Sunday, July 29, 2012

Solo 401k can be Invested in foreign investments but the Trustee has to live in the USA


While all 401k plans including Self-Directed Solo 401k (a/k/a Solo 401k, Individual 401k, Self-Employed 401k) allow for the Solo 401k Trustee to invest the plan assets in foreign investments such as foreign real estate, private companies, etc., most Solo 401k trustees are not aware that he or she must reside in the United States in order to make Solo 401k investment decisions including investing the Solo 401k in foreign assets. This is substantiated by a recently completed international project by the EPCU (Employee Plans Compliance Resolution Systems) whereby they discovered the following:

Templeman stated that 95% of the respondents found that the vast majority of the foreign companies understood the rules regarding the need to maintain domestic trusts and that substantive decisions must be under the control of persons in the United States.

You can view this article by visiting following link: http://hr.cch.com/news/pension/072712a.asp

Additional Information:
Following was pulbishend in IRS newsletter which can be retrieved via following link:


A trust is a domestic trust if:
  • A U.S. court can exercise primary supervision over administration of the trust, and

  • One or more U.S. Persons have authority to control all of the trust’s substantial decisions.
Plan requirements including Solo 401k

In order to be an internal Revenue Code Section 401(a) qualified plan or other profit-sharing plan’s trust must be a domestic trust.

Domestic Trust
IRC 401(a) requires that the Solo 401k trust be created or organized in the United States (i.e., a domestic trust).
Treas. Reg. 1.401-1(a)(3)(I) mandates that a trust including a Solo 401k trust forming part of a qualified plan be created or organized in the United States, and be maintained at all times as a domestic trust. Failure to qualify as a domestic trust would cause the trust to lose its tax exemption under IRC 501(a).

Closing Words

Therefore, if you currently operate a Self-Directed Solo 401k where your are the Trustee of the plan and are looking to move to a foreign country like Panama or Costa Rica, you may want to name someone else who will be located in the USA as the Trustee of the Solo 401k even if you do not plan in investing in foreign real estate (whether in foreign countries such a Costa Rica or Panama).   

Sunday, July 22, 2012

Consider Partial In-Plan Roth Rollover (Roth Solo 401k Conversion)


Partial In-Plan Roth Solo 401k Rollover | Roth Solo 401k Conversion | Process Partial Solo 401k Roth Conversion

For those looking to process an In-Plan Roth Rollover commonly referred to as Roth Solo 401k conversion, but are hesitant to do so because of the tax consequences, you may want to consider processing a partial in-plan Roth rollover (Roth Solo 401k conversion) to minimize the tax hit. By way of background, amounts converted from a traditional Solo 401k (pre-tax funds) to a Roth Solo 401k (post-tax funds) are fully taxable in the year of the conversion. However, the IRS Solo401k rules permit the self-employed business owner to process partial in-plan Roth rollovers. Therefore, since amounts processed in-plan Roth rollovers will increase your taxable income for the year, the potential exists for an in-plan Roth rollover to bump you into a higher income-tax bracket.  Lastly, there are no restrictions on the number of in-plan Roth rollovers that the Self-Directed Solo 401k participant may process.

Additional Information
How to Tax Report In-Plan Roth Rollovers visit:

Convert a Solo 401k Plan to a Roth Solo 401k Plan visit:

For Roth Solo 401k Contributions visit:



Sunday, July 15, 2012

Solo 401k Loan


Solo 401k | Solo 401k loan | Solo 401k Plan | MySolo401k.net


Based on the total Solo 401k balance, the Solo 401k loan option can be exercised as soon as the Solo 401k bank account(s) are funded. Note that if both participants participate in Solo 401k or self-directed Solo 401k, generally both spouses or two business partners since solo 401k is for maximum of two participants, two bank accounts are required—one for each participant.  Therefore, the Solo 401k loan option is available to each Solo 401k participant, thus allowing both to combine the borrowed proceeds for any purpose. What’s more, each participant can borrow 50% of their respective solo 401k account value not to exceed $50,000. The permitted loan amount does not increase nor decrease each year like the Solo 401k contributions limits. Of course, the Solo 401k loan has to be paid back with interest—typically the solo 401k loan payment interest rate used is the WSJ Prime rate plus 1%; however, based on testimony from a Department of Labor expert, a certificate deposit rate plus 2 percent is also acceptable. Thus, in today’s economy a CD rate may be more favorable, especially if you have determined that a favorable loan payment rate may be in your best interest to avoid defaulting on the Solo 401k loan . Lastly, visit [Mclaughlin V. Rowley, 698 F. Supp 1333 (N.D. Tex. 1988)] to learn more about solo 401k loan rates.

