401K Plan Loans — Why 72(p) Can Assist Your Investments

People often wonder if they can borrow money from their 401(k) plans. The answer is yes, but there are a number of things to bear in mind when you do.

Firstly, the money that was paid into your 401(k) is your money, but it was allowed to accrue interest tax-free. In addition, money that you paid into the fund was tax-deductible. In order to enjoy that tax-deferred or tax-free status, you have to comply with specific IRS regulations.

When you take out a car loan, what happens when you don’t pay it back? They come and they repossess the car, of course.

Now, what happens if you default on a loan from your 401(k)?

The IRS will consider the 401(k) “distributed”. That means they assume you cashed out your account. Not only is the entire fund now voided, but you face a 10% penalty for cashing out early. You may also be forced to pay an additional capital gains tax.

Guidelines for Executing a Loan with Your 401(k)

401(k)s are not like savings accounts where you simply withdraw money and pay it back whenever. You must draw up a legally executable contract and that contract must follow IRS guidelines. The repayment plan must also conform to IRS guidelines. In other words, it’s risky to borrow against your 401(k), but it can be done, and safely.

401(k) Loan Limits

No loan taken from a 401(k) is allowed to exceed either $50,000 or half the vested balance, whichever is lower.

401(k) Loan Repayment Limits

The loan must be repaid over a period of no more than 5 years. Exceptions are made for loans used to purchase homes.

401(k) Loan Repayments and Interest

You can’t just float yourself an interest-free loan. The loan must be repaid on (at least) a quarterly basis with a legitimate interest rate attached to it. The loan must be 1% over prime and there must be an agreed upon amortization schedule.

Section 72(p) regulations are not meant to hurt you. They’re meant to help you. When you borrow against your 401(k) you are using tax-exempt monies that the IRS and the government have allowed you to set aside for your retirement. If you could just take money out of the fund then that would defeat the entire purpose of it.

Logistically, you’re borrowing the money from yourself and then paying it back with interest. Technically, however, you are borrowing money from a fund that enjoys tax-free or tax-deferred status. There are conditions for enjoying those exemptions.

Our recommendation is to tread lightly and know what you’re getting into before executing the loan. If necessary, have someone help you with the process.

IRS Form 5500-EZ: Needed To Terminate Solo 401(k) Retirement Account?

If you have a  self-directed, or solo 401(k)—or what the IRS calls a one-participant 401(k)—you already know the taxman requires you to report accounts with more than $250,000 in annual assets. This is done through the IRS form 5500-EZ.

If you are terminating a self-directed 401(k), whether it is associated with you as a sole-proprietor or through an entity you own, you also need to file a 5500-EZ form. In fact, once you close your account, the IRS gives you seven months to file. How does this work?

Step 1: Terminating Your Solo 401(k) Retirement Account

As the Trustee of your account, you are responsible for a great amount of the work related to terminating your plan. Transferring your funds to another retirement account, for example, is not the only part of a plan’s termination.

In order for you to be compliant with the IRS regulations, you will need to contact your plan document sponsor.  In turn, the sponsor will provide you with the necessary forms required for you to terminate your account.

Step 2: Filing with the IRS

Once you have completed the forms provided to you by your plan document sponsor, you will need to file the 5500-EZ Form with the IRS. This form, which can be downloaded from the IRS website, is relatively simple. However, hiring a reputable professional may be a good idea. Contact us if you need a referral or if you have other questions!

When a CPA Says The IRS Prohibits A Solo 401K From Investing in Real Estate

A lot of old school CPAs still believe that you can’t use retirement vehicles like 401(k)s or IRAs to invest in real estate. They say this despite the fact that thousands of people all over the country are using retirement vehicles to do just that.

And why not? Real estate is an excellent investment right now. We’re not talking about derivatives or investing in financing, we’re talking about the real estate itself. Real estate has always been a smart investment because the value of real estate moves in the opposite direction currency does.

In other words, as the value of currency goes down due to inflation or other economic factors, the value of real estate goes up. Real estate isn’t the only investment that is true of, but the market for real estate is booming everywhere right now and that doesn’t appear to be changing because it’s not due to anything more than supply and demand. There are more folks entering the housing market now, and their options are increasingly limited due to the fact that inventory is low.

Why Some CPAs are Leery about Using Retirement Vehicles to Invest in Real Estate

Traditionally, IRAs and 401(k)s, even when they are of the self-directed variety, have been used to invest in stocks, bonds, and mutual funds. Real estate is a separate kind of investment entirely, and CPAs are justifiably cautious when it comes to using a Solo 401(k) to invest in real estate.

But the same rules that apply to any investment in your Solo 401(k) also apply to real estate. That is to say, you cannot directly benefit from property in any way. You cannot reside on the property. No one in your family can reside on the property. Any monies received from the investment must be paid directly to the retirement account, and finally, you cannot manage the property yourself. You’ll need a property manager.

With that in mind, you can (in fact) hold real estate in a retirement account. Regardless of how suspicious a CPA might be of doing so, it’s perfectly legal.

On the other hand, not every trustee out there is going to offer their customers the option of using their retirement account to invest in real estate. That may, actually, take a bit of digging. You’ll need to find a trustee who is not only capable but also willing to establish and manage an account that allows you, as the account owner, to invest in “non-traditional” assets like real estate.

But once you’ve found them, you’ve tapped into one of the most lucrative markets in today’s economy. So it’s well worth the effort.

The Self-Directed IRA Plan Asset Rules

When you open an individual retirement account (IRA), you do so as a way of saving for your golden years. An IRA allows you to invest in mutual funds, stocks and bonds. However, a self-directed IRA, also known as a SDIRA, permits much more.

With your SDIRA, you can invest in real estate, private placements, precious metals and more. In fact, with a SDIRA, you can invest in almost anything. However, there are some rules. The Department of Labor (DOL) established the Plan Asset Rules as a way to define what is considered an IRA asset. By understanding this rule, you can avoid participating in a prohibited transaction.

Plan Asset Rules

The Plan Asset Rules are also referred to as “Look-Through” Rules. Two main things can trigger the Plan Asset Rules. These are:

Exceptions to the Plan Asset Rules

There are certain exceptions to the DOL Plan Asset Rules. We noted the rules as they apply to an operating company—a partnership or limited liability company (LLC) that typically engages in the development of real estate as well as venture capital or companies that provide various goods and services. When it comes to an operating company, if the plan does not own 100% of the partnership or LLC, then the DOL rules do not apply.

However, you should still review and understand prohibited transactions as defined by the IRS. These transactions can cause the IRS to treat your actions as an early distribution. This will result in penalties! The Plan Asset Rules will also not apply if the operating company, or the interests of the partnership or membership, are publicly offered. The same is true if the interests are registered under the Investment Company Act of 1940.

Impact and Consequences

In reality, many of your investments will not trigger the DOL’s Plan Asset Rules. Direct purchases of real estate, precious metals and many other types of transactions performed on behalf of your plan will not trip the Plan Asset Rules. In fact, even if it otherwise would, as long as a disqualified person does not participate in the transaction, you will not trigger these rules.

