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Dmitriy Fomichenko

About Dmitriy Fomichenko

Dmitriy is the founder and president of Sense Financial Services LLC, boutique financial firm specializing in self-directed retirement accounts with checkbook control. He began his career in financial planning and real estate investing in 2000. He owns multiple investment properties in various states and is a licensed California Real Estate Broker. Over the years, he has instructed hundreds of investment and financial planning seminars and has mentored thousands of investors.

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Important deadlines

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As year-end is approaching, please note the following important upcoming deadlines:

Contributions Deadline:

Plan owners must formally elect to make contributions before December 31st. Depending on your business type, you may also be required to make employee elective deferral contributions before December 31st. We’ve put together a summary for you that answers common questions about contributions. In order to review this information, click on the link below:

Contribution Basics

Form 1099-R:

If there is a distribution or a Roth conversion within your Solo 401k plan in 2023, Form 1099-R will need to be issued from your Solo 401k by January 31, 2023. Distributions and Roth conversions are taxable events and need to be reported to the IRS. 

You are responsible for the 1099-R filings on behalf of your plan:

Form 1099-R Instructions

Deadline to receive Required Minimum Distribution (RMD):

Plan participants who turned 72 years old in 2023 are required to take their first required minimum distribution (RMD) before April 1, 2023.

To determine the amount of distribution you must take, please click on the RMD calculator below:

RMD Calculator

As the plan administrator it is your responsibility to withhold the taxes and report the distribution, learn more here:

Withholding 20% Tax on Distribution

Sponsor Reporting:

As the document sponsor of your Qualified Plan, we are preparing to submit our annual report to the IRS. The report will list all 401k plan sponsors using our documents.

If there has been any changes in your situation (e.g. change in the business type, address, addition of employees, etc.) please let us know by Monday, December 20th. Our goal is to provide you with the help and guidance needed to keep your plan in compliance. If you have any question, please don't hesitate to let us know.

Calculating plan assets

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I'm getting ready to file Form 5500-EZ and need help calculating the plan assets of my 401k. I used some of the funds for a down payment to purchase an investment property. The rest of the purchase price was financed using a hard money loan. My wife doesn't have any investments at this time, just some cash. How do I calculate the net plan assets?

Answer:

First, you must calculate the total plan assets. To do so, simply add up all assets plus cash for all participants. Please note that if the total plan assets exceed $250,000, you are required to file Form 5500-EZ.*

For properties owned by the 401k, the value of each property will need to be based on other properties in the area-  real estate comps, CMA, broker's price opinion or a third-party appraisal can be obtained.

Example:

Your plan owns a property valued at $220,000. There is $15,675 of cash in your checking account for the 401k. Your spouse  has $18,000 cash in her 401k account. There is a mortgage note against the property for the amount of $120,000.

Total plan assets will be calculated as:

+ $220,000.00 Value of the property
+ $15,675.78 Cash in your account
+ $18,000.13 Cash in spouse's account

Total plan assets: $253,675.91  (Note: since the total exceeds $250,000, you are required to file the 5500-EZ)*

- $119,841.09 Mortgage against the property (Total plan liabilities)
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Net plan assets:  $133,834.82

* Please see our detailed instructions on how to complete Form 5500-EZ below. On the form, you are required to enter a single number for total plan assets, then total plan liabilities, then net plan assets.

Annual Filing Requirement

 

How do I value real estate in my Solo 401k plan?

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My Solo 401k plan owns real estate property. How do I value that?

Answer:

The value of each property will need to be based on other properties in the area (real estate comps), or a third-party appraisal can be obtained.

Please note: if you are taking an in-kind distribution or in-kind conversion of the property (i.e. there is a taxable event), then you must use a licensed third party appraisal to determine the accurate value of the property.  The appraisal must be dated as close as possible to the taxable event.

Hands off my IRA

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Many Americans keep their wealth, or a large portion of it, in their retirement account. It’s a great way to build your retirement “nest egg” in a tax-deferred vehicle, and if you make wise investment choice, allow your investment returns compound, keeping the money moving, you can reach retirement with millions. It’s been my honor to help our clients unlock their retirement accounts and give them the ability to invest in alternative assets.

There is a proposed law that could have a massive, adverse impact on self-directed IRAs and 401ks. This legislation would seek to prohibit investments made from IRAs and other retirement vehicles into private placements, drastically reducing investors’ ability to diversify into other asset classes outside of the stock market. As the bill is currently worded, it would force investors to liquidate these types of private holdings inside retirement accounts within the next 2 years, triggering a taxable event, or face their full retirement account being stripped of its tax- deferred status. 

Even if it does not directly affect you, please GET INVOLVED! Tax attorney, John Hyre, has dug into the bill and shared his thoughts here. He provides a very good breakdown of the bill and ways to take action.

https://www.handsoffmyira.com/

Penalties for late filing of Form 5500-EZ

Under the SECURE Act, penalties have increased substantially. Effective for returns that are required to be filed after December 31, 2019, the SECURE Act increased the penalty to $250 per day, not to exceed $150,000 for a late-filed form.

But the penalties don’t stop there. In addition to the IRS penalty, the DOL can assess a civil penalty against a plan sponsor in an amount not to exceed $1,100 per day as a result of failure to timely file Form 5500.

