BACKGROUND/QUESTION: Specifically, we plan to use the funds as a loan from the 401k to buy inventory, at the moment $25k a batch, then pay the 401k back with 10% on the loan once the units are sold (usually takes about 2 to 3 months), so practically a 90 day loan. We make $3,750 profit on the $25K, we would then pay $27,500 back to the Solo 401k (the original borrowed plus 10%) and keep the remaining $1,250 in the company as profit.
Our (maybe optimistic) idea is that most of the profit ($2,500 of the $3,750) then goes into our 401k and thus builds our retirement pot, rather than if we just kept it in the company we would have to pay tax on that money. We know we have to pay tax on that money in the solo 401k when we retire and take the money out, but right now we need every cent we can make to invest in and grow the business. We thought this a reasonable split so that at least the govt. gets some tax revenue.
Is the above model acceptable to the IRS?
ANSWER: This will not work as it will run afoul with the solo 401k regulations.
1. The maximum you can borrow from a solo 401k is 50% of the 401(k) balance not to exceed 50,000 (see following links for more on this
http://www.mysolo401k.net/solo-401k/solo-401k-loan/ ). For example if the balance of your 401(k) is 50,000 the maximum you can borrow is 25,000. On the other hand if the balance of your 401(k) is 200,000 the maximum you can borrow is 50,000. The loan would be to you and then you can use the funds however you wish because they would no longer be considered solo 401k funds.
What is more the interest rate is determined by the IRS rules. The interest rate is the prime rate plus one point so I would be 4.25%. Also, the minimum loan period is five years. Payments are made monthly or quarterly over a five-year. Consisting of principal and interest payments.
Also the RS has a 12 month loan restriction to keep people from churning their 401(k) for loans. To read more about his restriction visit the following link.
2. Unfortunately you cannot loan your 401(k) directly to your corporation it because that is your business. It doesn't matter whether it's a corporation, LLC or sole proprietorship. What matters is that it is your business it is prohibited to loan your solo 401k funds to your own business. Therefore, you can only do this through a 401(k) loan as mentioned above in number one above.
QUESTION: I purchased a home on Maui using my after-tax savings in July of this year. The mortgage will likely be paid off by year-end. Is there a way to swap or sell my house to my solo-401K (http://www.mysolo401k.net/)title so that I can free-up my after-tax capital (e.g. transfer the solo-401K money and title to my 401K to my regular, after-tax account)? Unfortunately, when we opened escrow, I was unaware of the solo-401K idea! So we are after-tax wealth poor, but retirement wealth healthy.
ANSWER: Because as the solo 401k owner you are a disqualified party, the solo 401k cannot purchase real-estate that you own or have ever owned. Visit (http://www.mysolo401k.net/solo-401k/solo-401k-faqs/
) to learn more.
QUESTION: My wife is a Realtor and Appraiser and we have a couple of rental properties we manage/lease. So our home business is mainly real estate oriented. Where I help out in all of this is general maintenance/upkeep of rentals, fielding calls with new tenants, the occasional real estate' for sale' sign install and picture taking of listings she has had or appraisals she is working on, etc. Would this fit the bill as part-time self-employment activity for me?
ANSWER:Good question and yes you are both essentially performing self-employment activity through real estate activity as sole proprietors which means you will each need to file a separate Schedule C (Form 1040) to report your respective part-time self-employment activity.
QUESTION: If so, would we have to set an individual Solo 401k’s for each of us, or is it one Solo 401k with accounts for the wife and myself since it is basically one business?
ANSWER:You can both participate in the same solo 401k since you are married and both performing self-employment activity in the same line of business; however, you would each have a separate brokerage account under the plan to separately hold both of your respective retirement funds.
QUESTION: Would it be smart to setup the Solo 401k before requesting the rollover into it so I can give Fidelity the new retirement account info to note it on the check they will be cutting? I don’t want put myself into a situation where a check payable to only me (income tax and penalty).
ANSWER:Yes the solo 401k plan first must be adopted (i.e., all the 401k adoption documents must be signed) before you can request the non-taxable transfer to it.
QUESTION: And lastly, what do we need to do to move forward to set up the Solo 401k(s)?
ANSWER: Once you are ready to proceed, you can call us and we will walk you through our on-line application, or you can proceed on-line using the following link:http://www.mysolo401k.net/solo-401k/open-a-solo-401k-account/
QUESTION: I think I know the answer to this but so far I haven't been able to find anything on the internet that directly says you cannot do this. My realtor wants to open a solo 401k and then buy a property that is 75% owned by himself and 25% owned by the solo 401k. Is this possible if you keep good records and show that 25% of the expenses and income are coming from or going to the solo 401k?
ANSWER:You are correct that it is prohibited for the solo 401k owner to purchase a property that has ever been owned by him or her. This would be in violation of the following rule.
