Check Book Solo 401(k): A Primer
There are many types of IRA’s, but lesser known is their sister platform: the Self-Directed Check Book Solo 401(k). This retirement plan is reserved for self-employed individuals who do not have “non-owner” employees. It gives corporate-like retirement benefits without the hassles and expense of corporate-like paperwork.
Traditionally, the only retirement plan available to self-employed workers was the SEP IRA which contains all the rules of a traditional IRA, but offers an increased contribution limit.
The Solo 401(k) Plan not only increases the SEP contribution limit but also adds a host of additional benefits, including being your own custodian. This gives enormous advantage to those wanting to self direct the investment of their retirement funds.
As most self-employed workers are more amenable to charting their own route, the Solo 401(k) can quickly seem like a made-to-order investment platform.
While the SEP IRA still has the name recognition as the self-employed retirement account choice for the self employed, the need to defer more income and the desire to have control is rapidly making Self Directed Check Book Solo 401(k) the new choice for self-employed or small business entrepreneurs.
Why the Solo 401(k) is Better than the Check Book IRA LLC
- Instant Check Book Control via a checking account and/or brokerage account
- The ability, as Trustee of the 401(k), to direct and approve unlimited investments
- Be able to add your spouse’s retirement funds to your plan for more firepower
- Defer up to $58,000-$64,500 of Self Employment Income, depending on your age
- Personally borrow up to $50,000 from the Solo 401(k)
- Lower fees and maintenance costs
Take Advantage of This Gift from Congress
The new Self Directed Check Book Solo 401(k) was made possible because of changes Congress made to the Tax Code in 2001 and 2006.
Since there cannot be any employees that are not owners, Congress felt they could remove many of the cumbersome and costly reporting rules and regulations. Thus, the Solo 401(k) was born!
Contribution limits were raised, a Roth component was added, compliance and reporting was simplified, and administrative requirements were relaxed.
Also, by allowing the business owner to be their own Trustee, these changes made it all the more accessible, affordable and manageable for the small business owners and the self-employed in general.
If you are self-employed and have no full-time W-2 employees (other than you spouse or other owners of your business), you qualify to self-sponsor a 401(k) plan, and serve as the Trustee, Plan Administrator and direct all its investments.
Even if you’re just doing something or thinking of doing something on the side that produces self employment income, you could qualify. Here are some examples of how simple it is to generate enough Self Employment Income to qualify.
What Can You Do With a Solo 401(k)?
What exactly can be done with this structure?
First, let’s talk about what the tax code says:
The Tax Code Prohibits
The tax code is exclusive when it comes to 401(k)s. In other words it identifies what they cannot invest in; anything else is allowed. There are only two types of investments that are disallowed to them. Let’s take a look at what they are.
The Employee Retirement Income Security Act (ERISA) places restrictions on a 401(k)’s ability to invest in life insurance.
26 USC 408(m) prohibits a 401(k)s from investing in collectibles.
That’s it; end of story. Those are the only two classes of investments that are off-limits to a Solo 401(k). Anything else you can think of that does not involve life insurance or collectibles is allowed.
The Tax Code Allows
Articles & Videos
Here are some articles & videos from our website about different investments you can do with a Solo 401(k).
If you don't like the idea of having your retirement metals stored halfway across the country in a depository, then this video is for you. As Trustee you can hold coins and bullion bars at home.
Does Your Spouse Have a Retirement Plan?
The Solo 401(k) is the only way you and your spouse can combine your accounts for more investment power.
Below are examples of people investing in all kinds of real estate, the private equity world, precious metals, and more exotic investments such as patents and other intellectual property and offshore. Most were done with the Check Book IRA structure, but since the same investment rules apply to the Solo 401(k), all of these studies are possible with using the Solo 401(k) structure. Remember you get even more freedom with a Solo 401(k). Click “Read More” for each full story or you can go to this page to read them all: Client Case Studies
Setting Up a Solo 401(k): What to Expect
The easiest way to think of the setup process is to realize that two things are going on at once. Think of two train rails running side by side. Each rail is going its own speed. Same thing here, except that at the end of the process, those two rails join together.
So, what happens after you submit your application to us? Let’s look at those two rails and make sense of this. Keep in mind, what you see is a simplification, but hopefully it will help you see the forest through the trees:
Submit your Solo 401(k) application to us.
Once we have your information, including the info on your company, which will serve as the plan sponsor, we can get to work creating the Solo 401(k) plan documents. We create prototype customized plans, so it generally will take us several days to get all the plan paperwork in order.
Once we’re finished with the plan paperwork, we will upload the plan documents to DocuSign for fast and easy signature. We like to schedule a call to walk you through the documents, and the next steps of opening a bank or brokerage account, and starting your rollover(s).
