full-time employer 401k plans allow for voluntary after-tax contributions, those with  owner-only businesses should seriously consider opening a solo 401k that allows for voluntary after-tax contributions. Unlike full-time employers where the employer decides to allow or not to allow for their 401k plan to receive after-tax contributions, the same is not true of owner-only businesses. As the owner of your business, you have a say in participating in a solo 401k plan that allows for voluntary after-tax contribution in addition to Roth contributions.
What is a solo 401k voluntary after-tax contribution? Just as the words imply, voluntary after-tax contributions are made from earned income that is subject to taxes, so you cannot deduct the contribution on your personal or business tax return. Because the earnings on the voluntary after-tax contributions are taxable, the account holder will convert the voluntary after-tax contribution immediately to a Roth solo 401k or a Roth IRA.

Do all Solo 401k plans allows for voluntary after-tax contributions? No but you can easily choose a solo 401k plan provider that does allow for voluntary after-tax contributions.

What is the maximum solo 401k voluntary after-tax contribution? The annual solo 401k contribution limits are determined on an annual basis. For 2020, the maximum solo 401k contribution limit is $57,000 or $63,500 for those 50 or older in 2020. Therefore, if you have enough net income from self-employment, for 2020 the voluntary after-tax contribution limit is $57,000 as the catch up amount of $6,500 can not be applied as voluntary after-tax contribution, but it may be made to the Roth solo 401k bucket.

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2020 Cares Act (COVID-19) Solo 401k and IRA Distribution Deadline

11/6/2020

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QUESTION:

My question is regarding taking money out of my solo 401k or IRA.
I now need money to live on having been laid off. Do I have until end of December 2020 to take money out ??  I wasn’t thinking of taking a loan as don’t think I will be able to pay this back but you never know I assume I have three years to decide on paying it back or paying the taxes on the money?



ANSWER:

If you qualify to take a CARES ACT Distribution from your solo 401k plan or IRA in 2020, the deadline to take it is 12/31/2020.
You have three years and a day to re-contribute the amount of the CARES Act distribution in order to avoid the taxes (in which case you could file an amended return to claim a refund for taxes paid prior to the re-contribution).

See More HERE,  at the following: https://www.irs.gov/newsroom/coronavirus-relief-for-retirement-plans-and-iras#:~:text=The%20CARES%20Act%20waives%20required,your%20first%20RMD%20in%202020.


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Max Out IRA Contribution & Then Transfer it to a Self-Directed Solo 401k

11/2/2020

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QUESTION:
Good morning. Quick question. Can I make my max contribution ($7000 – I am 55) to my existing IRA, then transfer the new balance to the solo 401k, and then still do my max voluntary contribution for 2020?

ANSWER:

While Traditional IRA contributions don't affect the participant's ability to make solo 401k contributions, contributing to a solo 401k plan does affect the ability to make Traditional IRA contributions on a pretax basis (tax deductible). 

You can view the IRA contribution limits HERE to determine if the IRA contribution is tax deductible. If it is not tax deductible, and while you can then make it on a non-deductible basis, you won't be able to transfer the non-deductible IRA basis to the solo 401k plan because the IRA rules do not allow for the transfer of non-deductible (after-tax) IRAs to a solo 401k plan.

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Pretax Solo 401k Roth Conversion Questions

10/26/2020

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BACKGROUND & QUESTIONS

Our little company has lost money in both 2018 and 2019, which precluded us from making any additional contributions to our Solo 401k accounts. 

We would like to roll over our current Solo 401k funds into a Roth Solo 401k plan.  All of our current Solo 401k funds were pre-tax contributions. We understand there will be a tax hit in making the conversion.
We have a few questions:

1.  Does our business have to have to be generating a profit at the time that we make the conversion election?
2.  We incurred significant investment losses earlier this year; both short term and long term capital losses.  Can those losses be used to offset the gain associated with making the Roth conversion, or can we only use ordinary losses of which we have none.  I am assuming the later.
3.  How do we calculate the potential tax liability for the conversion?  Is it as simple as the value of the 401k accounts on the date of conversion, less our basis in the accounts, then taxes at our current income tax rates for ordinary income this year?

ANSWERS:

1. As long as you are performing self-employment activity at least on a part-time basis whether it leads to profit or not, you can continue to participate in the solo 401k plan including processing in-plan conversions. 

2. Plan conversions are subject to earned income tax rates in the year of the conversion (i.e., the year the funds or assets are converted). 

3. If you are converting non-liquid assets (e.g., physical real estate), you will need to first get the property appraised by a third party and taxes at the earned income tax rates will be due on the appraised value when you file your personal tax return Form 1040 by April 15 following the year in which the conversion occurred.

4. If you convert liquid assets (e.g., publicly traded stocks) the closing stock value on the date the stock is converted in-kind to the Roth solo 401k holding account is the value that will be subject to taxes at the earned income tax rates. 

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Solo 401k Promissory Note/Loan to Siblings

10/20/2020

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QUESTION:

I have a solo 401k plan. I was considering lending money to my brother from my Solo 401(k) using a promissory note.  Would it be possible to do so without violating prohibited transaction rules?  Is there a limit on the rate of interest that I could charge him?  Does he need a business purpose to borrow that money, or can it be for any reason as long as he fulfills the terms of the loan?


