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:

• Works of art, including paintings and sculptures
• Rugs
• Antiques
• Metals
• Gems
• Stamps
• Certain coins*
• Beverages that contain alcohol, such as wine or champagne
• Musical instruments, like a trumpet or piano
• Historical objects

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.  

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 prevents business from unfairly avoiding taxes because their owners have established them within a retirement plan.
• The UBTI also prevents these businesses from holding an unfair position when competing with other entities that do have to pay taxes. (If one business does not pay taxes, it has a potential financial advantage over others that do.)

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.

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.

• You do not need a custodian. If you were to use a self-directed individual retirement account (SDIRA), you would need to have a custodian act on your behalf when investing. These services are not free; the firms that specialize in solo accounts often charge large fees to provide this service. You can avoid this through the use of a solo 401(k).
• You have complete checkbook control. When you establish a business entity in the name of your 401(k), you are able to open a bank account with checkbook control. Because you do not need a custodian to approve your spending, this gives you complete and immediate control over your investment funds.
• Your solo 401(k) real estate investment is not subject to Unrelated Debt Financed Income (UDFI). At 40%, the UDFI tax is hefty. If you use 20% of your SDIRA, combined with a mortgage that pays the remaining 80%, to purchase a property – 80% of your gains will be subjected to the 40% UDFI tax! This is not so with a solo 401(k).
• You can utilize non-recourse business loans. Using non-recourse business loans to purchase real estate with your solo 401(k) can help to protect those assets from lawsuits, bankruptcy and more.

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.

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 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:

• A Trade or Business. This can be as common as a flower delivery business or as innovative as your own AI software company. The main requirement is that your business must have intent of profit. This intent must show itself through some kind of regular activity to prove that you’re trying to further your business.
• A Sole Proprietor or Independent Contractor. Examples include freelance writers, web designers, ride-hailing service drivers or private tutors. If you make an income from providing such personal services, then you qualify as a sole proprietor or independent contractor.
• A Partnership or Husband-and-Wife Sole Proprietorship. In this case, the self-directed 401(k) plan would be registered under the partnership, not under each individual. Also, each individual in the partnership must perform self-employment activity and have an earned income from that activity.
• An S-Corp or C-Corp. In this case, your business has been incorporated and you’ve filed all the proper paperwork to be considered a separate legal entity.
• A Limited Liability Company. This is for those of you who have combined the benefits of partnerships and corporations.

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. 

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:

• Sole Proprietorship
• Limited Liability Company (LLC)
• C Corporation
• S Corporation
• Limited Partnership

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.

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.

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?

• Statistics show that baby boomers are typically more educated than previous generations have been.
• Baby boomers have lived through at least two serious economic downturns that significantly affected quality of life and finances.

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.

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

• In 2018, if you are under 50, the IRS has set the allowable maximum contribution limit for 401(k) accounts at $18,500. (This is $500 more than they allowed in 2017.)
• For those who are under 50, a defined contribution of $55,000 from all sources is permitted.

Participants 50 And Over

• If you are 50 or older, you are permitted to invest “catch-up” contributions up to $6,000. (Catch-up contributions are additional elective contributions.)
• That gives individuals over 50 the ability to makes a maximum of $24,500 elective contributions to their 401(k). In other words, those who are over 50 can elect to contribute $6,000 on top of the $18,500 allowable by the IRS.
• For those who are 50 or older, the total allowable defined contribution from all sources is $61,000.

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.

A self-directed 401(k) is a great way to save for retirement. Unlike the typical 401(k) plan set up by an employer, a self-directed one allows for a much more diverse investment portfolio. A self-directed 401(k) also grants you more control over your investment decisions. In fact, because it is self-directed, you have total control. This even includes the ability to make self-directed 401(k) loans to yourself.

Personal Loans Via Your Solo 401(k)

As a self-directed 401(k) owner, you are allowed to borrow from your account. This is not permitted in almost all other types of retirement accounts. The Internal Revenue Service (IRS) distinguishes between taking a loan from your self-directed 401(k) and requesting a distribution. Early distributions can cause your entire individual retirement account (IRA) to be disqualified and subject to penalties and taxes. This is not so with a self-directed 401(k) loan. If you need a personal loan, for anything, the self-directed 401(k) is your best bet. Let us look at the two most frequently asked questions about how this works below.

How Much Can You Borrow?

You can borrow up to $50,000 or half of your balance, whichever is lower. In other words, if you have $75,000 in your account, you can only borrow up to $37,500; but if you have $150,000 in your account, the loan is capped at $50,000. Unlike a bank loan, borrowing from your self-directed 401(k) does not require a credit check.

How Does Repayment Work?

Borrowing from your self-directed 401(k) works like any loan. In other words—and here's the bad news—you must repay it. If you are on a regular pay cycle, you can elect to make blended payments. These will consist of the principal and interest owed on the loan, as dictated by an amortization table. If you do not receive a regular paycheck, you must make a payment every 90 days. You have 5 years to pay back your loan. After that, the remaining balance of the loan is deemed to be a taxable distribution by the IRS. (There is a caveat if you are borrowing for the construction of your home. If you did, speak with a financial expert to determine if you are eligible for a longer repayment period.)

Have Questions About Self-Directed 401(k) Loans?

We have many years of experience helping our clients understand the IRS regulations placed on self-directed accounts. While these types of accounts give you total control over your future finances, we are here to ensure you do not trip over regulations that can cost you in penalties and fees. If you are considering taking a loan out of your 401(k), our experts advisors can help you plan your repayment options.