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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.

Posts by Dmitriy Fomichenko:

What can a Solo 401k invest in?

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Your Solo 401k is designed to give the widest range of investment options as allowed by law.

In the plan documents

Your plan documents state that you can direct the investments of your 401k

  • As Participant in the 401k: Defined Contribution Adoption Agreement, L4
  • As Trustee of the 401k: Defined Contribution Trust Document, 4.2

The plan documents don't comprehensively list or limit what you can invest in. 

Self-directed with checkbook control

Since your 401k with Sense Financial is established as self-directed with checkbook control, you can invest in a wide range of investment options.

Your 401k is structured so that no custodian is needed, so you are not restricted to what a custodian offers as potential investments. Some examples of what your 401k can invest in:

  • Real estate
  • Mortgage notes
  • Traditional assets, such as stocks, bonds, mutual funds

Brokerage account for Solo 401k

Prohibited transactions

Investments are limited by the IRS prohibited transaction rules, e.g. investments cannot be self-dealing.

Understanding prohibited transactions

Is my Solo 401k plan covered under ERISA?

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No, the Solo 401k is not covered by ERISA.

  • Your Solo 401k is a qualified plan
  • Department of Labor (DOL) Regulations 2510.3-3(c) state that Title I of ERISA does not cover plans for partners or a sole proprietor, such as a Solo 401k

While the Solo 401k is not technically covered under Title I of ERISA, the ERISA rules are still considered as a reference because the Solo 401k is a qualified plan.

Fixing incorrect transaction on my 401k debit card

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I opened up a Solo 401k bank account with a debit card. I just realized that I mistakenly gave the debit card number to the wrong vendor, and he has charged me twice for a personal transaction. How do I fix this?

Using the 401k funds for personal transactions is a prohibited transaction, as you are a disqualified person with respect to the investments of the 401k.

Understanding prohibited transactions

You may be able to correct the prohibited transaction:

Correcting a prohibited transaction

Going forward, take precautions such as:

  • Clearly identify the 401k debit card and the personal debit card
  • Do not carry the 401k debit card along with your personal cards
  • Keep the cards separate

Contributions from my corporation

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Can you please explain how to make contributions to my 401k from my corporation. Can I get paid by the corporation as an independent contractor via 1099 and then claim the state taxes on my personal return or do I need to do the payroll deductions and submit them to the state?

Answer:

Since your 401k plan is sponsored by the corporation, all employee elective deferrals must be made through the payroll.

Profit sharing contributions are made by the company and are 100% deductible.

Since you own a corporation you must take reasonable salary, please consult your CPA or tax advisor for details. Be sure to inform your payroll service provider (payroll company or your CPA) that you intend to make contributions into the 401k. Contributions made by the employee must be reflected on the payroll and the funds must be deposited to 401k account within 7 days of payroll.

Below is an example of a paystub showing the deduction from wages, into the Roth 401k:

Pay-stub-sample

Below is an example of the W2 showing $18,000 contribution made to a Roth 401k in the box 12a:

(In the example below there are Roth contributions (Box 12a code AA). In this case, the amount would be included in box 1. If the deferrals are pre-tax the code used in box 12a would be "D" and then amount in box 1 would be reduced by the amount in box 12a.)

W2-sample

Peer to peer lending using Lending Club

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I'd like to check with you if participating as a lender in peer-to-peer lending platform such as Lending Club will be okay in my Solo 401k. They do support opening a Self-directed IRA account, but I would like to be able to invest directly out of my 401k without opening new self-directed IRA account.

Yes, you can invest using the Lending Club platform with your Solo 401k.

You will need to establish a trust account in the name of your Solo 401k trust:

https://www.lendingclub.com/public/investment-account.action

  • Name of the trust: Name of your Solo 401k trust
  • Tax ID of the trust: EIN of your Solo 401k trust
  • Grantor: Plan sponsor/Adopting business of the Solo 401k

https://kb.lendingclub.com/investor/articles/Investor/What-are-Lending-Club-s-investment-account-options/?l=en_US&fs=RelatedArticle

Titling of assets in the Solo 401k trust

Paying the fee to setup the plan from the plan

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Can the fee to set up the plan be counted as a plan expense and be paid for out of the plan?

Answer:

Generally, expenses incurred in connection with the establishment, termination and design of the plan relate to the employer's business activities and should not be paid by the plan. See DOL Advisory Opinion 2001-01A.

For example, if an employer has received a bill for attorney's fees related to a meeting to discuss whether a plan should be implemented and, if so, what type of plan should be established, that bill is a settlor expense and should not be paid by the plan that is established as a result of that meeting. However, once an employer decides to establish or terminate a plan, necessary administrative expenses incurred to implement and maintain the plan, or to complete the termination of the plan, could be paid from plan assets.