Violating the DOL’s Plan Asset Rules does come with consequences. However, when you establish a SDIRA with a reputable law firm, avoiding these consequences is easy.

Does the Manager of a 401(k) LLC Need a Real Estate License?

LLCs are magnificent legal creatures with a number of fantastic uses. One potential use is that they can act as an investment vehicle for your 401(k). They can also hold other LLCs. It is by no means out of the ordinary to establish a separate LLC for each property held in the 401(k).

However, some folks wonder if they’re going to buy property with their 401(k) LLC, do they need to have a real estate license. The short answer is: no.

Why You Don’t Need a Real Estate License to Buy Real Property for your 401(k)

Not only do you not need a real estate license to purchase real estate with your 401(k), but if you use your real estate license to purchase property, it could be flagged as a prohibited transaction by the IRS.

Retirement accounts such as 401(k)s and IRAs are prohibited in investing in businesses that you are receiving a profit from or properties that you yourself (or your family members) derive a benefit from.

Being both the manager of the 401(k) LLC and simultaneously executing transactions with your real estate license on behalf of the 401(k) would be red-flagged by the IRS as a prohibited transaction.

What If You Execute Transactions with Your Real Estate License for Another LLC of Which You are an Employee?

Even then, the answer is no. Neither an owner of real estate nor a principle of an LLC needs to have a real estate license to execute trades related to real property. That includes selling, leasing, or renting.

Even those who have an LLC business that is not related to their 401(k) LLC would not necessarily need a real estate license for the purpose of executing trades.

Why not?

Well, the answer is sort of simple. An employee who is executing trades, managing properties, showing houses, or otherwise engaged in real estate transactions would need a real estate license. You as the owner or principle, however, do not.

Basically, because you own the property or the company that owns the property, no one really cares if you have a real estate license or not. In fact, if you’re using your real estate license to execute trades from your 401(k) it would probably work your disadvantage since it would be a conflict of interest according to IRS rules.

If you’re still fuzzy about the issue, it’s always best to contact a tax professional.

Terminating Your Self-Administered 401(k) Plan

Updated for 2022.

For those who own a business and self-administer their own solo 401(k), there might be a point in time when you cease business operations or sell off the business. What happens to your solo 401(k) then?
The solo 401(k) has to be terminated once there is no longer any business to sustain the plan. The question then becomes: how?
Most folks are a little foggy on that part. Allow me to explain.

How to Terminate Your Self-Administered Solo 401(k) Plan

You’ll need to terminate your self-administered 401(k) plan when your business is dissolved. Here’s how:

#1. Consult a Tax Professional

A tax professional should be included in the process. You’ll have a number of choices of what you can do with your 401(k), but you don’t want to cash it accidentally without that being your primary intention.

#2. Contact Your Plan Document Sponsor

You’ll want to contact your plan document sponsor and make them aware of your intention to terminate your solo 401(k). Because it’s a solo 401(k), you are the trustee and you operate the plan without any third party assistance. Therefore, it’s your responsibility to ensure that you are abiding all Department of Labor and IRS guidelines in the process. You will then be provided with paperwork by your plan document sponsor.

#3. The 1099-R

The first thing you will need to do is report the distribution of the 401(k) to the IRS. This is true regardless of whether you roll it over into another tax-deferred vehicle like an IRA or not. If you do intend to roll it over into a non-taxable vehicle, then there will be a timeline you need to be aware of.

#4. Distributing Funds

For those who are not simply cashing out their 401(k), the funds need to be distributed as soon as is logistically possible. That means understanding that you need to set up the IRA quickly.

#5. Reporting the Rollover

You now need to tell the IRS what happened to the funds that were distributed from the 401(k). They especially want to know when it’s been distributed into another vehicle that is protected from taxes. How do you do that? You can do it on Form 1040. On line 4a you include the full amount being withdrawn. Then on line 4b write the word rollover and put a zero for the taxable amount. The IRS also asks that a statement be included with your return letting them know you rolled it over into a new qualified plan.

#6. Form 5500-EZ

This form 5500-EZ needs to be filled out once your 401(k) assets exceed $250,000. It also needs to be filled out each year thereafter so long as your holdings eclipse that value. In addition, it needs to be filled out again once the funds have been distributed. It must be filled out within seven months of terminating your 401(k).

Now What?

You should be all set. Your 401(k) is terminated. The assets held therein are now successfully rolled over into an IRA.
The process isn’t complicated, but it is labor intensive. Friendly reminder. The 5500-EZ must be filled out within seven months. Some folks are under the misguided assumption that it needs to be in by a specified date. That’s not true. The clock starts ticking as soon as you terminate your 401(k)!

Solo 401(k) Benefits: What Small Business Owners and Investors Have To Know

Are you thinking about the best way to save for your retirement? If so, there are several options available to you. It is likely your company has offered you the opportunity to invest in an individual retirement account (IRA) or a 401(k) plan. Traditionally, these options are provided through a pre-selected firm chosen by your employer.

If you are a small business owner (or an employee of a small business), a simplified employee pension (SEP) IRA or Simple IRA may also be avenues you have considered. However, a self-directed, or solo 401(k) plan has benefits that go beyond these options.

Have you not heard of a solo 401(k)? We are not surprised. Although it has been around for almost two decades now, solo 401(k) plans have remained relatively unknown as they are not options provided by most employers. However, they certainly provide plenty of benefits that make them appealing to those who learn of them. Do you want to know why? Keep reading to find out more.

# 1. Higher Contribution Limits

When you compare the contribution of a solo 401(k) to those of almost all other retirement accounts, you will notice that it is substantially higher. In fact, contributions to a solo 401(k) can be five to ten times higher than those made to most other retirement accounts.

Your solo 401(k) also comes with contribution flexibility as well. You may opt for pre-tax, or traditional, contributions. These contributions are tax-deferred, which means they are taxed only when you take a distribution. You can also opt for after-tax, or Roth, contributions. When you have a Roth solo 401(k), your distributions are taken tax-free. Why? Because the Internal Revenue Service (IRS) cannot legally tax you twice for the same dollars. Because you were already taxed on the contributions, your gains and returns are tax-free. If, for example, you made an income of $125,000 through self-employment, your maximum contribution limit for a Roth and self-directed IRA (SDIRA), would be $5,500. (If you are over 50, however, this limit increases to $6,500.) By comparison, your contribution maximum is $18,000 through a traditional 401(k).

You can also make employee deferral contributions and profit-sharing contributions. Like a traditional 401(k), your solo 401(k) has a maximum employee deferral contribution limit of $18,000. Depending on your incorporation status, however, you can also include a profit-sharing contribution of up to 25% of your annual income. That means your maximum contribution limit could actually be $54,000! Using our example of a $125,000 income, with a solo 401(k), you could have an employee deferral contribution of $18,000 plus a 25% profit-sharing contribution of $31,250. This would give you a maximum contribution of $49,250 a year.