Once the plan documents have been executed, you can open a bank account for the plan. Any bank can open the account, so long as they offer checking accounts to Trusts. If you’d like a recommendation of a bank to work with, we have several we can introduce you to. Brokerage accounts can also be set up at Fidelity, Charles Schwab, TD Ameritrade, Scottrade, Interactive Brokers, & E*Trade.
Most people don’t know it, but you can roll over or transfer IRAs to a 401(k). You can also roll over other 401(k), 403(b), TSP, and 401(a) plans to the new Solo 401(k) as well. Keep in mind, the only account you cannot roll into the Solo 401(k) is a ROTH IRA.
Once the new Solo 401(k) is in place, we will provide you rollover and transfer forms so that you can instruct your current IRA Custodian or other plan administrator to roll over or transfer your accounts to the new Solo 401(k).
Once the rollover or transfer forms are submitted, it will generally take anywhere from 1-3 weeks for your current Custodian/Administrator to process the request and issue a check or bank wire.
Once the rollover/transfer requests have been processed, the Custodian/Administrator will send a check or bank wire, which will be deposited directly into the new Solo 401(k)’s bank account. At this point, your setup is complete, and you are ready to invest!
The Last Step, The Final Piece
This not really a final piece, so much as it is a suggestion. We generally suggest that you call us once you setup is complete, so that we can answer any questions you may have before investing. It’s good to revisit the rules, and ensure that you’re starting off on the right foot.
What is Required Each Year for the Solo 401(k)?
There aren’t a lot of annual requirements for the Solo 401(k) to keep it in good standing. You’ll see below that you may not need to file anything at all to keep the plan in compliance.
Plan Document License & Compliance Fee - $200/Year
We set up all client Solo 401(k)s under our IRS Determination Letter. Because we are the Plan Document Provider, it is our responsibility to ensure your plan documents stay updated and compliant from year to year. The Tax Code is an ever-changing thing, but we keep up on those changes, we draw up any amendments as they are needed, and send them to you for review and signature. We explain what has changed and how it affects you; all you have to do is download the amendment and keep it in your records.
Solo 401(k)s need to file a Form 5500EZ only if the plan’s total assets exceed $250,000. The 5500EZ form is an information return, not a tax return. Many clients complete the form themselves, while others have their CPA do it. Either way, it’s a simple 2-page form that takes just a few minutes to fill out.
If the 401(k) has incurred taxable income (see below for more info on this), the plan will file a 990T tax return to report the income and figure the tax due. It is advisable to have your CPA handle this filing.
What’s Not Allowed? What’s Off-Limits?
This section is about the types of transactions that cannot be done with a Solo 401(k). The rules are pretty simple, but they’re important.
The limits to a Solo 401(k) can be divided into three groups:
1. Disqualified Investments
2. Disqualified Persons
3. Disqualified Entities or Companies
We’ll look at each of these, and give an explanation for each. As usual, links to articles on our site are provided so that you can dig as deep as you want.
26 USC 4975 identifies certain persons that are considered to be disqualified to the Solo 401(k), which means that none of these persons can deal with or have anything to do with the Solo 401(k).
It’s a pretty short list, so let’s go through who the disqualified persons are:
1. Plan Owner
2. Plan Owner’s Spouse
3. Plan Owner’s Lineal Descendants
4. Spouses of the Lineal Descendants
So, let’s assume we’re talking about your Solo 401(k). The disqualified persons would be you, your wife or husband, and your lineal descendants and their spouses; so your parent, grandparents, children and their spouses, grandchildren and their spouses, etc.
All of those people are off limits to the Plan. That means that no transactions of any kind can occur between those parties and your Solo 401(k).
For more information, please read this article: Prohibited Transaction Rules, Part II: Who is a Prohibited Person?
Spouses in a Solo 401(k)
One of the additional advantages of the Solo 401(k) is that a husband and wife can combine their retirement plans into one plan, and thus combine their funds to do investing.
For example, if a husband and wife both own a company (or if one of the spouses works for the other), and there are no other employees, they can both contribute to the Solo 401(k), plus they can both roll their other eligible retirement accounts (including IRAs) into the Check Book Solo 401(k). All of those funds are now under one plan, can be co-invested, and can be managed by one or both of them as Trustee(s).
Investments in the plan can be separate, or the husband and wife can combine their funds when they invest for increased purchasing power. As the Trustee of the plan, you get to decide whether you want to combine all the funds into one bank account, or open separate bank accounts for each plan participant.
You and your spouse can contribute and defer taxes on up to $108,000 if you’re under 50 years old. If you’re over 50 years old, you’ll be able to contribute up to $120,000. As you can see, the increased contribution limits give quite an advantage to a self-directed Check Book Solo 401(k).