ANSWER:


While it is not prohibited to invest one's solo 401k funds via a promissory note to their sibling provided that (i) the transaction is not part of a step transaction: for example, it is prohibited for the sibling to turn around and loan/invest those funds to the solo 40k owner's parents (i.e. such transaction would be deemed a roundabout/straw-man transaction which would result in a solo 401k prohibited transaction); and (ii) the funds are not otherwise used by the sibling to benefit you personally (e.g. to pay back a per-existing personal debt that the sibling has to you personally, etc.). 

Like any promissory note investment, the loan must be documented on a promissory note payable to the plan and the interest rate and other terms must be arms' length/fair market terms (i.e. the terms if the sibling were to borrow the funds from an unrelated person or entity).

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Self-Directed Solo 401k for Realtor Client

10/14/2020

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QUESTION:
I have a client, a realtor, who would like to invest in rental properties through a solo 401(k). The problem: she has an employee, so I'm guessing that a Solo 401(k) is out of the question. Or is it? There are only the two employees and there will not be any more in the future. 

Is there something she can do? 


ANSWER:

Is the person a w-2 employee or a 1099-misc independent contractor? If the latter, your client can set up a solo 401k if he/she has earned self-employment income and no other business with full-time w-2 employees.

If the person is a w2 employee and works less than 1000 hours per year (or starting in 2021 500 hours per year for 3 consecutive years ending in 2024), your client can still set up a solo 401k as described above.

If the person is a w2 employee and works 1000 hours or more per year, your client can't set up a Solo 401k unless the person becomes a 3% or more partner in the business.

If the person can't set up a Solo 401k, he or she can still invest in rental properties through an IRA LLC.

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Fidelity Solo 401k for Voluntary After-Tax Contributions

10/1/2020

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I currently have a Fidelity self-employed (Solo) 401(k) but I am disappointed that I am not allowed to make voluntary after-tax contributions.

QUESTION:

Would I be able to have a Fidelity self-employed 401(k) for pre-tax employee and employer contributions and a MySolo401k (held at Fidelity) for voluntary after-tax contributions?  

ANSWER:

Yes, a self-directed solo 401k from a solo 401k provider such as My Solo 401k Financial plan does allow for Voluntary After-Tax contributions. Please see the below post and video for more information on 
Voluntary After-Tax: click here. 

The 
existing self-employed 401k at Fidelity can be restated to a self-directed solo 401k and you could use Fidelity as the custodian of the cash.  The self-directed solo 401k provider would complete all the necessary Fidelity brokerage forms and internal transfer form. The provider would set up a Pretax Solo 401k for your employee and employer contributions, the Voluntary After-Tax Solo 401k sub-account, and then a Roth Solo 401k account or if you wanted to you can convert the After-Tax contributions to a Roth IRA at an institution of your choice. To learn more about how you can use a self-directed solo 401k provider and Fidelity at the same time, CLICK HERE.
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Use my Self-Directed 401K as part of the down payment for my new home

9/27/2020

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QUESTION:

I will be buying a new home, soon.  How can I use my self-directed 401K as part of the down payment?

ANSWER:

Here are some possible options for tapping into your self-directed 401k (aka solo 401k plan) for accessing funds for your primary residence purchase:

Over age 59 1/2: If the solo 401k account holder is over age 59 1/2, he or she can distribute any of the solo 401k funds penalty free (that is, the 10% early distribution penalty is waived). Of course, federal taxes, and possibly state taxes also apply.

Under Age 59 1/2: On the other hand, if the account holder is under age 59 1/2, he or she can distribute any funds previously transferred to the solo 401k from an IRA or a former employer plan; however, the 10% early distribution penalty applies on top of federal taxes, and possibly state taxes.

Under Age 59 1/2 and Distribution Exception: If your solo 401k only contains annual contributions and you are under age 59 1/2, you can use the "Principal Residence" exception to access funds for use in the purchase of your primary residence. However, the 10% early distribution penalty still applies as well as federal taxes, and possibly state taxes.


Participant Loan: Just like traditional 401k plans allow for loans, the account holder may borrow from his solo 401k plan even before the occurrence of a distribution-triggering event. Under the solo 401k participant loan rules, the solo 401k account holder can borrow 50% of his solo 401k balance not to exceed $50,000.
For example, if the balance of your solo 401k (including investments) is $125,000, the maximum that you can borrow from your solo 401k plan is $50,000.
On the other hand, if the balance of your solo 401k is $90,000 (including investments), the maximum loan amount available is $45,000. VISIT HERE to learn more about the solo 401k participant loan rules.



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    Author


    George Blower is a principal of My Solo 401k Financial LLC and also serves as the General Counsel with responsibility for providing all legal services to the organization.  

    Prior to joining My Solo 401k Financial, he served as general counsel for a subsidiary of a Fortune 500 financial services company.  

    He received his bachelor’s degree in economics at the University of Michigan in 1998 with honors. He received his juris doctorate from Harvard Law School in 2001. He is a member of the Michigan and Ohio bar associations.

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