Isn’t Lending of Money to the Solo 401k Owner Prohibited?

Yes, the Solo 401k prohibited transaction rules prohibit the “lending of money or other extension of credit between a plan and a party of interest”. However, just like most rules exceptions apply to this prohibited transaction rule.  Specifically, Internal Revenue Code Section 72(p) and the 2001 EGGTRA rules permit each Solo 401k participant to borrow money from their respective Solo 401k tax-free and without penalty, provided the following rules are followed:
  • Solo 401k loan is made in accordance with specific provisions regarding such loans set forth in the Solo 401k plan;
  • Solo 401k loan bears a reasonable rate of interest (see discussion above); and
  • Solo 401k loan is adequately secured—for example, if the participant borrows 50% of the current Solo 401k value, up to 50% of the account balance will serve as security for the loan. Visit Department of Labor Reg. 2550.408b-1(f)(2) for more on this.
Uses of Solo 401k Participant Loan

 No restrictions apply with respect to the use of the Solo 401k loan proceeds. Simply stated, Solo 401k loan proceeds can be used for any purpose as long as the Solo 401k loan rules are followed. Following are some common uses of Solo 401k loan proceeds:
·         Purchase or renovate primary residence
·         Save primary residence from foreclosure
·         Pay credit card debt
·         Vacation
·         Business expenses
·         Investing outside Solo 401k
·         Help out a friend or family member
·         Any reason that you see fit

Thursday, July 12, 2012

Solo 401k and the UBIT Rules

Solo 401k | UBIT | UBTI | Unrelated Business Taxable Income | Rules | MySolo401k.net

What is unrelated business taxable income?
  • Tax sheltered accounts such as IRAs and Solo 401k generally don't pay taxes until distributions begin, ideally at retirement.
  • Further, self-directed solo 401k can invest a variety of alternative investments such as real estate and businesses.
  • Therefore, when you Open Solo 401k and invest in a business, you are in direct competition with businesses that pay taxes.
  • Of course, this is unfair to tax-paying businesses outside retirement accounts including Solo 401k.
  • As a result, to level the playing field the IRS requires Solo 401k plans that invest in a business to pay UBIT on net income generated from the investment in that business.
UBIT or UBTI Does Not Apply to Real Estate Solo 401k

  • Unlike tax shelters such as IRAs that are subject to UBIT if debt financing (non-recourse loan or leveraging) is incorporate in the real estate transaction, Solo 401k, a type of qualified plan, is not subject to UBIT as it falls under the passive income umbrella.

  •  However, investment types other than real estate that generate passive income include stocks, bonds, mutual funds, and money market accounts and thus subject the Solo 401k to UBIT if leveraging (margin) is incorporated.
 Don’t get confused; Investment in Trade or Business Subjects Solo 401k to UBIT
  • Similar to IRAs, Solo 401k cannot escape paying UBIT from the investment in an operating business such as a partnership or LLC that generate pass-through income.
  •  Instead, when a Solo 401k generates profits from a business, the net income is subject to payment of tax just like a business outside the Solo 401k to put it on the same playing field as the tax-paying entity that invested outside a solo 401k. For example, a Solo 401k that invests in a restaurant, an operating company, will be required to pay UBIT on the restaurant profits.
 Unrelated Business Income Tax Facts for Solo 401k
  • Solo 401k real-estate purchases that incorporate debt financing are exempt from UBIT payment
  • Solo 401k that incorporates debt financing when investing in an operating company such as a restaurant will be subject to UBIT on profits.
  • UBIT does apply to Solo 401k investments in trade or business  that invests in a trade or business.
  • UBIT is paid only on income of $1,000 or more from a trade or business
  • UBIT is reported to the IRS on Form 990T, Exempt Organization Business Income Tax Return.
  • UBIT falls under IRC Sec 511, and exceptions are found in Publication 598, Tax on Unrelated Business Income of Exempt Organizations.
  • If UBIT applies, payment required with Solo 401k funds.

