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Solo 401ks and Self Directed Retirement FAQs

Following are some of the most commonly asked questions about self directed retirement accounts. Feel free to contact us with additional questions.

I’ve heard that the government is about to prohibit checkbook control; what about this?

There is no official source attached to this claim. If you think that government prohibition of checkbook control is actually likely, first consider that 401k plans (in fact all qualified plans) have never had a custodial requirement to begin with. To date, that’s over a quarter century (27 years) of checkbook control with no sign of change.

If you think logically about this, it makes perfect sense. The government allows you to prepare your own tax return. You can misconstrue facts and figures on this official financial document if you wish, to your own detriment. Outlawing an IRA with checkbook control (aka checkbook IRA) of retirement accounts is akin to outlawing self-prepared tax returns.

Are there any other reasons to want to transact at the custodial level?

The only other possible benefit of transacting at the custodial level is bookkeeping.

If you can’t balance a checkbook or at the very least organize bank statements, contracts, settlement statements and other applicable documents in a file folder, then you will probably experience problems keeping handling the bookkeeping requirements of your LLC account.

Cautionary Note: If you don’t understand basic recordkeeping and bookkeeping you shouldn’t be a self-directed investor. The potential for error is just too great.

What about extra tax returns?

Checkbook control creates no unique additional filing requirements. It makes use of a single-member LLC, which the IRS disregards for tax purposes. In other words, there is no tax return required. If your IRA or LLC were to invest into a multiple-member LLC partnership, a 1065 partnership return needs to be filed, but this is the case with or without checkbook control.

What is a Solo 401k plan?

A Solo 401k plan is a retirement plan for entrepreneurs, small business owners and independent contractors who have no full-time employees.

Who qualifies for the Solo 401k plan?

Anyone who owns and operates a legitimate business which does not have full-time employees. The business can be in any form, eg, S-Corp, LLC or sole proprietorship. See advice from a qualified business consultant or financial professional for which setup is right for your business.

What if I have an existing retirement account; can I transfer funds from it into a Solo 401k plan?

Yes, you can. Any funds that are eligible to be transferred into an IRA can also be transferred into a Solo 401k plan. The flexibility of the Pension Protection Act of 2006 ensures this possibility.

What if I currently work at another company, but have a legitimate business on the side; can I still open a Solo 401k account?

Yes, you can. Even if you are currently employed full-time at another company, if you own and operate a legitimate business that does not have full-time employees, you qualify for a Solo 401k plan.

What if I own two companies; one with no full-time employees, and one with full-time employees? Can I still open a Solo 401k account?

No, you can’t.

Can I borrow money from my Solo 401k plan?

Yes, you can. You are eligible to borrow up to half of the account’s value, or $50,000, whichever is less. Stipulations apply, so consult with a qualified financial professional.

Are there earnings requirements a business must meet to be eligible for a Solo 401k plan?

No, there aren’t. The only requirement is that the business be legitimate. Furthermore, you must truly intend to make meaningful contributions to your Solo 401k plan.

Is there a limit to how much I can rollover into to my Solo 401k plan from a pre-existing retirement account?

No, there isn’t. And, this is one of the reasons the plan is so appealing to entrepreneurs. The plan is very flexible. You can even suspend contributions if you wish. Consult with your financial advisor for the particulars.

Are there limitations on how much I can contribute to my Solo 401k plan?

Yes, there is. Currently, the maximum is $45,000 annually. For those aged 50 or more, what’s known as additional “catch up” contributions can be made. This is in the amount of $5,000.

One of the best features of the Solo 401k plan is that your spouse can contribute up to $45,000 per year also. This is in addition to your contribution. When compared to the maximum annual contribution of only $5,000 in a traditional IRA ($6,000 for those aged 50 or more), the benefits are obvious.

Do I have to pay administrative fees for my Solo 401k account?

When compared to traditional IRAs, the fees are minimal, as you handle most of the transactions yourself. The fees you do have to pay are nominal, eg, document maintenance fees. These are in the $200-$600 range.

Remember, feel free to contact us if you have further questions.