iSolo401k - Solo 401k Blog

CRD Repayment by 2020 Tax Filing Deadline

5/12/2021

QUESTION:

I received from my solo 41k provider the 1099 for the CRD I made in 2020 from my Solo 401K account. I am now in a position to repay this distribution before filing my 2020 tax return on May 17, 2021. If I do this, I should not have to pay any taxes on the original distribution on my 2020 return, right?. From what I have read, the repayment is treated as a trustee to trustee transfer. In order to accomplish this transfer, do I need to provide the solo 401k provider with any documentation? Does the solo 401k provider need to provide me with any documentation? Can I simply deposit the repayment back into my Solo 401K account?

ANSWER:

Correct that no taxes would be due. You don't need to provide the solo 401k plan provider with any documents in order to treat it as a non-taxable direct rollover.

As long as you return the 2020 Cares Act related distribution to an IRA or to the solo 401k by your personal tax return (Form 1040) due date in 2021 plus timely filed extension, you won’t owe income tax for 2020 on the amount distributed. The IRS has posted a Q and A on this topic and is question 7. Click here to view the IRS page. That same IRS page also references more examples surrounding the return of the COVID-19 related distribution found in Notice 2005-92 Sections 4.D, 4.E and 4.F.

Invest a Solo 401k in Copyrights

1/10/2021

QUESTION:

Do you have any resources that can help me figure out how my solo 401k can invest in copyrights? I'd like to purchase copyrights for books and receive royalties directly into my 401k. Who can help me figure this out?

ANSWER:

We don't know of any IRS code information that specifically addresses investing in copyrights. Nor do we know of any professionals that do.

However, the IRS code does not list copyrights as a disallowed investment. See the following: https://www.irs.gov/retirement-plans/retirement-plan-investments-faqs

The following private investment procedure may be helpful when investing in such an investment.

https://www.mysolo401k.net/solo-401k/private-company-investment/

Another item to keep in mind is that such investment may generate UBIT.
What is Unrelated Debt-Financed Income Tax?Similar to UBIT there is another tax called Unrelated Debt-Financed Income (UDFI) tax that ONLY applies to IRA investment income derived from debt-financed property, proportionate to the debt on the property. HOWEVER, UDFI does not apply to solo 401k plans so this is why individuals prefer solo 401k plans over IRAs for investing in real estate whereby a non-recourse loan (debt financing) is used.

Co Invest in Real Estate Using a Solo 401k and my personal Funds

12/5/2020

BACKGROUND & QUESTIONS:

We are looking at buying some investment property. We would like to own it 50/50 with the solo 401k.

QUESTION 1. Is it allowable for me to personally own 50% of the property with the SOLO 401k. Seems like it is allowable at the outset. Correct?

ANSWER:

Yes provided certain rules are followed.

Invest in Real Estate Under a Tenancy in Common (TIC)
Under this method, the title is taken in both of the other tenant and in the name of the solo 401(k). Following is an example as to how the title to the property would read assuming the name of the solo 401k is Chargers Solo 401k Trust and the name of the other tenant

Example: 30/70 split between unrelated person Matthew Brown and his solo 401k plan (Chargers Solo 401k Trust)

How property purchase is recorded: Matthew Brown, an undivided 30% interest, and Chargers Solo 401k Trust, an undivided 70% interest.

Compliance Notes

The percentages of ownership are determined by how much funds each party invests at the time of real estate purchase.

All expenses and income are shared based on the ownership percentages.

The property may be purchased from or sold to a disqualified party (e.g., the solo 401k owner, his or her parents, children, to name a few).
The solo 401k owner is not allowed to use the property for personal use.

QUESTION 2.
How do I sell it someday? It appears that I could not buy the solo 401k's share and the 401k could not buy my share. Correct?

ANSWER:

You can not personally buy the portion your solo 401k owns and vice versa.

QUESTION 3.

This would mean that the only way out of the investment would be for the property to be sold to a 3rd party, correct?

ANSWER:
That is correct, and 3rd party (who is not a disqualified party) would have to purchase the property.

QUESTION 4.

Also, is there a better way to do this? I.e., hold the property in an LLC with me and the 401k as 50/50 owners? Or, does that just make it more complicated? And, would it change anything?