Solo 401k LLC is Bad Idea and Costly

Solo 401k fo LLC | Special Pupose LLC | 401k Liability Protection


Don't get taken for a ride by companies touting Solo 401k LLC. Under this arrangement, the facilitating company charges in excess of $2,000, typically just for the formation of the LLC plus applicable registration/formation documents required by the state.
The LLC facilitator in many instances will state that a special purpose LLC is required in order to gain checkbook control of your Self-Directed Solo 401k funds, for privacy, and that a Solo 401k LLC is required to shield the self-directed Solo 401k from creditors (401k liability protection).
They are simply wrong for the following reasons:
· Solo 401k is already shielded from creditors thanks to the Employer Retirement Income Security Act of 1974 (ERISA).
· In 2005 Congress passed legislation that exempts qualified retirement plan (QRP) assets from bankruptcy estates under federal law.
· The Trust Solo 401k documents include language called "anti-alienation language" that further protects it from creditors.
The Solo 401k LLC Arrangement Creates Unnecessary Annual Fees
· The main reasons why the self-employed business owner chooses to open Solo 401k with checkbook control is to eliminate unnecessary fees and administration headaches.
· When you introduce an LLC to the Solo 401k process for making Solo 401k investments, common in an  IRA LLC transaction, it results in unneeded annual fees.
· Reason being, the LLC is subject to annual filings and payment of annual taxes. For instance, California requires filing of Form 568 and payment of an $800 annual tax, which is due by the 15th of the 4th month of the taxable year, and is paid using CA Form 3522, Limited Liability Company Tax Voucher.
Unlike a Self-Directed IRA, Self-Directed Solo 401k Already Comes with Checkbook Control
· One of the main differences between a Self-Directed IRA and a Self-Directed Solo 401k, with respect to investment purposes, is that the Self-Directed Solo 401k can be setup with checkbook control without incorporating the LLC element that is required to gain checkbook control for the IRA LLC transaction.
· Therefore, incorporating the LLC element to Solo 401k adds an extract step that is not only more costly but also unnecessary.
It's Simple to Shield Your Personal Name
At  Solo 401k plan establishment, you can assign any name that you wish to your Solo 401k.
· Therefore, since the Solo 401k checking account is generally setup in the name of the Solo 401k plan and under the Plan's EIN, and the alternative investments are made in the name of the Solo 401k plan, you have the option to name your Solo 401k a fictitious name like Palms Solo 401k instead of using your personal name.
Lastly, following blog contains information about Creditors and Solo 401k: http://mysolo401k.net/Blog-for-MySolo401k.html?entry=bankruptcy-and-creditors-claims-self

Tuesday, July 10, 2012

Solo 401k Bank Account


Solo 401k Bank Account | Reporting IRA or SEP or SIMPLE IRA Rollover or Transfer to Solo 401k Bank Account

The Bank Plays Limited Role With Respect to Solo 401k Bank Account

I recently opened solo 401k bank account and established checking account for my Self-Directed Solo 401k at Bank of America, and subsequently transferred/rolled over my SEP IRA from Charles Schwab to my newly established Self-Directed Solo 401k checking account. Can you please clarify for my banker how to report the transfer of my SEP IRA to my newly established self-directed Solo 401k? Thank-you for your help.  

You and Solo 401k Provider Administer the Solo 401k Plan Not the Banker

Actually the bank has no roll in transferring the funds or reporting the SEP IRA transfer to your newly established Self-Directed Solo 401k with checkbook control. Instead, the bank’s only roll with respect to the Solo 401k is to provide bank account with checking account feature. All of the administration for the Solo 401k is handled by you in conjunction with your Solo401k provider. Regarding reporting the rollover, this will need to be done when you file your 1040 in the year following the SEP IRA transfer to your Solo 401k with checkbook control. For example, if you processed the SEP IRA transfer/rollover to your Solo 401k bank account in 2012, then you will report the rollover when you file your personal tax return, Form 1040 in 2013, usually by April 15 unless you filed a tax extension.

See below regarding how to report transfers from SEP IRA, SIMPLE IRA and Traditional IRA to Solo 401k bank account.

Reporting Rollover or Transfer of IRA, SEP IRA, and SIMPLE IRA to Solo 401k Bank Account on Tax Return-Form 1040 or 1040A

  • Entire distribution goes on line 11a if you file Form 1040A, on line 15a if you use the long Form 1040.
  • 0 goes in box 11b of Form 1040A or in line 15b if you file Form 1040 since you deposited funds in Solo 401k checking account. Remember to write "rollover" next to the amount.
  • File applicable Form 1099-R, which will be issued by the releasing IRA, SEP IRA, or SIMPLE IRA releasing institution and mailed to you by January of year following the distribution, with your Form 1040.