Plan administrators may also face other penalties on incomplete filings unless they submit a statement of reasonable cause for failing to file a complete annual report and the DOL approves it.

This makes proof of mailing extremely important, even if it is mailed well before the deadline.  Be sure to send using certified mail (such as Priority Mail), make sure it’s scanned in at the post office and save a copy of the label/receipt and the tracking history in your files.  Tracking history is usually online for a limited time (several weeks), so it’s best to print it out upon delivery.

As always, if you need any assistance please don’t hesitate to contact our office.

SECURE Act: New part-time eligibility rules for 401(k) plans

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In 2020 and prior years, Solo 401k plans could exclude part time W-2 employees who worked less than 1,000 hours from participating in a 401k plan. This all changes for both full-time employer 401k plans and owner-only Solo 401k plans starting on January 1, 2021.

The SECURE Act
Stemming from the Setting Every Community Up for Retirement Enhancement Act (SECURE Act), Solo 401k plans will be impacted by the three years, part-time (500 but less than 999 hours) employee rule that will allow part-time employees to choose to make employee elective contributions to the company-sponsored 401k plan.

2020 and Prior
Before the passage of the SECURE Act, non-owner W-2 employees (common law employees) who worked less than 1,000 hours during the plan year could be excluded from having the option to participate in a 401k plan and thus did not impact the owner-only businesses from setting up a Solo 401k plan. Only those years after 2021 are counted.

2021 and Future Years
The three year provision is effective for the 2021 plan year, but years before 2021 do not count for purposes of counting the three-year eligibility.

Long-Term, Part-Time Employee
A W-2 employee will be deemed a long-term, part-time employee once he or she completes 500 hours of service/work in three consecutive 12-month periods.

Does the SECURE Act nullify the 1,000 hours of service per year rule?
No. 401k plans must now have dual eligibility requirements. An employee can become eligible for the plan by fulfilling either: (a) the one year of service requirement (1,000 hours of service in one year), or (b) the three years of service requirement (at least 500 hours of service for three consecutive years).

Excess Solo 401k contributions

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The Solo 401k participant typically makes annual Solo 401k plan contribution when completing business tax return for the year. As a result, the Solo 401k participant can usually determine her IRC Sec. 404 deduction limits before making her Solo 401k contribution, thus preventing any excess Solo 401k contribution headaches.

10 Percent Penalty and Form 5330: When the Solo 401k participant contributes more than the allowable deduction for a given tax year, he is typically required to pay a 10 percent penalty on the over contribution amount also known as the excess nondeductible contribution amount pursuant to (IRC Sec. 4972). As such, this penalty amount must be reported to the IRS by the plan participant since he is the owner of the business by filing IRS Form 5330, Return of Excise Taxes Related to Employee Benefit Plans, and remit the penalty to the IRS. Please refer to IRC Sec. 404(a)(1)(E) as it details that the amount of the otherwise deductible contribution that exceeds the limitation for any given year shall be carried forward indefinitely and applied to subsequent years.

IMPORTANT: Even though excess nondeductible Solo 401k contributions may be returned to the Solo 401k employer under limited circumstances, the Solo 401k employer runs the risk of incurring substantially greater penalties by taking a reversion of plan contributions. The reversion penalty is typically as high as 50 percent depending on the circumstances pursuant to (IRC Sec. 4980).

First Determine Contribution Type

When removing excess contributions from a solo 401k plan, you first need to determine the type of contribution being removed. There are 2 (two) types of contributions that apply to a solo 401k plan.

  • Type 1 (one): Employee Elective Deferrals Contributions that exceed the annual limit
  • Type 2 (two): Employer Profit Sharing Contributions

The Rules Are Different for Each Contribution Type

The rules for removing the employee contributions vs the employer profit sharing contributions are different and are discussed below.

Here is what the IRS code says regarding removing Employee Contributions

If the excess salary deferral is not returned on or before April 15 of the following year, the contributing participant must pay income tax on the deferral both in the year of deferral and in the year of distribution. The deferrals are not included as after-tax assets even though they have previously been included in income in the year of deferral (IRC Sec. 402(g)(1) and (Treas. Reg. 1.402(g)-1(e)(8)). The earnings on the excess will be taxed in the year of distribution. Any corrective distribution of less than the entire amount of the excess deferral plus income is treated as a pro rata distribution of excess deferrals and income (IRC Sec. 402(g)(2)(D), Treas. Reg.1.402(g)-1(e)(10)).

For the employer contributions (profit sharing), here is what the rules state:

  • They will need to remain in the solo 40k plan and treated as contributions in future years. However, a 10% penalty will need to be paid on the over contribution amount also known as the excess nondeductible contribution amount pursuant to  (IRC Sec. 4972).
  • This penalty amount of 10%  will need to be reported by the solo 401k owner by filing IRS Form 5330, Return of Excess Taxes Related to Employee Benefit Plans, and remit the penalty to the IRS.
  • Please refer to IRC Sec. 404(a)(1)(E) as it details that the amount of the otherwise deductible contribution that exceeds the limitation for any given year shall be carried forward indefinitely and applied to subsequent years.

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