# 2. Flexible Loans

Unlike almost all other retirement accounts, solo 401(k) plan owners are able to take out personal loans without paying steep interest rates, IRS penalties, or other such fees. In fact, taking out a personal loan from your solo 401(k) is relatively easy and painless. If you choose a reputable firm, like IRA Business Trust, your loan request can be processed in just minutes. The IRS allows you to easily take out a loan up to $50,000 or 50% of your account value, whichever is less. As long as your loan request abides by this limit, your request is instantly approved. In addition to this, you set your own interest rate and have up to five years to pay off the loan from your solo 401(k). However, if you use your loan to purchase your primary residence, you are permitted to take up to fifteen years instead. You can set the frequency of your repayments as well. While some opt to make regular payments along with their standard contributions, as long as you make a payment every quarter, you are on track. Perhaps best yet – you can use your personal loan for anything you desire. This includes paying off your personal or business debt, mortgage, or buying that new car you have been eyeing.

You may want to note that not all financial institutions or investment firms permit you to take a personal loan. At Royal Legal Solutions, however, we understand that your solo 401(k) is built from your hard-earned dollars. If you want to take a personal loan from your own retirement account, we support you. Our professionals will make it easy for you to get the funds you request.

# 3. Alternative Asset Investments Options

A solo 401(k) will certainly allow you to invest in the same stocks, bonds, and mutual funds other retirement accounts permit. However, a solo 401(k) allows you to invest in much more! While there are almost limitless investment possibilities, some of the most notable include real estate, precious metals, private equity and debt, life insurances, cryptocurrencies, private placements, and renewable energy sources. A solo 401(k) makes investments in these alternative assets easy as well. A solo 401(k) does not require you to establish a limited liability company (LLC) or other business entity in order to invest in real estate. (Although, it certainly will not prevent you from doing so either. After all, an LLC can help you protect your assets and your investment returns.) You also do not need to get the approval of your solo 401(k) custodian. Why? Because the IRS does not require you to have a custodian or trustee in order to open a solo 401(k)! You are also able to take out a non-recourse business loan for your solo 401(k). This will allow you to invest in real estate, bypass the Unrelated Business Taxable Income (UBTI) tax, and protects your solo 401(k) assets from debt claims.  

# 4. Easy to Set Up

Royal Legal Solutions makes your solo 401(k) account set up easy. Our professionals have streamlined the process to ensure it runs as smoothly and quickly as possible. We keep our setup costs low, minimize paperwork, and assist with contribution rollovers.

Prohibited Solo 401(k) Investments: What You Can't Invest In With a Solo 401(k)

Planning for your retirement while you are still young and able-bodied enough to work is a great idea. Using an individual retirement account (IRA) or 401(k) are some of the most recognized means of benchmarking funds for the day you retire. With an IRA or 401(k) plan, you are able to invest in stocks, bonds, and mutual funds. While these options can certainly generate gains, a solo 401(k) can go beyond this. At Royal Legal Solutions, we strive to provide you with the information you need to make educated investment decisions. Below, we take a look at the investment options the IRS permits and forbids to make sure your solo 401(k) abides by regulations. After all, you want your money to stay in your pockets instead of being subjected to hefty IRS penalties or fines.

Solo 401(k) Investment Options

Also known as a self-directed 401(k) plan, a solo 401(k) offers increased investment opportunities. This includes things like real estate, precious metals, private equity, private placements and renewable energy sources. Known as alternative assets, your investment options can appear limitless. However, there are a select few things that the Internal Revenue Service (IRS) does forbid your solo 401(k) from investing in.

Investments You Cannot Make With Your Solo 401(k)

The IRS allows you to invest in more than what it forbids. In fact, with the exception of the items listed below, the IRS does not define what investments you can make with your solo 401(k). This makes it even more important for you to abide by the few limitations placed on your solo 401(k) investment options.

Collectibles

When it comes to physical assets, collectibles are the only type the IRS does not permit a solo 401(k) to invest in. Included in this list are:

If you should use your solo 401(k) to invest in these items, the IRS will consider it a distribution. Because of this, you will be taxed based on the market value of that collectible at the time of purchase. It is important to remember that early distributions are not only subjected to taxes, but also penalties and fines.
Exceptions: Certain coins, however, are exempt from this rule. As previously stated, your solo 401(k) is allowed to invest in precious metals. Because of this, coins or bullions that are at least 99.5% pure gold, silver, platinum, or palladium are exempt from the IRS collectible regulations.

S Corporation Stock

Like other types or retirement accounts, your solo 401(k) plan can still be used to invest in mutual funds, bonds and stocks. When it comes to stocks, however, there is one exception. According to the Internal Revenue Code (IRC), Section 4975 (16), retirement plans of any type are not permitted to purchase or own any type of S Corporation stock. A retirement plan is considered a type of trust. By purchasing or owning stock, a solo 401(k) would be considered a shareholder. Trusts are expressly forbidden by the IRS from being shareholders of an S Corporation.
Exceptions: As with collectibles, there are exceptions to this rule. Solo 401(k)s are allowed to invest in any other type of business entity. This includes C Corporations, limited liability companies (LLCs), sole proprietorships, and partnerships.

Prohibited Transactions

The IRS also prohibits transactions with disqualified persons. This is true for any type of transaction, even if it would otherwise be considered legitimate. Disqualified persons are defined by the IRS to be ancestors, lineal descendants, and individuals or entities connected to the solo 401(k) itself. Ancestors include your father, mother, and grandparents. Lineal descendants are your spouse, children, grandchildren and other such persons. A corporation or property that is owned or controlled by your or a family member is an example of a connected entity. This may seem confusing. To help keep yourself within regulations, there is one main question you should ask. Will I, or any of the individuals listed by the IRS as a disqualified person, benefit directly or indirectly from the transaction or investment? If the answer is yes, you should avoid the transaction.
Exceptions: Siblings, aunts, uncles, nieces, nephews, and cousins are not disqualified persons. The same is true of the same indirect relatives of your spouse. Stepchildren are also not considered to be disqualified persons. This means that transactions with these individuals are legally permitted by the IRS.

Hire a Professional You Can Trust

At Royal Legal Solutions, our experts have plenty of experience. As a reputable avenue for opening a solo 401(k), we make the process quick and easy. Our professionals are committed to each and every customer who opens an account with Royal Legal Solutions. If you have questions or concerns regarding retirement accounts, investment options, and IRS regulations – our staff have the answers. Please contact us today for more information regarding our retirement account options and how we can help you save for your golden years. We all want to avoid worrying about money when we retire. With a reputable professional at your side, your retirement plan has the potential to grow exponentially.  

UBTI / UBIT / UDFI And Your Solo 401(k)

Are you saving for your retirement years? For many, a 401(k) allows them to benchmark and grow their retirement account. Unlike an individual retirement account (IRA) or a traditional 401(k), a solo 401(k) allows you to invest in much more than just mutual funds, bonds and stocks. Real estate, precious metals, private placements, renewable energy sources and many other alternative assets become available to investors through a solo 401(k). Because of these investment options, a solo 401(k), also known as a self-directed 401(k), gives you plenty of options that will help you diversify your portfolio. Like a traditional IRA or 401(k), however, a solo 401(k) is typically considered a tax-deferred account. Why? Because most individuals choose to use their pre-tax dollars to fund the account. However, there are certain situations in which a solo 401(k) account will owe taxes prior to a distribution at the age of retirement.

