Blog Posts - 401kSelfStarter.comEducational Blog By Harvard Law Attorney

Solo 41k S-Corporation Controlled Group Question

9/22/2020

QUESTION:

I have a S-Corp, 100% owned by me, I pay myself on W2. Let's call this S-Corp as "MySCorp".
My wife has a S-Corp, 100% owned by her, and has a full time employee on W2. Let's call this as "WSCorp"

Now, all of MySCorp's revenue is coming from WSCorp. I do consulting on behalf of WSCorp for it's clients and I bill WSCorp for my work.

The business relationship is like: I perform consulting work for end-clients on behalf of WSCorp, WSCorp bills the end-client for the consulting work I did. I bill the WSCorp from MySCorp for the service I provided.

Here are my questions:

Can I start Solo 401k for myself from MySCorp? If yes, the next question is: can i bring my wife on to MySCorp's payroll and have her as part MySCorp's solo 401k plan?

ANSWER:

You both would not be able to open a Solo 401k because your wife has a full-time employee, and due to the affiliated service group rules, you would be considered affiliated to her business. Furthermore, your situation could also be a controlled group because the default is that ownership held by a spouse is attributed to other spouses for purposes of analyzing whether a controlled group.

Long-Term Part-Time Employee for 401k Eligibility Purpose

9/14/2020

Stemming from the SECURE Act, 401k plans including solo 401k plans will need to be offered to “long-term” part-time employees starting on January 1, 2024.

Definition of A “long-term” part-time employee:

It is a W-2 employee who is at least 21 and works at least 500 hours each year for 3 (three) consecutive years beginning January 01, 2021.

Illustration:
A W-2 employee who works at least 500 hours in the 2021, 2022 and 2023 plan years will be immediately eligible to join the solo 401k plan for purposes of making elective deferrals effective January 1, 2024 (for calendar year plans).

Lastly, this new rule applies to employee contributions only not profit sharing contributions also known as employer contributions.

Are we allowed to build a rental property vacation home with solo 401k funds?

9/10/2020

QUESTION:

Are we allowed to build a rental property vacation home with solo 401k funds? It would be 100% rental income in a resort area.

ANSWER:

With respect to a Solo 401k investment in real estate, unrelated business income tax (UBIT) could apply if the income generated is considered business rather than investment income. For example, with respect to income generated by a Solo 401k investment: income generated from fixing and flipping a higher volume of properties may be considered business income that is subject to UBIT whereas rental real estate income is generally considered passive investment income and not subject to UBIT. One type of rental real estate income that may be considered business income, however, is short-term rental income as described here. Practically speaking, whether income is considered short-term will depend on the facts and circumstances (e.g. the average rental period, etc.).

Investing Pretax and Roth Self-Directed Solo 401k Funds in the Same Property

8/23/2020

QUESTION:

I currently have a self-directed solo 401k that holds both pretax and Roth funds. I want to pool both sources of funds in the same real estate property investment. What do I need to do to be able to do this?

ANSWER:

Yes, you could purchase property using both Pretax and Roth funds from your solo 401k plan. The property would be purchased in the name of the solo 401k Plan. You would need to wire money for the purchase from both sources (i.e., the pre-tax account and the Roth account) of the solo 401k to purchase the property.

While title to the investment property would be in the name of the solo 401k plan, going forward you will need to allocate income and property expenses between the Pretax and Roth sub-accounts based on the ownership percentages. Income and expenses would need to be shared in proportional to the ownership percentages. For example, if the Solo 401k purchased a property for $100K and it was a 60/40 split between the Pretax and the Roth sources, the purchase, expenses and income would be allocated based on this 60/40 split.

Another option is to invest both the pretax and Roth solo 401k funds in an LLC so that title to the property is taken in the name of solo 401k funded LLC. This would allow all of the funds to flow through one bank account (the LLC bank account). VISIT HERE to learn more.

Can my wife also participate and contribute to my self-directed solo 4o1k plan?

8/20/2020

QUESTION:

We have not yet started to receive income from this business. My spouse is retired. Can he setup deposit into his accounts from personal funds until we start receiving income from our business?

ANSWER:

Spouse must earn self employment income from the sponsoring business entity (the self-employed business).

Only self-employment income can be contributed into solo 401k. If neither of you have earned self-employment income yet from the self-employed business that sponsors the self-directed solo 401k plan, neither participant will make contributions.

On the other hand, If you both are providing material services for the business, you could each perform rollovers into the solo 401k from previous employer plans or IRAs. You just would not make fresh contributions into the plan because there is no self employment income to justify contributions at this time.

Can I contribute to both a solo 401k plan and my day time job employer 401k plan?

8/18/2020

QUESTION:

I am considering opening a solo 401k. I currently have an LLC that makes minimal net income, I have no employees and for tax purposes file like a sole-prop. I also have a regular full-time job that does not offer a 401k. My question is, can I contribute the $19,500 from my savings (which is less than my w2 income from my regular job) or are contributions completely limited to income from the business only? I can't seem to find a definitive answer. I realize if I wanted to contribute the max amount the formula would be derived from the self-employment income, but I can't figure out whether the $19,500 could be made without making that in the business. I really appreciate the time and look forward to digging into this.

