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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:

Titling of assets in the Solo 401k trust

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When dealing with all plan assets, whether a bank account or a title to real property, always use the Solo 401k Trust.

  • All assets purchased by the retirement account should be titled in the name of the Solo 401k Trust
  • Always use the Solo 401k Trust EIN for any 401k transaction
  • Check the Solo 401k Trust EIN for the correct wording ("ABC 401k Plan" or "ABC 401k Trust")

The Solo 401k Trust EIN document was provided to you in your set of plan documents.

Do NOT use the EIN for your business nor your personal Social Security Number when providing a tax ID for a 401k transaction.

Example

If your 401k trust is named DBM Solo 401k Trust and investing in a note:

  • The agreement should list DBM Solo 401k Trust as the buyer
  • The title company should list DBM Solo 401k Trust as lienholder
  • Your bank accounts and/or brokerage accounts should be in the name of DBM Solo 401k Trust

For specifics of how to take the title to real estate please read Titling Real Estate in the Solo 401k Trust

What can a Solo 401(k) invest in?

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Contrary to the vast majority of 401(k)s and even some Solo 401(k)s, your Solo 401(k) from Sense Financial can invest into anything allowed by law. Our plan documents don’t place any additional restrictions on your activities. This leaves you free to invest in real estate, private businesses, mortgage notes, and more. The acquisition of traditional assets such as stocks, bonds, and mutual funds is also permissible.

The main restriction is on “self dealing” which means you cannot direct your Solo 401(k) to transact with (or benefit) you or most of your family members. Such a transaction is called a prohibited transaction.

Solo 401k contribution from self-employment income

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Is it correct that a Solo 401k only allows me to contribute based on my self-employment income?

Answer:

Yes. The Solo 401k plan is an employer-sponsored plan. The employer is the plan sponsor which you used to adopt the plan.  This is your self-employment, either you as sole-proprietor or a business entity (LLC, corporation, etc).

All contributions to your Solo 401k must come from the business earnings of your self-employment. You cannot contribute any additional funds from full-time employment W2 wages elsewhere or any other funds not related to the sponsoring entity.

In additional to large contributions limits from your self-employment income, you are able to roll over existing funds from other qualified retirement plans such as a Traditional or SEP IRA, 403B, 401k, etc.

Is my Solo 401k plan covered under ERISA?

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Your 401(k) plan is a Qualified Plan. The DOL regulations provide that a plan that covers only partners or a sole proprietor is not covered under Title I of ERISA. Pursuant to Department of Labor Regulations 2510.3-3(c). However, even though a solo 401(k) plan is not subject to Title 1 of ERISA, the ERISA rules are still looked at as a reference because a solo 401(k) Plan is still a qualified retirement plan. 401(k) generally has greater protection than an IRA.

Fixing incorrect transaction on my 401k debit card

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

Answer:

First, let me remind you to treat your 401k transactions with greater caution. The 401k checkbook/ debit card and the personal debit card should be clearly identified. Also, you should not carry the 401k debit card in your wallet along with your personal debit and credit card. Keeping the 401k checkbook and debit card separately would help you to avoid mistakes such as these.

Second, review the following article on how to correct the prohibited transaction:

Correcting a prohibited transaction

 

 

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.

Answer:

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

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

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

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

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

IRS Reminds Plan Sponsors of Plan Restatement Deadline

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April 30, 2016, is the deadline for employers using pre-approved retirement plan documents to sign an updated version of their 401(k), profit-sharing or other defined contribution retirement plans.

Retirement plan documents must be revised when the law changes. In an updated web page, the Internal Revenue Service (IRS) reminds plan sponsors that document providers who offer pre-approved plans update the plan in its entirety once every six years and request a new opinion/advisory letter from the agency. The IRS generally approves all updated defined contribution plans at the same time. Most opinion/advisory letters for the latest round of pre-approved defined contribution plans were issued on March 31, 2014. Employers have two years, until April 30, 2016, to adopt these updated plans.

After April 30, 2016, if a plan sponsor hasn’t adopted a restated plan, the plan does not comply with the tax laws and may be ineligible for tax benefits.

Providers should have sent plan sponsors a revised plan document, approved by the IRS, which complies with the Pension Protection Act of 2006 (PPA) and other law changes listed on the 2010 Cumulative List of Changes in Retirement Plan Qualification Requirements. Even if plan sponsors made amendments to your plan to reflect these laws as they became effective (interim amendments), they are still required to adopt a PPA plan document.

Most employers don't need to apply for a separate IRS determination letter for a pre-approved plan, and a plan sponsor who adopts a master & prototype plan (standardized or non-standardized) may not apply for its own determination letter. Instead, the plan sponsor should rely on the approval letter issued to the document provider.

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

How to choose a business to adopt your 401k plan

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If you have more than one business that you own, the following can help you choose which one you use to adopt your 401k plan.

The business must have no full time, non-owner W2 employees. In fact, if you have any full time, non-owner employees that receive a W-2 in any businesses that you or your spouse own, you are not eligible for a Solo 401k at all. This is true even if you have other businesses that do no have any employees.

  • Part time employees (W-2 employees who work less than 500 hours per year) do not affect Solo 401k eligibility
  • Independent contractors (workers who appropriately 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) are also acceptable when determining Solo 401k eligibility.

Contributions to the 401k plan must come from earned income from the adopting employer. This is an important consideration. If you have a business that generates a lot of passive income, but no earned income, you will not be able to make contributions to any retirement plan, including the Solo 401k, from that 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.

Remember, you can adopt the Solo 401k with any entity type such as a sole proprietorship, a corporation, or an LLC. You do not have to have an established LLC or corporation to adopt the Solo 401k plan. If, for instance, you have an LLC that holds rental properties and generates very little earned income but you also work as an independent contractor as your main source of income, you can adopt the plan as a sole proprietor and make contributions based on your 1099 income.

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