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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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    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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