Sunday, July 8, 2012

How to Open Solo 401k

How to Open Solo 401k

Guidelines
1. Familiarize yourself with all the various Solo 401k providers as the types greatly vary based on features and services that you are looking for. For example, Solo 401k providers range from broker dealers to banks, and self-directed Solo 401k administrators that assist you in administering the plan, but you ultimately serve as the primary administrator and Trustee.
2. Before you open Solo 401k, determine what investments you are looking to make. For example, if you plan to invest in alternative investments such as real estate (rentals, fixer-uppers, land, foreign real estate, etc.), promissory notes (e.g., trust deeds, unsecured notes, etc.), tax liens, private companies (e.g., Limited Partnership, private placements, etc.) and precious metals (e.g., gold and silver bars or coins), you will most likely want to open a self-directed Solo 401k with a provider whose Solo 401k documents allow for alternative investments as well as permit you to serve as the Trustee of your own Solo 401k plan.  On the other hand, if you are looking to only invest in traditional investments known as equities (e.g., stocks and mutual funds), you may want to open Solo 401k with a brokerage firm such as Fidelity or Charles Schwab.  However, some self-directed Solo 401k providers also offer Solo 401k for investing in alternative investments which can be opened at Fidelity, Charles Schwab or TD Ameritrade, thus making it easy for you to continue investing in equities.  


3. Consult with your financial professional regarding how much you should contribute to Solo 401k to reach your retirement goals.


4. Understand the annual Solo 401k contribution rules as they generally increase each year, but may be reduced in the coming years stemming from the government need for more tax revenue.   


5. Maximize your annual Solo 401k contributions. For example, for 2012 tax year you can contribute as much as $50,000 and an additional $5,500 if you are age 50 or older, and the full amount is fully tax deductible. And the best thing about Solo 401k contributions is that you can contribute as much or little as you want, provided you have the self-employment income to support the contribution and don’t exceed the annual limit.     
6. Since Solo 401k plan allows for incoming rollovers or transfers consider consolidating all of your retirement plans including IRAs by rolling them over to Solo 401k. Not only will this greatly reduce annual fees, transaction fees and investment fees, you will also gain access to more funds that can be borrowed through a Solo 401k Loan.  

7. Make Solo 401k contributions no later than your tax return due date plus extensions.

8. Open Solo 401k by 12/31 in order to make annual contribution by your tax return plus extension duet date. 


Facts and Additional Information
  • Any self-employed business type qualifies for Solo 401k. For example, independent contractors incorporated or unincorporated businesses, partnerships, sole proprietorship and Limited Liability Company. The key is that you do not have any full-time employees; however, you can still open Solo 401k if you have part-time employees, defined as those working 1,000 hours or less.
  • The only type of retirement account that cannot be rolled over to Solo 401k is Roth IRA. For full list of retirement account types that can be rolled/transferred to Solo 401k visit Consolidating Retirement Plans .
  • The Solo 401k Participant loan is available to each Solo 401k participant, and the maximum loan limit per participant is 50% of their individual account balance not to exceed $50,000; therefore, when added-up, both business owners can borrow a combined maximum amount of $100,000 from the Solo 401k plan.

Friday, July 6, 2012

Solo 401k Checkbook


Solo 401k Checkbook | Solo 401k Checkbook at Bank | Solo 401k Checkbook at Broker | Solo 401k Checkbook at Credit Union


 Obtaining Solo 401k Checkbook is fairly straightforward provided your Solo 401k Provider understands the Solo 401k checkbook control process.  Therefore, make sure to Open Solo 401k with a Solo 401k provider that provides you with Solo 401k checkbook guide to take to your local bank, credit union or brokerage firm to ensure your Self-Directed Solo 401k is properly established.

Solo 401k Checkbook can be opened at following financial institutions:

Solo 401k Checkbook at Bank

Even though not all banks have trained their staff on Solo 401k Checkbook Control process, we have found Wells Fargo bank to be the most educated bank regarding the process. Chase bank and Citi Bank are starting to understand the process but it’s still a hit or miss. However, once they read the Solo 401k Checkbook Control blog, they seem to understand it. Where the confusion occurs is at the account type level. These banks either think you are trying to open a family trust, living trust or a Solo 401k or Individual 401k with them, which is not the case. You are simply looking to open a basic checking account for your Solo 401k. In other words, you are not looking to use the banks administrative or fiduciary services as these services will be provided by you as the trustee of the Solo 401k.     

Solo 401k Checkbook at Credit Union

Similar to banks, not all credit unions have trained their staff on Solo 401k checkbook control process. However, we have found credit unions to generally understand the process once they read the our Solo 401kcheckbook control blog.