ANSWER:

Your contributions to a Solo 401k must be based on your self-employment income.
2) Keep in mind that for purposes of determining the amount of employee contributions that you can make to a solo 401k (i.e. up to $19,500 for 2020 if you are under 50 years of age), you must aggregate your employee contributions to both the Solo 401k and contributions to your "day job" 401k.
3) At the same time, you can make employer contributions to your Solo 401k regardless of contributions made to your "day job" 401k plan.
4) Please see more regarding contributions at HERE.

LISTEN TO RECORDING - Client Only Webinar: Deep Dive - Solo 401k Contribution Rules for Sole Props, LLCs C corp

No Longer Self-Employed Solo 401k Eligibility

8/8/2020

QUESTION:

If I would change my status from schedule C to full-time employee, what should I do with the self-employed solo 401k account without any tax issues?

ANSWER:

If you were no longer self-employed, you would need to close the solo 401k plan. Once the business owner is no longer self-employed, he has the following options:

Transfer the Solo 401k to an IRA which is considered a trustee to trustee non-taxable direct rollover. If the solo 401k plan holds alternative investments such as real estate, and cryptocurrency for example, those investments can be moved over in-kin to the IRA.

Transfer the solo 401k to a full-time employer 401k provider which most likely will not allow for alternative investments, just traditional investments such as mutual funds an equities.

Quick Guide: The 401k Business Financing Process | ROBS 401k

8/6/2020

Once the entrepreneur has decided to use her retirement funds to finance an existing or new business, following are the steps the ROBS 401k provider will generally follow to complete the funding of the business:

Step 1: File articles of incorporation with the Secretary of State.

Step 2: Obtain employer identification numbers (EIN) for (i) the corporation and (ii) the new ROBS 401k plan. Takes 2 business days.

Step 3: Open corporation bank account: Typically takes 1-2 business days.

Step 4: Draft new plan & Establish an Account for the new plan: The ROBS 401k provider will prepare the plan establishment forms. The account takes five business days to open.

Step 5: Transfer existing retirement funds to the new ROBS 401k plan: It generally takes 8-12 business days for the funds to be transferred to the new account provided that the transferring institution timely processes the transfer out form.

Step 6: Fund the Corporation with the new plan proceeds: After the plan funds have been deposited into the account for the plan, it is time to finish funding the Corporation, which will be accomplished by wiring funds to the bank account of the C-corporation.

Step 7: Complete and Sign the Corporation Documents: After the Corporation has been fully funded, we will e-mail the Corporation bylaws, stock certificates and minutes.

Investing a Wells Fargo Self-Directed Solo 401k in Real Estate

8/5/2020

QUESTION:

I have a checkbook Solo 401k account and I am using Wells Fargo to hold the funds. Do you have any information on how I can invest my solo 401k in real estate?

ANSWER:
Assuming you opened a self-directed solo 401k and Wells Fargo is simply holding the solo 401k funds in a bank account titled in the name of the solo 401k plan, please see the following:

Wells Fargo is the custodian of the cash in the Solo 401k bank account.
You are the trustee of the plan and you will hold onto the title documents for the real estate purchased by the Solo 401k (i.e. you are the custodian of these documents).
The Solo 401k can invest in real estate subject to the following requirements:
- Real estate investment procedures: https://www.mysolo401k.net/solo-401k/solo-401k-real-estate-investment-procedure/
- Please keep in mind that you can't work on the property yourself and if you do a high volume a fix and flips (e.g. more than 2 per year) the IRS may attempt to tax as a business (Unrelated Business Income Tax).
- The property must be purchased from an unrelated person and then sold to an unrelated person.
- You can't lease the real estate owned by the Solo 401k to you or any other related persons.

VISIT HERE to learn more about investing a solo 401k in real estate.

2nd ALERT: Owner of Retygo.com Jeff Trin Held in Contempt for Violating Court Order to delete Better Business Bureau (BBB) reviews

6/25/2020

Owner of Solo 401k provider used forged IRS favorable determination letter

On June 24, 2020, a State of Michigan Circuit Court for the County of Oakland held Jeff Trin in civil contempt for violations of the Court's prior order by failing to delete the Better Business Bureau profile of Solo 401k Services LLC.

Previously, the Court held Mr. Trin (the founder of Phoenix-based Solo 401k Services LLC and Retygo Financial LLC) in civil contempt and ordered him to:

·         Permanently discontinue and dissolve Solo 401k Services LLC, an Arizona limited liability company, through which Mr. Trin offered self-directed retirement accounts such as self-directed Solo 401k plans.

·         Shut down Solo401kServices.com, the related email accounts and telephone number as well as related Better Business Bureau profile.

The Court held Mr. Trin in civil contempt for violations of the Court's prior order by failing to delete the Better Business Bureau profile of Solo 401k Services.

Mr. Trin, founder of Solo401kServices.com and Retygo.com which offers on its website "IRS approved retirements plans" including Solo 401k accounts, previously pled no contest to fraudulently altering an IRS favorable determination letter.

This type of letter is important because it allows the client to verify that the IRS has reviewed the offered Solo 401k plan documents and that the plan is a qualified plan.

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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