You’ve decided to save for the future using a solo 401k, and you’ve named yourself the solo 401k custodian. But what does that mean?
A solo 401k, also called a self-employed 401k, or an individual 401k, is a unique savings vehicle for small business owners without employees except for their spouses.
That makes a self-employed 401k a solid choice for real estate investors searching for a retirement plan similar to that in a larger corporation.
An individual 401k is similar to a standard 401k in that a person would contribute pre-tax earnings, and those contributions would be invested in other investment opportunities to grow. Those investments enjoy tax deferment until you retire and withdraw the funds.
A critical difference between a solo 401k and a traditional 401k is the role of a solo 401k custodian. This post will explain who can be a solo 401k custodian and their duties.
You can be the custodian of your solo 401k. Section 401 of the IRS Code controls your ability to be the custodian.
A custodian is a person or entity with fiduciary responsibility or authority over the assets in the account.
The required custodian does not have to be a third party in a self-directed 401k plan. The requirement allows you more freedom to invest your money on your terms without a third party's permission.
The Employee Retirement Income Act of 1974 (ERISA) and the Pension Protection Act of 2006 provide the legal basis for small business owners to start and act as custodians of their solo 401k
You can be the trustee for a solo 401k; the tax code refers to where the assets are held rather than a third party in charge of funds.
For instance, you can have your solo 401k in cash in a bank, precious metals in a safety deposit box, real estate, or assets in a brokerage account. As the trustee of the solo 401k, you're the controlling party and decide where the money goes.
A trust must hold all your 401k assets in a trust, and the plan must name a trustee. The trustee can be you, and you'll be responsible for the following items:
As the trustee, you'll be responsible for the maintenance of the individual 401k. As the solo 401k custodian, you'll need to pay attention to specific benchmarks, including:
Your solo 401k custodian duties revolve mostly around keeping good records. Typically, you won't even have to file taxes on your plan.
The few administrative duties change when your plan hits the $250,000 benchmark. You must file a tax return when you hit that amount in the plan. For the tax return, remember these essential items:
The solo 401k is crafted explicitly for self-employed people (like yourself) and their spouses. To qualify for this type of 401k, your business must:
If your business scales to the point you need to hire a full-time employee (outside of your spouse), you no longer qualify for the solo 401k.
If you hire a full-time employee (other than your spouse), you have two options:
Should you close the account, you must inform the IRS via your final 5500-EZ form.
When you reach 72 years old, the solo 401k triggers a minimum required distribution. Even if you work well into your golden years, you'll be required to start making withdrawals from your solo 401k.
As the custodian, you'll need to ensure that you do the following:
A solo 401k is designed for small business owners to save using a 401k. Unlike most retirement plans, you can act as a solo 401k custodian.
As a custodian, you're responsible for the following:
You'll also need to be aware of crucial benchmarks in the plan, including:
Ready to take the next step in securing your financial future? Take our tax quiz to see how we can customize a tax savings strategy for your real estate investment empire.
Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
Ready to know more than your attorney? Join our community platform where you'll get immediate FREE access to all our best educational resources for real estate investors. Including 8 Masterclasses, group mentoring replays, and much, much more.
Join thousands of real estate investors in all 50 states as they enjoy exclusive content, special promotions, and behind-the-scenes access to me and my guests. No spam, ever. Just great stuff!