Solo 401k Checkbook at Broker

We have found that Fidelity, Charles Schwab and TD Ameritrade have a great grasp on Solo 401k checkbook control process. Of course, their applicable forms, not their Solo 401k or Individual401k forms, have to be completed and the Solo 401k provider’s Solo 401k document is required. It is possible to open brokerage account for your new Self-Directed Solo 401k with checkbook control with broker dealer because the administrative and fiduciary services will he provided by you as the trustee of the Solo 401k. In other words, the broker dealer is simply providing a brokerage account for your Solo 401k with an added checkbook feature.   

Lastly, your existing Solo 401k or Individual 401k with any of these brokers can be converted to Solo 401k checkbook control. To learn how, visit Change Solo 401k provider.

Wednesday, July 4, 2012

Is Solo 401k subject to IRS audit?



Just like any other type of retirement plan, Solo 401k is subject to IRS audit. The IRS examiner's primary objective is to determine whether the form and operations of the Solo 401k plan are in accordance with:
  • The Solo 401k qualification rules set forth in the code, and
  • the terms of the Solo 401k document.
In addition, IRS examiners will consider whether the plan has engaged in any prohibited transactions and whether the plan's books and records are concerned with protecting the government's interests as well as the interests of the plan's participants.

Further, whether the business is actually active and if both participants are contributing to Solo 401k that they are actually working for the employer.

Whether the employer's deductions for Solo 401k plan contributions are within the limits set by the code Section 404;

Whether the Solo 401k plan assets are held in trust and are properly titled; hence why it’s important to open Solo 401k checking account(s) in the name of the Solo 401k, not your personal name;

Whether the Solo 401k plan assets, income and loss are being properly accounted for; and whether the plan engaged in any prohibited transactions under code Section 4975 (c);

Whether the Solo 401k is continuing to use the Solo 401k providers prototype plan document.

Sunday, July 1, 2012

Partner with Solo 401k for house purchase



I’m thinking about proceeding to Open Solo 401k, but would first like to know If I buy real estate partially with funds from a Solo 401K and the other part with my own money, is that permissible?   I realize the home would be deeded to both the 401K trust as well as me, individually.

Purchasing real estate alongside your Solo 401k is permissible provided it is structured under tenancy-in-common and no debt financing is incorporated by you personally nor the Solo 401k, even if it's a non-recourse loan. Reason being, bringing debt to the table would result in a prohibited transaction because it would be deemed “Lending of money, or extension of credit between a plan and a party in interest”, since you would be party to the transaction. Note however that non-recourse financing would be allowed if only the Solo 401k was the party to the transaction.

To learn about prohibited transactions visit:

To learn about tenancy-in-common transactions visit:

To learn about how to invest in real estate with Solo 401k visit:

Establish Solo 401k in Houston TX


Establish Solo 401k in Houston TX | Invest Solo 401k in Houston TX Real Estate | Loan Solo 401k to Cousin in Houston TX


My cousin lives in Houston TX and is looking into buying real estate in the Houston Texas area before the real estate market heats up.  As such, I see this as an opportunity to grow my Self-Directed Solo 401k while at the same time helping my cousin out. In other words, I would like to invest my Solo 401k through a loan to my cousin so that he can purchase investment real estate in the Houston TX as well as foreign real estate (e.g., Mexico, Costa Rica and Brazil specifically). However, before I proceed with investing my Solo 401k with my cousin in Houston Texas, do you know if such an investment would be deemed a prohibited transaction since I would be loaning my Solo 401k to my Cousin?

The quick answers is yes it is permissible to loan your Solo 401k to your cousin so that he can purchase investment real estate, whether in Houston TX or foreign real estate, provided the Solo 401k benefits from the loan investment.

The long answer is that you still need to proceed with caution. Specifically, even though your cousin does not fall under the disqualified party category (i.e., list of parties that Solo 401k cannot transact business with), your intention for making such investment with your Solo 401k must be for the growth of the Solo 401k not to help your cousin invest in Houston TX real estate. In other words, you will need to make sure you charge your cousin a loan interest rate that substantially benefits the Solo 401k. If you loan your solo 401k to your cousin and charge 1% when the market rate for this type of loan is 10%, the IRS wills most likely rule that the transaction was prohibited since it did not benefit the Solo 401k.  

Lastly, not all Solo 401k providers allow their Solo 401k holders to invest their Solo 401k in alternative investments such as loans, real estate, precious metals; therefore, make sure that you open Solo 401k with a provider whose Solo 401k document allows for investing in alternative investments.     

To learn more about how to invest Solo 401k in a loan, visit investing in notes procedure.

To learn about who falls under the disqualified party category with respect to prohibited solo 401k transactions visit: