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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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    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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