How Do I Start My Own 401k – A self-directed solo 401k is a type of self-employed retirement plan that allows investments in alternative investments such as real estate, stocks, metals, tax liens, and traditional investments such as stocks and exchange mutual funds. For a list of popular solo 401k investments, visit here.
While the above types of investments, including real estate, can be placed directly through a solo 401k plan rather than a solo 401k LLC, this blog post explains the process of placing investments through a solo 401k LLC (i.e., a single-member solo LLC). It covers. 401k LLC).
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How Do I Start My Own 401k
NOTE: My Solo 401k Financial also specializes in establishing single-member LLCs where the solo 401k is the sole member.
The Ultimate Roth 401(k) Guide
The first step is to open a self-directed solo 401k with a solo 401k provider that allows the solo 401k plan to invest in alternative investments, such as a single-member LLC.
Once the solo 401k is established, the next step is to open the solo 401k bank account and fund it by making annual contributions or by rolling over IRAs (except Roth IRAs since Roth IRA rules do not allow transfers to a solo 401k). 401k (click here to learn more about this restriction) and/or former employers are considering a solo 401k plan.
Once the self-directed solo 401k is funded, it is time to register the LLC with the Secretary of State. The Secretary of State will charge a fee to register the LLC, and this fee varies by state.
Once the above steps are completed, the next step is to prepare the LLC operating agreement. This is a vital step because the LLC operating agreement will need to outline both the solo 401k rules and the IRS rules. For this reason, the use of a commercially available LLC operating agreement (e.g., legal approximation) is not recommended. For example, regulatory language surrounding 401k prohibited transaction rules, unauthorized investment rules, deceased account rules, QDRO rules, distribution rules, RMD rules, UBIT and UDFI rules should be included in the LLC’s operating agreement.
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Step Five: Obtain an Employer Identification Number (EIN) for the LLC (do not use the solo 401k foundation’s EIN)
Step Six: Open the LLC bank account (this is a separate bank account from the solo 401k bank account)
This is a separate bank account from the solo 401k because this bank account is owned by the LLC. You choose where to open the LLC bank account, and a solo 401k does not require the use of the bank or credit union where you open the bank account. The bank or credit union representative will request a copy of the LLC’s articles of incorporation and the LLC’s Employer Identification Number letter.
Once the LLC bank account is opened, the next step is to fund the solo 401k. LLC bank account financing can be done via check or money order, and funds must flow directly from the 4o1k solo bank account to the LLC bank account. If financing is by check, the check must be made out to the LLC, not your personal name.
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Once the LLC is funded using solo 401k funds, future investments will be made through the LLC bank account rather than the solo 401k bank account. Additionally, investments will be titled in the name of the LLC. For example, if the LLC invests in real estate, the purchase funds will flow from the LLC’s bank account to the seller, and expenses and earnings will also flow into the LLC’s bank account, not the solo 401k bank account. However, when you are ready to dissolve the LLC or no longer want to invest through the LLC-owned solo 401k, the funds will return to the solo 401k bank account. Additionally, loans to solo 401k participants and distributions such as required minimum distributions (RMDs) will need to be processed from the solo 401k bank account and not the LLC bank account.
The LLC will only have one member because there is only one solo 401k trust. There is no second trust when pooling funds in a solo 401k because there is a single fund with pre-tax and Roth money in different subaccounts.
When funds are returned from the LLC to a solo 401(k), they must be divided between pre-tax and Roth subaccounts based on the percentage of funds originally invested. For example, if 60% of the initial investment came from pre-tax funds and 40% from Roth funds, 60% of the returned funds will go to the pre-tax subaccount, while 40% will be deposited into the Roth subaccount.
Everything is going well with the new LLC and we are ready to receive rental income after purchasing three properties under the 401k owned LLC. Question; In addition to any trust funds, should income collected from the LLC account be put back into the solo trust 401k and into a separate account for pre-tax income?
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All investments and expense and income streams related to LLC investments will go through the LLC bank account.
The purpose of the LLC created for the solo 401k plan (the LLC owned by the solo 401k) is to invest in the LLC. Therefore, there is no need to return funds to solo 401k bank accounts (both pre-tax bank accounts and Roth-designated bank accounts) until you are ready to receive distributions from the solo 401k plan, assuming you encounter a distribution-triggering event.
When I opened the Business Checking Account for the LLC the bank offered me a credit card. Is it ok?
No, because the solo 401k is a member of the LLC, the LLC is not allowed to receive credit cards. It would be forbidden.
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I am working with the bank to finance the construction of a new investment property loan that is 100% owned by my LLC and solo 401K. They want me to personally vouch for the loan. I don’t think this is possible but I ask you, can I personally guarantee this since it is actually in the name of an LLC? That would be my preferred route: giving the personal guarantee.
Good question. No, since your Solo 401k plan is a member of the LLC, you cannot personally guarantee the loan to the LLC that owns the Solo 401k.
Additionally, loans made to an LLC of which the solo 401k plan is the sole member should be non-recourse, and the funds should be used to purchase the home, not to build a property on land already owned by the LLC. . .
I’m investing in real estate with a friend. Is there an advantage to having funds/control flow through a special purpose LLC over a special purpose LLC? directly from 401k plan?
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The advantage of this is that your two respective funds (your 401k alone and your other investor) are combined into a single LLC so the investment is made in the LLC’s name. Therefore, all expenses and income will flow from a single LLC bank account. You will also benefit from the extra layer of LLC protection from creditors that is available outside of the LLC by purchasing homeowners insurance.
The downside is that the LLC is considered a multi-member LLC and therefore is taxable as a partnership and requires annual Form 1065 filing:
You also need to file for each partner, i.e. solo 401k. So, although the solo 401k is not subject to tax on the partner’s share of income until the actual distribution from the solo 401k is made, this adds the additional partnership tax reporting requirement.
Are assets protected as much in an LLC as in a Solo 401k? Suppose someone tripped over the curb and tried to pick it up?
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Although the Solo 401k is a separate entity, one could reasonably argue that any legal liability should be limited to the Solo 401k, one of the key features of an LLC is the limitation of legal liability (i.e. having ”in the name”). and this feature is widely recognized and accepted.
People say it is, but it says a lot of things: Do you think there is an advantage to doing business through an LLC over the current method?
Based on customer feedback, most customers do not have a separate LLC. Those who do this often try to protect other assets in their solo 401k (for example, half the funds are invested in real estate and the other half in a brokerage account).
Can I fund my existing solo 401k, which includes both Roth and pre-tax funds, into the same LLC solo 401k?
Can You Contribute To An Ira & 401(k) In The Same Year?
Yes, you can put both pre-tax money and Roth solo 401k money into a single LLC. The LLC will only have one member because there is only one solo 401k with pre-tax and Rothmoney in different subaccounts. When funds are returned from the LLC to solo401(k), they must be divided between pre-tax and Roth subaccounts based on the percentage of funds originally invested.
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