UBTI Rule

As with all other forms of income, the Internal Revenue Service (IRS) has established regulations that govern retirement accounts. Because solo 401(k), and a few other investment vehicles, are able to invest in business entities, the IRS recognized a potential loophole. To prevent this, the IRS establish the “Unrelated Business Taxable Income (UBTI) Rule.” (UBTI is referred to as an Unrelated Business Income Tax (UBIT) as well.) Defined under the Internal Revenue Code Section 512(a)(1), the UBTI Rule basically stated that income is to be treated as unrelated if the income generating activity is:

  1. A business or trade;
  2. Regularly carried on; and
  3. Not substantially related to furthering the organization’s exempt purpose.

The three factors above are very important to understand. A business or trade, as defined by the IRS, is any activity that results in the generation of income through the sale of goods or providing of services. A regularly carried on activity is one that is occurs on a repetitive cycle. This even extends to seasonal activities, such as the sale of holiday postcards to raise money for a non-profit. The size and extent of an activity is important in the determination of a tax-exempt status. If an activity appears larger than necessary, the IRS is likely to treat is as unrelated. The IRS will examine the sale of each item in order to determine if it is considered “related” or “unrelated” and if the UBTI rule applies. Why does this mean your solo 401(k) may need to pay taxes? Let us take a look.

UBTI Taxes and Pass-Through Entities

Pass-through entities, such as a limited liability company (LLC), do not directly pay taxes. Instead, their income passes through them and to the entity that owns them. If an LLC is owned by an individual, that person pays those taxes as it is considered a personal income. However, many solo 401(k) owners opt to establish their own LLC’s, or other pass-through entities, in order to protect their investments and increase their capital. For more information, check out our previous piece on how to protect your assets with an LLC or other business entity. This is where the UBTI rule comes into play.

The UBTI tax is rather large. At 40%, most owners do try to avoid incurring this tax. If you own or invest in a C-Corporation, however, you are in luck. C-Corporations are not considered pass-through entities. They pay taxes every year. Because of this, they are exempt from the UBTI rule.

UBTI/UDFI and Solo 401(k) Real Estate

One of the many benefits of a solo 401(k) account can take out a non-recourse business loan. This is often borrowed from an individual or a business entity. A non-recourse loan is typically considered debt financing. This means the solo 401(k) is not subjected to paying UBTI taxes on any incomes generated through that loan. (An Unrelated Debt Financed Income (UDFI) is not subjected to the UBTI rule.) Therefore, if the solo 401(k) uses a non-recourse business loan to purchase real estate, instead of using a LLC directly, the owner will not have to pay that 40% UBTI tax on any income generated by that property!

IRA Business Trust Can Help

The professionals at Royal Legal Solutions know how important it is to avoid violating tax regulations. We also know that you worked hard for your retirement finances and you deserve to keep as much of them as possible. If you would like to learn more about retirement accounts, like a solo 401(k), IRA Business Trust can help.

Real Estate Investing With Your 401(k)

Saving for your retirement is a great way to ensure you have a source of income even after you end your career. A 401(k) is a fairly standard way of doing this. With a 401(k), pre-tax dollars are taken from your wages and applied directly to your plan’s investments. Often, your employer will match this contribution, but it is not required. With a 401(k), your investments are limited to stocks, bonds, and mutual funds. This type of 401(k) is known as a “traditional” account.

If you would like to have more control and investment options, however, consider opening a self-directed 401(k). Also known as a solo 401(k)—or what the IRS calls a one-participant 401(k)—these accounts allow you to invest in much more, including precious metals, private placements, foreign currencies, and real estate.

For many, the opportunity to invest in real estate is the primary reason they switch to a solo 401(k).  Let’s take a look.

Real Estate Investment with a Solo 401(k)

It is true – you could purchase real estate with the money in your personal bank account. Not only would this give you a more immediate payday, but you would have direct control over what you did with the property.

However, if you used your personal finances to invest in real estate, any gains would be subject to federal and state taxes, therefore reducing your actual profit margin. This is not so for a solo 401(k). When you use a solo 401(k) to invest in real estate, your gains are tax-deferred. This gives you a larger fund pool to use for future investment opportunities.

Easier Investing Through Your Solo 401(k)

A solo 401(k) is not the only retirement-planning vehicle you can use to invest in real estate. However, it does offer several features that make it easier and almost completely hassle-free when compared to other options.

How Does This Work?

When using your solo 401(k) to invest in real estate, there are six basic steps that you will need to take.

  1. Open a solo 401(k) account. When you are planning to invest in property through your retirement account, it is important that your solo 401(k) account name is the only one associated with all purchase-related documents.
  2. Transfer funds into your solo 401(k) account. This may seem obvious, but it is an important step. Contributions can be made through roll overs, transfers from other qualified plans, or through your pre-tax deposit into the account.
  3. Decide how you plan to purchase property. There are three ways you can invest in a piece of real estate with a solo 401(k). The most basic option is a solo 401(k) cash purchase, in which you use only funds from your account to invest in the property. A tenants-in-common (TIC) purchase allows you to use both personal and solo 401(k) cash to invest in a property. (This option allows you to partner with individuals other accounts would consider “disqualified persons”, however you cannot use a mortgage or debt to purchase through a TIC.) Finally, you can also use a non-recourse business loan to purchase, or partially fund, your real estate investment. (This option protects your other investments and funds from bankruptcy or default should one of your properties fail.)
  4. Make an offer. This is where step one becomes vital – your solo 401(k) is the buyer of any real estate you invest in. Using your personal name on any documents related to the purchase is prohibited by the Internal Revenue Service (IRS).
  5. Make your deposit. As the purchaser, your solo 401(k) must make the deposit for the property. Make sure it has the funds it needs to do so.
  6. Complete the closing process as usual. As the solo 401(k) trustee, you need to submit any required purchase documents to your escrow agent, including the check from your retirement account. You should also personally retain copies of all documents in a safe place should you ever need them.

Expenses Related to Your Solo 401(k) Investment

When it comes to expenses related to your solo 401(k) real estate purchase, all payments must come from your retirement account. If you use your personal finances, the IRS will consider it an early distribution, resulting in penalties and taxes. This is easy, however, because of the checkbook control you get when you open a bank account in your solo 401(k)’s name.

 

Form 5500 EZ Filing Requirements For The Solo 401(k)

If you have a self-directed, or solo 401(k)—or what the IRS calls a one-participant 401(k)—one of the benefits that may have attracted you to this type of retirement account was the tax-free growth potential.

A solo 401(k) allows account owners to leverage a wider range of investments than a traditional retirement account. In fact, account owners can invest in real estate, precious metals, renewable energy and much more—all in addition to the stocks, bonds and mutual funds a traditional account permits. Because of these investment opportunities, account owners are more likely to see increased diversity and growth potential. When coupled with tax-free growth, the returns can quickly escalate.