ANSWER:
An LLC can be established to purchase the property. The LLC would be a multi member LLC with you and the solo 401k being the members. With that said, a multi member LLC would have to file Form 1065 on an annual basis and you would need to issue K-1s for each member. https://www.mysolo401k.net/co-invest-with-my-401k-in-a-newly-formed-llc/

An advantage of the LLC is that the income and expenses don't have to be split between the two tenants (contrast with compliance rules described above). Instead, all of the income and expenses would be paid/received by the LLC. See more below:

Invest in Real Estate Using a LLC

When both the unrelated person (in this example Matthew Brown) and the solo 401k (Chargers Solo 401k Trust) pool their funds and invest in a LLC, title to the real-estate property is taken in the name of LLC. For example, if the name of the LLC is San Diego Charges LLC, title on the deed will read San Diego Chargers LLC.

Self-Directed Solo 401k for me and my children

12/2/2020

BACKGROUND & QUESTION:

If I bring on my son as an employee in 2021, what will happen to my solo 401K? My wife and I are currently on the plan. No further contributions? Is there anything in particular that is recommended to do with the plan for that scenario, as I'm sure many small companies expand to hiring employees after first having a solo 401k.

ANSWER:

A solo 401k plan is for an owner-only business with no full-time employees other than the owner, spouse of the owner and/or other owners and their spouses.

Therefore, you can maintain the Solo 401k notwithstanding that the business has hired your son as an employee provided that:

(i) your son is under 21 years of age regardless of the number of hours he works; OR
(ii) your son does not work more than 1000 hours per year or starting in 2021 does not work more than 500 hours per year for 3 consecutive years; OR
(iii) your son is 3% or more owner of the company regardless of the number of hours that he works.

The Solo 401k plan will need to be shut down if your son (i) is 21 years of age, (ii) works as a w-2 employee for 1000 hours per year or starting in 2021 works more than 500 hours per year for 3 consecutive years; and (iii) is not a 3% or more owner of the company.

Depending on the assets held within the plan, you would need to determine the type of qualified account you would transfer the assets to (e.g. a new full-time employer plan, IRA, or self-directed IRA such as our IRA LLC which allows Alternative Investments).

Solo 401k Controlled Group Question: Separate Businesses for Husband and Wife

12/1/2020

BACKGROUND & QUESTONS:

My husband has a business with full time non-owner employees. I do not work in my husband's business and I do not own any of my husband's business.

I own and operate my own PLLC.
My husband's business does not interact with my business.

If I establish a solo 401k under my business my husband may want to participate in my solo 401k plan because my husband might be performing some work for my business.

ANSWER:

You may be able to set up a Solo 401k for your separate business but your husband can't participate in the Solo 401k (even on account of work performed in your business).

Typically, your spouse’s ownership of another business would be attributed to you such that if the other business has employees it would prevent you from opening a solo 401(k). In order to avoid the application of these attribution rules (And assuming that there is no interaction whatsoever such that the affiliated service group rules would not apply), your husband would not be permitted to have any direct ownership nor even participate in your business. See the discussion of the attribution rules as they applied to controlled groups at the following:
https://www.irs.gov/pub/irs-tege/epchd704.pdf

Solo 401k Leased Employees Questions

11/24/2020

BACKGROUND & QUESTIONS:

A CPA I work with met with me to run through four potential candidates he has for the Solo 401k. One of the clients is in the below situation and I wanted to run it by you to understand if the Solo 401k would be an option. I think it would be and am hoping it is.

The potential client owns an orthodontics practice and has no direct employees. It is a single-member S-Corp. He essentially pays a company 10% of revenues to staff his practice, manage billing, insurance, etc. All of the employees in his office are employed by the large company that he pays 10% to. They have access to the large companies 401k plan, but the potential client is not allowed to participate as he is not an employee of the large company and has no ownership in that company. For his single member S-corp he is the only employee and takes a salary of $60,000 per year.

Do you think a Solo 401k would be allowed in this situation? As none of the employees work for his S-Corp and they also have access to the large companies 401k whereas the potential client does not, I would think control group rules would either force the larger company to provide him access to the 401k, but given the fact that they do not I believe the control group rules would certainly allow him to have a Solo 401k.

ANSWERS:

I agree that the person described below is eligible to setup a Solo 401k if the employees described below are not leased employees (and he has no other business with employees). Please see more information below.
QUESTION: How do I know if I have any leased employees?

Answer: If all three of the following criteria are met then the individual/employee in question will be considered a leased employee.

1.            First, the individual must be hired pursuant to an agreement between the company sponsoring the 401(k) plan and the leasing organization.
2.            Second, the individual must perform services under the primary direction and control of the company sponsoring the 401(k) plan.
3.            Third, the individual must work on a substantially full-time basis for at least one year. (There are different interpretations of what "a substantially full-time basis" means, but one easy rule of thumb is to count individuals who work 1,000 or more hours in a year).