Sale, exchange, or leasing of property between a plan and a disqualified person;
See following links for more information.
QUESTION: For the non-recourse loan let me set-up an example. For a house that sells for 80 K, we use the solo 401k to purchase the house for "cash" Later, after the house is cash flowing, we would like to get the some cash back into the 401 k. Would it then be possible to get a non-recourse load on a house that the 401 k already owns?
ANSWER: This is an excellent question and one that we are receiving more often. No. Reason being, the non-recourse loan proceeds must be applied towards the purchase of the property not used to improve the already solo 401k owned property. Also, non-recourse loan funds may not be used to improve existing solo 401k owned real estate.
Solo 401k Real-Estate Purchase Procedure
Solo 401k Contributions
QUESTION: I want to know if I can invest solo 401k funds to buy properties along with others with their individual funds or with entities like LLC or S-Corp, etc. where I will be one of the managers of the properties or maybe I am the manager, but will not take any compensation to manage the property. Managing will involve acquisition, rehab, day-to-day management, selling, etc.
Thank you, Raul in Houston Texas
ANSWER: It is generally not prohibited as long as in addition to not being compensated for doing managerial functions, such as the one's you mentioned, you do not perform any sweat equity work on the properties or sign on behalf of the LLC or S-Corp when making investment purchases to avoid any self-dealing issues.
Real-Estate Purchase Methods
Solo 401k FAQs
QUESTION:Is there any advantage or otherwise if we choose Fidelity or Wells Fargo to service the solo 401k account?
ANSWER: Because the Fidelity account for the solo 401k is set up as a brokerage account, it will allow you to also invest in equities in addition to having a checkbook attached to the brokerage account for placing alternative investments such as real estate, and you can also process the solo 401k participant loan by wire.
Whereas the Wells Fargo account is a bank account for the solo 401k not a brokerage account you will only be able to place alternative investments not equities, but can process the solo 401k participant loan. If you decide to go with Wells Fargo let us know as we have a contact person and special paperwork applies. Same goes with the Fidelity account; if you want to use Fidelity let us know and we will prepare the applicable Fidelity forms.
Solo 401k Investments
FAQs Solo 401k
QUESTION 1. Can I freely rollover any Sep-IRA or IRA accounts in cash form to my Solo 401K. I can ask Ameriprise to transfer or if they are are difficult, take a distribution as cash and deposit to Solo 401k within 60 days.
ANSWER: While you can transfer both SEP-IRA and traditional IRA accounts to a Solo 401k, you would want to do so a direct rollover as you can only do one 60-day rollover from one IRA account per 12 month period and there is no grace period if you miss the deadline. Please note that we would shepherd you through the direct rollover process as part of our services.
QUESTION 2. Your firm allows me to not only establish the Solo 401k, but at the same time establish a component alongside for a Roth Solo.
ANSWER: Yes our Solo 401k plan allows for both a traditional and Roth Designated Solo 401k sub-account. Please note that there is no additional charge for this feature.
QUESTION 3. The Roth Solo can only be funded through new contributions that are post-tax income and are subject to certain limits.
ANSWER: The Roth SOLO 401k Designated account can be funded from the following sources: (i) Employee contributions up to $18,000 in 2015 (or $24,000 if you are 50 are older) provided that you have enough self-employment income; (ii) Transferring funds from the traditional sub-account to the Roth solo 401k designated sub-account via an in-plan conversion (note: that this would incur a tax liability to convert the funds from pre-tax to post-tax status and we would handle the required tax reporting; you may read more here: http://www.mysolo401k.net/plan-roth-rollovers-aka-converting-solo-401k-solo-401k-roth-self-directed-401k-solo-401k-individual-401k-solo-k/ ); and (iii) After-tax contributions via a strategy dubbed the "mega backdoor" Roth - you may read more about this strategy at the following link: http://www.mysolo401k.net/mega-back-door-roth-using-solo-401k-plan/
QUESTION 4. I cannot transfer funds from my established Roth IRA accounts to the Solo Roth, however, I can rollover a portion of my Solo 401k into Roth by paying the tax - a "In-Plan" conversion.
QUESTION 5. I assume your firm facilitates the up to 50% or $50k borrow from Solo at prime plus a point.
ANSWER: Yes we handle preparation of the required documentation for a Solo 401k loan for no additional charge.
Solo 401k FAQs
Mark Nolan has been active in the 401k and IRA industry for over 18 years. Working as a 401k administrator at Nationwide Insurance Company; then working as a Compliance Officer and Manager at self-directed IRA/401k custodian companies such as Trust Administration Services Corporation (now owned by Equity Trust Company), to IRA Services Trust company. Mark is currently the Compliance Manager at MySolo401k.Net.