Your solo 401(k) does not normally have a standard, yearly tax filing requirement. However, there are two exceptions:

  1. If your solo 401(k) had over $250,000 in assets by December 31 of the previous year, you will need to file Form 5500 EZ in accordance with Internal Revenue Service (IRS) regulations.
  2. Additionally, if you terminate your solo 401(k), you will be required to file Form 5500 EZ as well.

Let's take a look at 5500 filing requirements for the solo 401(k).

What is Form 5500 EZ and Who Can See It?

Form 5500 EZ is an IRS document required to be submitted for one-participant retirement plans, like your solo 401(k) plan, by July 31 every year if the value of the account is over $250,000. For those who value their privacy, you will be pleased to hear that as of 2012, Form 5500 EZ is no longer a public document when submitted on behalf of a solo 401(k) account.

What If I Fail to File Form 5500 EZ?

If you own an account that meets the requirement threshold for filing Form 5500 EZ, failure to do so will result in penalties once the IRS finds out. At $25 a day, the IRS can fine you up to $15,000 a year for failure to file your Form 5500 EZ.

Avoid the Penalties and File Directly

If you need to file Form 5500 EZ for your solo 401(k), it must be submitted to the IRS directly. Mail your form to the Department of Treasury, Internal Revenue Service, Ogden, UT 84201-0020. Again, to avoid penalties, you must file Form 5500 EZ for any solo 401(k) valued at over $250,000 by July 31 every year.

 

Prohibited Transactions & Solo 401(k)s: What You NEED To Know

Your 401(k) investment account is one of the best ways to benchmark funds for your retirement. While a traditional account will allow you to invest in mutual funds, bonds, and stocks – a self-directed, or solo 401(k), offers you many more investment opportunities. With a solo 401(k), you can invest in virtually anything, including real estate precious metals, private placements, and even renewable energy sources! Better yet – unlike a self-directed individual retirement account (SDIRA), you can do all of this without having to go through a custodian, which can save you both time and money. However, as with anything governed by the Internal Revenue Service (IRS), there are certain types of transactions that are prohibited. Understanding these regulations can help keep your account from being penalized and fined. Let us take a look.

The Disqualified Person

Before we talk about prohibited transactions, it is important for you to understand what a “disqualified person” is. The IRS typically defines a disqualified person as the account owner (you) and certain family members. Additionally, entities that are directly (or indirectly) connected to your solo 401(k) account, such as an LLC that is under 50% (or more) control by you or one of the forbidden family members. Not all family members are included in this however. Ancestors, including your father, mother and grandparents, and your direct lineal descendants, like your spouse, children and grandchildren, are disqualified persons. Indirect descendants and non-relatives, however, are not prohibited. This includes friends, siblings, uncles, nieces, cousins, and stepchildren.

Prohibited Transactions

The IRS prohibits any transaction that benefits you personally or one of the disqualified persons. In the simplest terms, a prohibited transaction is one that occurs between your solo 401(k) and a disqualified person. In fact, the IRS specifically prohibits the following transactions.

The IRS enacts these regulations to ensure the appropriate taxes are paid to them and the U.S. Department of Treasury. Depending on if you made contributions to your account with pre-tax dollars or post-tax dollars will dictate when and how much you pay on your investments. For contributions that are made pre-taxes, your account’s funds are in a tax-deferred state. This means you pay taxes only on your distributions. Because a solo 401(k) is a retirement account, if you take a distribution before the age of 59 ½, it is considered an early distribution and it will be subjected to penalties and fines. As long as you pay these taxes, however, the IRS permits it.

The Easy Way to Figure out if a Transaction is Prohibited

IRS regulations can be confusing. Royal Legal Solutions is no stranger to IRS regulations! We can help explain any concerns you may have. For the most part, when you are going to initiate a transaction through your solo 401(k), ask yourself if any of the disqualified persons named by the IRS will profit from it. If so, the transaction is likely prohibited.

Prohibited Investments

While you can invest in almost anything with a solo 401(k), there are two exceptions. You cannot invest in collectibles, such as artwork, rugs, stamps, and certain types of coins. (Note, however, that you can invest in gold, silver, platinum, and palladium coins that are 99.5% or more pure.) Additionally, because a solo 401(k) is considered by the IRS to be a trust, you cannot invest in S corporation stocks.

Royal Legal Solutions Can Help

While you do not need a custodian with a solo 401(k), Royal Legal Solutions can still help. Our expert staff can assist you with opening a new solo 401(k) account, as well as providing support for transferring your contributions from a previous account and simplifying the overall process.

Solo 401(k) Eligibility: How Do I Know If I'm Eligible?

Individual retirement accounts (IRAs) and 401(k) accounts are two of the most well known types of retirement accounts available today. However, self-directed, or solo, 401(k) accounts are growing in popularity and there are plenty of reasons why. Not only can you invest in traditional things, like stocks, bonds and mutual funds – you can also invest in real estate, precious metals, renewable energy sources, foreign currency and so much more. Unlike self-directed IRAs, you do not need a custodian in order to make your investments. With complete checkbook control, your investments are entirely up to you, made when and how you want to. In addition to these more diverse investment options, they also come with higher limits for contributions, personal loans, and more. Have we peaked your interest? If so, you might wonder how you can qualify for such benefits.

How Do You Qualify?

You may not realize this, but qualifying for a solo 401(k) account is rather easy. There are only two main eligibility factors must be met in order to qualify for a solo 401(k) account. Let us take a look.

1.   Self-Employed Income

The first requirement revolves around owning a business and generating income. In other words, you must own your own business, which generates profits on a full-time or part-time basis.
First, let us discuss what type of business entities qualify. According to the Internal Revenue Service (IRS), you are considered self-employed if you own and operate one of the following business entities: sole proprietorship, limited liability corporation (LLC), C- or S-corporation, a partnership, or a limited partnership.

While there is paperwork associated with many of these types of business entities, you may want to note that the IRS defines a sole proprietor as someone who owns an “unincorporated business” by his or herself. As such, there is no official paperwork that is filed to formally establish this entity. Therefore, if you have a side hustle, such as selling homemade wares on Etsy, offering freelance writing services, or self-publishing that novel you have been working on – you qualify as a sole proprietor.

Now that you have established whether you own a qualifying business entity, you need to determine whether or not you display “self-employment activity.” In short, the IRS views generated incomes as proof of your self-employment activities. You should also note that the IRS does not care about how much time you spend on your business so long as you have a reported income generated by it.

This means that whether you are full-time, part-time, or even just supplementing your primary income through a side hustle, the IRS considers the income a qualifying activity. Therefore, even if you generate very little income, this is still proof of your business operations and qualifies you for a solo 401(k) account.

Additionally, even if you have a full-time job elsewhere, if you own a business that generates income, you can simultaneously hold a retirement investment account through your job as well as a solo 401(k) through your entity.

2.   No Full-Time Employees

Per the IRS Internal Revenue Code, as a self-employed individual, you cannot have full-time employees working for your business entity. There are a few exceptions, however. An employee is excluded if they: a) work less than 1000 hours a year, b) are under 21 years old, c) are union workers, d) are a non-residential employee or e) are an independent contractor. Additionally, if your spouse works for your business, the IRS considers them an “owner-employee” and exempts them as well. Similarly, any partners in a partnership or member of an LLC are also exempt.

What to Do If You Qualify

After reviewing the two eligibility factors above, do you qualify for a solo 401(k) account? If so, you may want to look into opening an account quickly. After all – the investment opportunities alone go beyond those of almost every other type of retirement account options. This type of diversification, in addition to the unparalleled level of control you have over your solo 401(k) account, are benefits worth investing in.

At Royal Legal Solutions, we want to see your retirement dreams come true. Having the financial security to retire and live comfortably is a goal almost all American’s share and we are no different. Our experts want to help you get there too. If you have questions about opening a solo 401(k) account, want to know more about retirement accounts in general, or want to clarify any of the numerous IRS regulations that govern your retirement funds, contact us today.

Setting up a Self-Directed 401k

Setting up a self-directed 401(k) may seem like an intimidating process. We’ve worked with many clients who are convinced of the self-directed 401(k)’s benefits, but aren’t quite sure where to get started. These four steps can help you get started. Today, we’ll cover the basics of setting up a self-directed 401(k) and throw in some tips on streamlining the administrative process.

Understanding Self-Directed 401(k) Eligibility Requirements

In most cases, we see individuals qualify for a self-directed 401(k) by meeting self-employment requirements. We’ve broken down these requirements into three parts:

Part 1: Perform Self-Employment Work<

This can be part-time work at the minimum or even moonlighting work done in conjunction with a full-time job. In fact, you can have a separate retirement plan with your full-time employer and also open a self-directed 401(k) under your self-employment work. Having two separate retirement plans or completing a plan rollover can be an overwhelming task. We can help you go over your options and set up a plan that fits your retirement needs.

Part 2: Operate a Qualifying Self-Employment Business

Here are the qualifying business types:

Part 3: Don’t Employ Any Full-Time Employees

A full-time employee works over 1,000 hours per year. However, a spouse who works over the 1,000 hours is excluded.

Meet Solo 401(k) Enrollment Deadlines

If you’re already considering a solo 401(k), plan ahead. The enrollment deadline is December 31. You’ll want to become familiar with the solo 401(k) adoption agreement document beforehand. Remember you’ll have to not only execute this establishing document, but also set up a checking account for your solo 401(k) investments.

Understand Investment Responsibilities

Unlike the traditional mutual funds found in employer sponsored 401(k) plans, a self-directed 401(k) plan requires more active investing. If you choose to invest in stocks, be prepared to babysit them.

Set-up a Self-Directed 401(k) with Checkbook Control

As you can see, setting up a self-directed 401(k) requires a few important steps. While we can’t research, pick and monitor your investments, we can streamline the process. We can set up a self-directed 401(k) plan and establish checkbook control on our secure platform. We specialize in private, high yield investments. Reach out today for your consultation. 

Types of Self-Directed 401k Plans

Retirement plans are confusing enough. Understanding contribution limits, picking mutual funds and simply setting up your plan can be overwhelming. To complicate it further are the different types of plans from traditional IRAs to 401(k)s. Today, I’m going to highlight two plans that all self-employed folks should know about, the self-directed 401(k) and the Solo 401(k).

What is a Self-Directed 401(k)?

You may have heard of the self-directed IRA. Also, we have already discussed the self-directed 401(k) and its benefits. It’s an offshoot of the traditional 401(k) plan. In both, employees can fund their retirement with pre-taxed dollars which are automatically deducted from their paychecks. The only difference is that in a self-directed 401(k), employees act as their own funds manager with the ability to choose from a large list of investment options. However, these plans are employer sponsored. In fact, according to consulting firm Aon, since 2007, the amount of employers offering self-directed 401(k)s have increased by over 10%. Now where does this leave those who are self-employed? That’s where the Solo 401(k) comes in.

What is a Solo 401(k)?

The Solo 401(k) was established in 2001 with the passing of the Economic Growth and Tax Relief Reconciliation Act of 2001. It’s also known as the Solo 401(k), Solo-k, Uni-k and One-participant k. The Solo 401(k) is a type of self-directed 401(k) designed for self-employed individuals.
According to the IRS: "It's a traditional 401(k) plan covering a business owner with no employees, or that person and his or her spouse (1).” Sole proprietorships, LLCs, partnerships, C-Corporations, S-Corporations also qualify under this plan. One must only claim self-employment income to qualify for a Solo 401(k). There are no exclusions for part-time self-employed individuals. However, any of business employees who work under 1,000 hours a year are excluded from the employee count.

Solo 401(k) Alternatives

This is not the first attempt at a retirement plan for self-employed individuals. The simplified employee pension or SEP, is another common plan for the self-employed. The main difference between the two plans are in contributions. In the Solo 401(k), there is an employee contribution and profit sharing option. Whereas in a SEP, there is only the profit sharing option. This difference is important because it’s possible to contribute more to your plan using a Solo 401(k) since you can contribute as both an employee and employer. Plus, the Solo 401(k) allows “catch up contributions” which can significantly increase your contribution limits if you’re over 50.

Self-Directed 401(k) Options

The Solo 401(k) offers the same benefits of an employer sponsored self-directed 401(k). However, with the Solo 401(k), business owners act as both employee and employer. Contributions are allowed under both classes, which can lead to increased contribution limits. Spouses can also make contributions, making the Solo 401(k) an ideal option for the self-employed and their family. If you're self-employed, we can help you setup a retirement plan. Contact us for more information or to set up your consultation.

What Are the Self-Directed 401k Eligibility Requirements?

We’ve already discussed the benefits of a self-directed 401(k) plan. Now you may be wondering if you’re eligible for this plan and all its benefits. In this post, I’ll discuss self-directed 401(k) eligibility requirements and give some examples. Eligibility requirements for self-employed individuals are a bit complex, so read on for a quick summary.

Employer Sponsored Self-Directed 401(k) Plans

More companies are offering the self-directed 401(k) plan. Some employers will refer to it as a "brokerage window." This signals that you have a window to make your own investments, outside of your employer’s investment offerings. However, don’t expect HR to announce all your 401(k) options. I frequently hear of employees who aren’t aware of this “brokerage window” until they search through their benefits handbook. I’d suggest directly asking your HR representative if they offer a self-directed 401(k) or if they’d consider extending this option to you.

What Happens if I Leave My Company?

If you no longer work for your employer and want to move your standard 401(k) into a self-directed 401(k) you have two options:

Direct Rollover

Funds in the current retirement plan are immediately transferred to the new self-directed 401(k). This transaction doesn’t go through a custodian and no withholding taxes are taken.

Traditional Rollover

Funds in the current retirement plan are transferred to a custodian. The custodian has up to 60 days to transfer those funds into the self-directed 401(k). If the transfer isn’t made within that time frame, the funds will be considered dispersed. This can lead to penalties or taxes.

Self-Employed 401(k) Eligibility Requirements

Even if you have an existing traditional 401(k) plan with your employer, you can still set-up your own personal self-directed 401(k) plan. However, you’d have to meet self-employed business owner requirements to start this second plan. There are two main requirements for a self-employed 401(k) also known as a solo 401(k).

Self-Employment Requirements

To qualify for a solo 401(k) you must own and operate one of the following:

Typically business owners keep their day job while they get their business going. If this is the case, you don’t have to wait until you transition into full-time self-employment. Part-time self-employment also qualifies for the self-directed 401(k) plan.

No Full-Time Employees

Full-time employees are defined as employees who work more than 1,000 hours a year. A spouse who works over the 1,000 hours is excluded. Thus, the typical part-time employees you would employ in your own small business are fair game.

Start a Self-Directed 401(k) Today

As you can see, the eligibility requirements for a self-directed 401(k) can be very specific. You must own and run a sole proprietorship or other qualified operation. Plus, you can’t have full-time employees, with the exception of a spouse. Once you meet these requirements, starting or transferring a plan to a self-directed 401(k) can open up a new world of high-yield investment options. We can help setup your self-directed 401(k). Call us at (425) 449-4554 for a consultation.

Investments in Self-Directed 401ks: Mutual Funds, Real Estate & Business Investments

The self-directed 401(k) is attractive because it provides options. The variety of investment options available are limited only by your own creativity. We’ve seen investors revamp their boring old retirement portfolio with a number of new and promising investments in self-directed 401(k)s.

However, just because the grocery store carries a dozen candy brands doesn’t mean it’s wise to gorge yourself on all of them. We’ve narrowed down the list to three common self-directed 401(k) investments and what you need to watch out for with each.

Self-Directed 401(k) Mutual Funds

We’ll start off with the traditional mutual fund. The self-directed 401(k) allows investors to diversify with both non-traditional and traditional investments. Mutual funds are what you’ll typically find in a standard, employer-sponsored 401(k) plan. They will be listed along with other pre-selected investment options in an employer’s 401(k) plan welcome packet.

Mutual funds are a collection of pooled securities like stocks and bonds. Because a mutual fund invests in a variety of securities, it’s a good option for increased diversity and potentially lower investment risk.

However, while you can choose which mutual fund to include in your retirement plan, you can’t control which securities are bought and sold within that mutual fund. Keep in mind that the average mutual fund offers an annual return of between five to eight percent.

Self-Directed 401(k) Real Estate

Another common investment in self-directed 401(k)s are real estate and real estate related investments. Real estate is one of the most popular alternative investment types. Here are the different types of real estate and real estate related investment you can make with a self-directed 401(k) plan:

Passive Real Estate Options

These options all offer the advantage of tax deferred growth, without the maintenance and administrative hassle rental properties require.

The main things to watch out for with all these real estate investments are “prohibited transactions.” These are transactions between the self-directed 401(k) plan and the plan owner or any of his family members/disqualified persons. Check out this article for a more detailed summary of who qualifies as a “disqualified person."

Self-Directed 401(k) Business Investments

A great advantage of the self-directed 401(k) is that it opens up an entire world of private investment options including C corporations and other private ventures. I know firsthand from living in the heart of Silicon Valley how frequent these potential business investment opportunities arise. Digitalization is only going to expand the flood gates even further for those willing to take the risk. The self-directed 401(k) allows these private investment opportunities.

Review Your Self-Directed 401(k) Investment Options

As you can see, having a 401(k) doesn’t mean you’re stuck with traditional investment options. Private investment options such as rental property and passive real estate are available under a self-directed 401(k) plan. Also, for the more entrepreneurial investor, private business ventures are another option. Don’t limit yourself. 

What Rules Affect Self-Directed 401k Plans?

There are two major rules to keep in mind when dealing with a self-directed 401k. These rules govern other popular retirement plans. First, are the rules related to prohibited investments. Second, are rules related to “prohibited transactions.” The latter are a bit more nuanced, which is why I’ll give an overview and specific examples of prohibited transactions. If you’re considering a self-directed 401k, read on to avoid these costly rule violations.

Prohibited Investments in a Self-Directed 401k

The IRS clearly prohibits two types of self-directed 401k investments, life insurance and collectibles. Collectibles include art, antiques, gems, vehicles, stamps and some coins such as gold and silver. The IRS doesn’t specifically endorse several non-traditional investments such as real estate. However, this doesn’t mean investors shouldn’t be cautious with these investments and the “self-dealing” rules associated with them.

Prohibited Transactions in a Self-Directed 401k

Self-Dealing

Self-dealing rules exist to prevent retirement plan owners from using one of their 401k investments for their own personal use. This would lead to an unfair double benefit: a tax benefit and a personal use benefit.
To illustrate, let’s look at Carol. Carol is a 40-year-old with a self-directed 401k. She invests in some apartments nearby and decides to also manage the property part-time. Carol takes a small compensation for property management. This results in an unfair double benefit, since Carol’s property investment not only enjoys tax-deferred status but also yields her a small salary on the side.

Disqualified Persons

Prohibited transactions aren’t just direct dealings such as the one above between an individual and his or her self-directed 401k. They also extend to dealings with “disqualified persons.” Disqualified persons include lineal family members, spouses, parents and grandparents. For instance, Carol would also be prohibited from renting out a property to her daughter, even for just a short summer stay. This would trigger a double benefit as well, since Carol’s daughter is considered a “disqualified person.”

Conflicts of Interests

Outside of family members, plan owners should also be cautious about other conflicts of interests that can trigger a double benefit. For instance, a retirement plan custodian or anyone else servicing the plan is a “disqualified person.” If the self-directed 401k is employer sponsored, then the employer and anyone who owns at least 50% of the company is also disqualified.

Is a Self-Directed 401k Right for You?

As you can see, the rules regarding a self-directed 401k can get complicated. While these plans allow a wider variety of investment options, you aren’t free to conduct transactions with anyone you please. Prohibited transactions limit you from unfairly gaining both a tax and personal benefit from your plan. Prohibited transactions also discourage your family members or anyone with significant power over your plan, such as custodians or employers to conduct transactions with you. We hope that going over these rules has helped you decide whether a self-directed 401k is right for you. If you’d like more information about setting up your self-directed 401k plan, contact us now.

The Pros and Cons of a Self-Directed 401k

One of my first jobs out of college was also one of my first to offer benefits. Besides familiarizing myself with our healthcare and retirement benefits, I was responsible for keeping track of any upcoming changes in our benefit offerings. Along with a gym membership and commuter benefits, the self-directed 401(k) was one of the major new offerings I saw on deck during my in time in HR. I found that the self-directed 401(k) only differed from a traditional 401(k) in two regards:

  1. More Options. The self-directed 401(k) didn’t limit my investments to a pre-selected list of mutual funds. Instead, it offered a wider variety of options including: bonds, stocks, real estate, private mortgages and precious metals.
  2. More Responsibilities. In a self-directed 401(k) I am the funds manager. This means I’m responsible for monitoring stocks and doing due diligence on my investments.

Like more traditional options, the self-directed 401(k) has its pros and cons.

Self-Directed 401(k) Pros

Tax Benefits

With the self-directed 401(k), I still enjoy the ability to fund my retirement account with pre-taxed dollars.

Increased Growth Potential

With a self-directed 401(k), I expand my investment field and thus expand my growth potential. I like to compare it to a massive dinner buffet. The self-directed 401(k) plan includes thousands of investment options. Whereas the traditional 401(k) is more like a price fixed menu. I’ve seen employers offer a pre-selected list of no more than a dozen options.

Self-Directed 401(k) Cons

Fund Manager Responsibilities

The downside of more options is that it can make an already complex process even harder. I’ve seen those with advanced investment experience act as their own funds manager just fine. For a larger group of people, the options and responsibilities are too overwhelming. Those who trade stocks are required to “babysit” them.

Lots of Homework

Also, since the self-directed 401(k) allows non-traditional investments like real estate, doing due diligence on them can be even more of a responsibility. The financials associated with traditional traded investments are more readily available.

Fees

Fee structures for self-directed IRAs vary, but they generally cost more than the traditional route. There are annual maintenance fees to consider. Plus, stock trading fees can easily add up and chip away at your total retirement fund dollars.

Bottom Line

The self-directed 401(k) is a growing retirement option. However, there is one critical question I’d ask myself before going this route.

What are my retirement goals and financial needs?

The self-directed 401(k)’s wider field of investment options can blind individuals into taking risks that aren’t compatible with their overall goals and needs. Once you’ve answered these questions, we can help you setup your own self-directed 401(k) or choose from a variety of other retirement options. If you still have additional questions, contact us or feel free to  set up your consultation today.

5 Pros and 5 Cons of a Self-Directed 401(k)

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Today, many Americans rely on the 401(k) plans set up by their employer as a means of saving for their eventual retirement. A 401(k) plan allows you to use your pre-tax dollars to invest in mutual funds, as well stocks, bonds, and Target Date funds. Most likely, a firm contracted by your employer manages your 401(k) plan. Often, the funds in these 401(k) accounts are automatically invested per your employer or managing firm’s direction. However, did you know there was a way to have more control and be more involved with your 401(k) investments? A self-directed 401(k) offers you more control, flexibility, and investment diversity. Before opening one of these specialized types of 401(k) plans, take a look at the pros and cons below.

The Pros

The Cons

Royal Legal Solutions Can Help You

Royal Legal Solutions has many years of experience with Solo 401(k) plans. As a firm that specializes in accounts that give the owner more options, flexibility, and control–we understand how important your investment choices are for your future finances.

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Self-Directed 401(k) Facts and "Secrets"

A 401(k) is one of the most common ways for individuals to save for their golden years. These funds, which are typically started with pre-tax contributions from your paycheck and your employer, are subject to several regulations from the Internal Revenue Service (IRS). Both the IRS and your employer can affect the investment options available to you for these accounts. However, a self-directed 401(k) plan eliminates the constraints on your investment opportunities from your employer.

Facts:

According to statistical studies, an estimated 10,000 Americans will turn 65 this year, and every year for at least the next decade. This generation, collectively referred to as baby boomers, has begun aging into retirement. Because of this, baby boomers are the new face of retirement. What makes them different from previous generations?

Because of this, the baby boomer generation has started to look for ways in which to gain more control over their financial security. This includes their investment portfolios. Self-directed 401(k) plans allows for this type of personal control baby boomers desire. However, not all investment firms work with these type of 401(k) plans. Because they are considered to be specialty accounts, less than 1% of financial advisors understand and willingly discuss self-directed 401(k) plans.

Secrets:

The entrepreneurial spirit found in many baby boomers have led them to grasp ahold of self-employment opportunities. If you and your spouse both work full-time jobs, you likely have 401(k) plans that have been established and managed by your employer. Perhaps you also have your own part-time business as well. Did you know that you, and your spouse, are able to open self-directed 401(k)s? Not only can you transfer the funds from your individual employer-established 401(k), but also finances from a qualified self-employed 401(k) account, can be rolled into a self-directed 401(k). Not only can you create your own self-directed 401(k) accounts, but if desired, you can combine your individual accounts into one, co-invested account. This immediately gives you both a much larger investment pool. A self-directed 401(k) inherently has more investment options than your employer’s version will as well. With your larger investment pool, more personal control, and increased options – your retirement account has a lot of growth potential.

We Can Help

As stated above, self-directed 401(k) are considered to be specialize accounts. As such, not all firms are willing to help manage self-directed 401(k) accounts. Royal Legal Solutions, however, has years of experience with these types of retirement accounts. If you would like to learn more, please contact us.

Funding Self-Directed 401(k)s

The contributions made to a traditional 401(k) account established by your employer are obvious. They are typically made with your pre-tax dollars and matched, or partially matched, by your employer. The benefits of using pre-tax dollars make these types of contributions ideal. Your 401(k) is also one that benefits from being a tax-deferred investment account.

One of the pitfalls of an employer’s 401(k) plan, however, is the limited, often biased, investment options available to you. With a self-directed 401(k) plan, many of those investment boundaries are removed. In fact, if you choose to open a self-directed 401(k) account, you not only increase your investment opportunities, but also your own control over the account as a whole.

The benefits of a self-directed 401(k) are definitely worth considering when it comes to your retirement nest egg. After all, an increase in your portfolio diversity is not just a great way to generate different types of returns and earnings, but also help to prevent the negative effects of an economic downturn from robbing you of your future. However, if you already have a 401(k) account with your employer or not, you may wonder how a self-directed 401(k) is funded.

Solo 401(k) Funding Options

Funding your self-directed 401(k) is not as complicated as you might think. At IRA Business Trusts, we tend to see three methods that help fund your new self-directed 401(k) account. Funds from transfers, contributions and profit sharing are typically used for these types of accounts.

 

Self-Directed 401(k) Plan: Contributions Rules You NEED To Know

A 401(k) is an important way to save for your golden years. While many Americans have heard of 401(k) plans because it is part of their employer’s benefits package, few have heard of a self-directed 401(k) plan.

These two types of accounts are similar in many ways. However, a self-directed 401(k) plan provides you with more investment options, flexibility and control. Because you have more types of investment possibilities, you are able to not only diversify your portfolio more but also help prevent economic downturns from destroying your retirement funds. Sounds great, doesn’t it? As with your employer’s 401(k) plan, a self-directed 401(k) often relies on contributions. If you are interested in learning more about contribution regulations for a self-directed 401(k) plan work, keep reading!

Self-Directed 401(k) Contributions

Just like the 401(k) plan offered by your employer, the Internal Revenue Service (IRS) allows for you to make elective contributions. Elective contributions are funds, as directed by you, which are withheld from your paycheck and applied directly to your 401(k). These funds are withheld before taxes are taken from your check. The IRS dictates how much you can contribute to your 401(k). For the most part, the IRS regulations fall into two groups: those that apply to people under 50 and those for individuals who are 50 or older.

Participants Under 50

Participants 50 And Over

Self-Directed 401(k) Contribution Sources

Your contributions typically consist of two types of discretionary fund sources. The contributions that come directly from your salary are often referred to as personal deferrals. When you opt to have your contributions taken from your salary before they are taxed, you are investing in a traditional 401(k) account. Should you opt for contributions to be made after taxes have been removed from your paycheck, you now have a Roth 401(k). Profit sharing, the other type of funding source, refers to those contributions made by your employer.