Invest Solo 401k in Airport Hangar Lease

11/24/2020

BACKGROUND & QUESTIONS:

I would like to have the solo 401K LLC lease (20 year) 2 parcels from the airport authority and build a hangar for the purpose of leasing. The building would be a duplex type hangar with 2 separate units and a condo type set up for each hangar. I can get a non-recourse loan to construct. The LLC would lease the property and also be on the deed for the “improvements/hangars”. At some time in the future someone may want to purchase a hangar.

Please let me know if this is possible? recommended or not?

What any pitfalls may be?

I understand all of the transaction must go thru the LLC entity and I am merely a manager. No mixing of personal funds and I can’t work on the project for any gain of any sort. I will lonely be handling the transactions for the LLC as a manager?

Lease rate on each parcel is about $1200 per year. Taxes on each parcel are about $800 per year. Cost to build both hangars in one building is about $1.25MM.

Thanks you for providing some clarity.

ANSWERS:

Yes the 401k rules allow for investing in land leases as long as the land is not leased from a disqualified party (e.g., you or certain relatives). The solo 401k owned LLC (single member) will need to be listed as the lessee on the lease with the payments made by the LLC.

Yes the loan will need to be non-recourse since the solo 401k owned LLC will be constructing the hangar.

When the hangar is sold, it cannot be sold to a disqualified party. While the hangars are being rented out, all the payments will need to flow back to the solo 401k owned LLC and ultimately to the solo 401k once retirement account distributions commence.

Whether income from an LLC is eligible for me to use toward this solo 401k

11/18/2020

If you receive both Schedule K-1 and W-2 wages under the LLC, then contributions to the solo 401k plan would be based on both sources or earned income.QUESTION:

One question I have is whether income from an LLC is eligible for me to use toward this solo 401k. The LLC is currently (2020) taxed as a partnership. There are 4 general partners. All my income comes through a K1. Next year (2021), the LLC will be taxed as an S corp where some of my income will come through a W2 and some through a K1. Can any of this income in either 2020 or 2021 be contributed to a solo 401k that I have that the other partners don’t have?

ANSWER:

The solo 401k plan would be sponsored by the LLC. The owners/partners of the owner-only business can choose to participate in the solo 401k plan but are not required to do so. Also, just one, some or all of the partners in the business can choose to contribute to the solo 401k plan even if the others do not contribute to the plan.

Contributions to the solo 401k plan are based on earned income generated through the self-employed business. If the LLC is taxed as a partnership, and you decide to contribute to the solo 401k plan, the solo 401k contribution (both the employee and employer) will be based on the figure listed in line 14 Code A of your Schedule K-1. On the other hand, if the LLC is taxed as an S-corp., the solo 401k contributions will be based on the figure listed in box 1 of Form W-2.

Multiple Solo 401k Plans

11/17/2020

QUESTIONS:

Suppose I have a day job with my regular company 401k plan, and I also have a single-person LLC that does one business and an S-Corp with no employees that does another unrelated business. Can I have two separate Solo 401k plans?

If that is the case, then I can have up to $63,500 total contribution ($26,000 pre-tax/Roth + company match + after-tax contribution which can be mega backdoored), plus two potential $57,000 after-tax contributions from my LLC and S-Corp. Does IRS allows for multiple Solo 401k plans?

ANSWERS:

In short: no you cannot because (i) the overall limit will be aggregated across all plans that are owned by you; and (ii) it is an audit red flag to have multiple plans as you describe above.

Use IRA LLC & Access to Solo 401K Rental Income & Repair Costs

11/16/2020

QUESTIONS:

Lets say for example I wanted to buy a house for $50K. If I use my self directed IRA, do I have to wait until 59.5 before I can touch the rental income? Also, can I use Solo 401K funds for repairs and expenses?

ANSWERS:

Yes a self-directed IRA LLC may invest in real estate. Title to the property would be taken in the name of the IRA fund LLC not the self-directed IRA. The income generated from the IRA LLC owned investment would flow back to the LLC and subsequently to the self-directed IRA from the LLC bank account. You could then take distributions from the IRA including the investment gains without meeting a triggering event (e.g., age 59 1/2, retirement, etc.) because distributions from IRAs are not as restrictive as those processed from 401k plans including solo 401k plans; however, the IRA distribution would be subject to the 10% early distribution penalty if you are under age 59 1/2 at time of the distribution.

Lastly, while you would not be able to use solo 401k funds directly to pay for expenses associated with real estate owned under a self-directed IRA LLC because the IRA LLC not the solo 401k owns the property, you may be able to transfer solo 401k funds to the self-directed IRA and then invest them in the IRA LLC. Once in the IRA LLC, the funds can then be used to cover expenses associated with the IRA LCC owned property.

Educating America on Solo 401k