Disqualified Entities or Companies
Entities or companies that are owned or controlled by one or more disqualified persons can also be prohibited from dealing with the 401(k). The general rule is that if any one or more disqualified persons owns 50% or more (individually or collectively) of an entity, then that entity is disqualified and cannot deal with the Solo 401(k). If you’re thinking of using your retirement funds to invest with a company you or other family members partially own or control, you should definitely talk with a competent CPA or tax attorney, as this area gets a little sticky.
For more information, please read this article: Prohibited Transaction Rules, Part III: Disqualified Entities.
Putting it All Together
All right, so now that we’re through the technical stuff, let’s talk about what this means in practice.
We have another article called Prohibited Transaction Rules, Part IV: IRA LLC Examples that puts all this together and gives a number of examples. Again, its written with the IRA LLC or Check Book IRA in mind, but these are the exact same rules that your Solo 401(k) would be subject to. That article should help you see how things fit together in the real world. This is an important subject to grasp, because while the limitations put on a 401(k) are few and far between, they are integral to ensuring your account remains in compliance.
UBIT, UDFI & The Solo 401(k)
First of all, let’s clear up what UBIT stands for. UBIT stands for Unrelated Business Income Tax.
UBIT is a tax that was instituted in order to level the playing field when a tax-exempt organization engages in a business activity. Imagine a University purchasing a Subway franchise. Because the University is tax-exempt, it wouldn’t be very fair to the fellow who owns the Subway across town, to pay taxes on everything he makes, while the University pays no tax.
Congress passed legislation in 1950 out of concern that tax-exempt organizations would have an unfair advantage over for-profit companies that had to pay tax.
When It Applies
UBIT applies when a Plan engages in a trade or business. Were you to purchase a coffee shop with your Solo 401(k), it would trigger UBIT. Were the Plan to buy a farm or ranch, the operation of the farm or ranch would trigger UBIT.
How It's Calculated
Because a Solo 401(k) is a tax-exempt revocable Trust, if the 401(k) receives unrelated business income, that income is taxed at the Trust rate. Should the 401(k) receive taxable income, it would file a 990T tax return to report and calculate the tax due. Any tax due is paid by the 401(k).
UDFI & Financing Property
UDFI stands for Unrelated Debt-Financing Income, and it is part of UBIT. This tax applies if you secure a loan to purchase property in an IRA or a Check Book IRA. However, there is no UDFI tax on a Solo 401(k). A lot of people don’t know you can finance property in an plan, but it has always been allowed.
The fact the Solo 401(k) is not taxed on leveraging real estate provides a huge advantage for this type of setup.
We're Here to Help
We are always happy to talk with you about UBIT & UDFI. If you have an investment in mind and wonder if it might be subject to UBIT, call us. We’re available to you, even after we set you up. If your CPA is unfamiliar with these issues, we’ll be happy to refer you to the one we use.
Why You Should Choose Us
Our hope is that through the above sections, you’ve seen how much we offer as a company. We have the most informative IRA LLC and Solo 401(k) website on the internet, and we go to great lengths to ensure our potential clients are informed enough to make a decision regarding which set up is right for you, the Solo 401(k) or the Check Book IRA.
We don’t have salesmen, and we don’t try to talk anyone into anything. All we can do is put this information in front of you and help you understand the structure, so that you can make your own decision as to whether or not it is for you.
So, if you are still considering the Solo 401(k), here are a few reasons you should use us:
We were one of the first companies to offer the IRA LLC structure, and we even came up with the name Check Book IRA and own the Federal trademark, which is why that’s the name of our company. And we have the website www.checkbookira.com because we were here first! We’ve leveraged our expertise and experience to the Solo 401(k) structure as well to give our clients the widest range of retirement planning choices available.
When we tell you something, you can rest easy knowing we’re not going off half-cocked, or telling you something that could get you in trouble.
We’re very conservative in what we tell clients, and if there’s even the hint of an issue that could result because of something the they want to do, we’re the first to bring it up. We’re then more than happy to help them figure out how to stay on the right side of the line.
Setting up a Solo 401(k) consists of a lot of moving parts, but you don’t have to worry because we’ll do the heavy lifting for you. We handle all of the plan paperwork, ensure the plan is compliant, and we help as much as we can on the banking side as well.
Have questions? Call us. We’ll take care of the details, so you can rest easy knowing everything is done correctly.
We’ve got your back. After you’re set up, we’ll always be here for you. Need help structuring an investment? Have tax related questions? Want to know if something is permissible or not? Call or email us. We’ll help you figure out and make sure you’re on the right side of the rules. We’ll make our CPA and attorney available to you as well, should you need them for a particularly complicated tax or legal question.
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Satisfied Clients in 50 States & 34 Countries
Our clients are all over the world, doing all sorts of interesting things. We’ve served them proudly since 2004 and have enjoyed getting to know them, helping them get the most out of the structure, and seeing them succeed in protecting and growing their retirement.