QUESTION: I am planning to roll over my SEP fund this new solo 401 k, and don't know if it will be done in the time limit if I need to terminate my SEP, the custodian might need  time to do it.  If I have to fund the employee portion of new plan within this year, is there minimum amount has to be funded? I planned to fund it before my 2013 Tax return, it will be next year.   

ANSWER: Because the funds from the SEP IRA will treated as a transfer to a solo 401k, it does not fall under the contribution category but instead the transfer category. Therefore, we will prepare a trustee-to-trustee transfer form to request that the SEP IRA check is made payable in the name of the solo 401k so that the SEP IRA funds tax sheltered status is preserved.

Regarding making annual contributions, because this is a solo 401k plan, you have until you file your business tax return in 2014 to make your 2013 annual solo 401k contribution. See IRS Pub. 560 for more on this.

Looking forward to hearing from you

Ron from Maryland

BACKGROUND: I’m impressed with your volume of knowledge.  Thanks for your time before.  Here is my hypothetical using a Prohibited Transaction under IRC.

It seems that the reason recourse loans can’t be utilized is because the assets of the 401k can’t be subject to creditors.  This assumes that the prospective person is engaging in a direct purchase of real estate. 

I’m interested in investing into an LLC which will invest in real estate.  The partners of this LLC, of which I’ll be involved in, albeit less than 50%, which is the prohibited transaction level specified by IRC, will then engage in a purchase of said real estate and develop / manage / rent it out.   Before even bringing any bank into the equation, I think we both could agree that this transaction as outlined currently is within the limits of the regulations.

Secondly, the LLC members would engage a bank.  The bank would require a personal guarantee of members of the LLC, save for the 401K plan or the principal of the 401k plan.   LLC management would ensure that the retirement plan would absolutely 100% not be included as collateral.

QUESTION: If these items were to lay out exactly as described above, I feel this transaction would be within the scope of the regulations.  What are your thoughts?

ANSWER: 

If existing LLC: First, when determining the ownership interest in the LLC, in addition to adding your solo 401k plan’s planned membership percentage, you must add your existing membership interest as well as any other family members interest in the LLC  to determine if the less than 50% test is satisfied. Further, even if this test is satisfied, neither you nor certain family members may get compensated for the management of the LLC.  

If a newly funded LLC: Because the LLC would fall under the newly funded category, the less than 50% ownership threshold would not come into play and, thus, you along with the solo 401k can hold a 50% or more interest in the LLC; however, you could not be compensated for managing the LLC.

Lastly, with respect to the non-recourse loan, even though it would be made to the LLC, it would be prohibited to use non-recourse funds if you were also investing your personal funds in the LLC because you would personally benefit as a result of your solo 401k plan’s investment in the LLC.



Ryan CPA in Oregon

BACKGROUND: My CPA is stating that a California resident must form the LLC within the State of California regardless if the investments will be in the State of Oregon. Let me know what your thoughts are. 


Her email to me states:

If the manager of the LLC is a California resident, the FTB says the LLC is doing business here and has to register and pay.

ANSWER:  It is my understanding that because the IRA LLC is not: 1) investing in real estate in CA and  2) not providing goods or services but, instead, will passively invest in real estate outside of CA (in other words it does not fall under the operating business umbrella), it is not subject to the same restrictions.

QUESTION: I have the following questions regarding funding a solo 401k with a 403(b) insurance annuity. I would be funding the Solo 401K by rolling over funds from an insurance annuity. If I understand correctly, I get the Solo 401K set up FIRST, and later instruct the annuity company to roll the funds over into the Solo 401K account. Do I have that right?

ANSWER: As long as you qualify to open a solo 401k, which entails being self-employed with no full-time employees (click here for more information on qualifying for a solo 401k),  yes the transfer rules allow for the transfer of a 403b annuity funds to a qualified plan such as a solo 401k plan.

Further, yes the solo 401k would first need to be adopted and the solo 401k bank account or brokerage account setup before the 403b annuity funds can be transferred or directly rolled over to the solo 401k.

Lastly, before funding the solo 401k with annuity proceeds first check with the annuity company as the annuity funds may be invested in a fixed annuity, or a variable annuity that is invested in funds that have distribution restrictions or may be subject to annuity early surrender penalties.

Thanks.

Carl
Irvine, CA