The following fees associated with the establishment of a plan are considered settlor fees and should not be paid with plan assets:

  1. Fees for plan design proposals
  2. Legal fees regarding corporate issues relating to the establishment of the plan
  3. Plan document fees

Choosing a business to adopt your Solo 401k

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As an employer-sponsored plan, the Solo 401k requires an adopting business. The adopting business must represent your self-employment.

If you have more than one self-employment business that you own, consider the following when choosing which self-employment business will adopt the plan.

Adopting business can be any entity type

The Solo 401k can be adopted by a sole proprietorship, LLC, corporation, etc. You do not have to have an established LLC or corporation to adopt the Solo 401k.

Adopting business must not have any full-time employees, besides yourself and potentially, your spouse

As an owner-only plan, the Solo 401k is designed for a self-employment business that does not have any full-time employees, besides the owner and the owner's spouse.

  • Part-time employees (W-2 employees who work less than 500 hours/year) do not affect Solo 401k eligibility
  • Independent contractors (workers who receive a 1099 instead of a W-2) do not affect Solo 401k eligibility
  • Other business owners who work for the company (such as your spouse) do not affect your Solo 401k eligibility and can also participate in the plan

Employees and your Solo 401k

Contributions to the Solo 401k are made from your compensation from the adopting business

Adopting your Solo 401k plan with the business that provides you with the largest amount of earned income will maximize the contributions you can make to the plan.

Active vs. passive income

Defining compensation

Contributions Guide

Recharacterization of Roth conversion

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Last December, my accountant grossly miscalculated my tax liability estimate, which led me to believe that a Roth conversion could be made with a manageable tax impact. Later, when she prepared my tax returns in April, I discovered that my tax liability was actually much higher, and that the tax impact of the Roth conversion was too great to make it worthwhile. Can the Roth conversion can be reversed through timely recharacterization within my Solo 401k plan?

Answer:

No.  You cannot undo the Roth conversion.

The "Participant's Election" section of the In-plan Roth Conversion Amendment states that the in-plan Roth conversion is irreversible and cannot be undone or recharacterized in any manner.  To not follow the terms of the plan (as stated in the amendment) would be an operational failure of the plan.

The Internal Revenue Bulletin: 2010-51 published December 20, 2010 (also listed as Notice 2010-84) provides Guidance on In-Plan Roth Rollovers:

https://www.irs.gov/irb/2010-51_IRB/ar11.html

In the Question/Answer section, it states the following:

Q-6. If a participant elects an in-plan Roth rollover, can he or she later unwind the in-plan Roth rollover, as can be done with rollovers to Roth IRAs?

A-6. No. The recharacterization rule in § 408A(d)(6) applies only to contributions to IRAs.

There is no way to reverse the Roth conversion.  You will have to declare that as your taxable income and pay the taxes. Please consult with your CPA for details.

Private lending from the Solo 401k

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Can I do private lending out of my Solo 401k?

Yes. You can lend money from your 401k to other non-disqualified persons. 

As fiduciary of your 401k, you are responsible to invest the plan for its benefit. These loans must be financially advantageous for your 401k, as they are investments of your plan. Your 401k will receive the principal and interest from these loans. 

Benefits of lending from your 401k

  • You can choose who your 401k lends to, as long as that person/entity is non-disqualified
  • You also choose the terms of the 401k loan, such as:
    • Principal amount
    • Interest rate
    • Length of the term
    • Payment frequency and amount
    • Whether the note is secured by collateral or not
  • Lending is an asset that you may have experience with and understand
  • The return to your 401k is pre-established
  • Loans can potentially yield a cash stream

Important things to know

  • The 401k loan must be a real economic transaction
  • The 401k is its own financial and legal entity. It is separate from you, your personal information, and your personal finances.
  • The lender is the 401k, not you/the plan participant
  • All loan documents must be in the name of the 401k, not your personal name
  • All income goes back to the 401k 
  • You, as plan trustee, can hire a professional to generate the loan documents: promissory note, deed or trust or mortgage, etc. Sense Financial does not have or offer loan documents.
  • All expenses for this process (loan documents, loan servicing) are paid by the 401k
  • You, as plan trustee, must sign the loan documents for the 401k
  • You, as plan administrator, must keep all records of the 401k loan. Forms for recordkeeping are available on the client portal. These are completed and then kept by you for recordkeeping only; they are not the loan documents themselves.

Forms to Administer Solo 401k Plan

Investing in precious metals

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Can I purchase precious metals, such as silver and gold, with my Solo 401k plan?

Yes, your 401k can purchase precious metals, such as gold, silver, etc.

  • The IRS has certain restrictions related to fineness, type of coins, etc. that can be purchased using a retirement account

For example, the coins cannot be “collectibles” per Internal Revenue Code Section 408. Check with your CPA if there are any questions.

  • All purchases must be in the name of the 401k and using the EIN of the 401k
  • All precious metals must be stored by an IRS-approved third party depository

Plan assets cannot be held by you, in your physical possession.

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