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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:

Do I need a business EIN in order to establish my Solo 401k plan?

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I'm completing my Solo 401k application, and it asks for a business EIN. I am a sole proprietor and have been using my name and my Social Security number until now to run my business. Do I need to apply for new EIN? And once I have a new EIN, will I have to file a separate tax return for my business?

Answer:

Yes.  A business EIN needs to be listed on the Solo 401k plan documents.

The 401k plan must be adopted by any eligible business of any type (e.g. corporation, partnership, LLC, sole proprietorship, etc.). Proper Employer Identification Number (EIN) must be used in connection with the business. You can not use your Social Security number. Therefore you, as a sole proprietor, need to apply for new EIN with the IRS and use it in connection with your business and on your Solo 401k plan documents.

If you are a sole proprietor, you can continue filing Schedule C (part of your personal tax return). The new business EIN can be entered in section D of your Schedule C. This should have no effect on your tax return, but we suggest you consult tax professional for details.

What determines the taxation rate applied to profits for financed properties?

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A qualified plan (such as the Solo 401k) is exempt from the UBTI related to buying property with financing.

For an IRA LLC however, the taxation rate is determined by the amount of leverage you’re using. For example, if eighty percent is leveraged and twenty percent of cash is put into the property, then eighty percent of the income/eighty percent of the gains will be taxable.

For calculating UBTI tax and preparing the relevant forms, always consult your CPA or tax advisor.

Solo 401k Plan and full time employee other than the plan owner and their spouse

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For my Solo 401K plan, if I have more than one employee besides me and my wife, do I have offer them a plan as well?

Answer:

You and your wife are considered owner-employees of the plan.  If you have any other full-time employees (working over 1,000 hours per year), they cannot participate in this plan. You cannot have a Solo 401k if you have full-time employees working for you. You can have independent contractors working for you. Please consult your tax advisor, CPA or  legal counsel to determine how you would need to structure the roles you need to fill where you’re hiring people to be independent contractors.

What if the Solo 401k sponsoring entity changes or is dissolved?

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I currently have a Solo 401K. What if I decide to dissolve the adopting business? Can I change the adopting business of the plan to another one?

Answer:

Yes.  It is possible to amend the plan to reflect the change in the plan sponsor, while keeping the plan information the same.  The investments of the plan and bank accounts will not be affected. The Solo 401K plan can be adopted under another business provided that new business is also a form of self-employment without employees.

The adopting business of the plan can be in the form of a sole proprietorship, LLC, corporation, etc.

If you would like to amend your plan, please use THIS FORM.

Can my Solo 401k plan partner with myself?

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I now have my Solo 401k Plan and would like to use 401k funds to partner with myself on investment.  How can I do that? Can I also partner with someone else's IRA or 401k?

Answer:

Your 401k can always partner with other people individually or with other people’s IRAs.  Under certain circumstances you personally may be able to partner with your 401k.  However, the burden of proving that you received no impermissible benefit from your IRA’s participation in the investment will be on you if the IRS ever questions the transaction.  The transaction still must be an arms-length transaction, and the investment remains subject to the same restrictions as if the entire investment were in your 401k.  In general it is better to separate your 401k investments from your own investments.

If you co-invest with yourself, you cannot get a non-recourse loan. A non-recourse loan is only possible if the 401k is the only investor or if it invests with other, non-disqualified parties. Once you combine personal funds, leverage is out of the equation. This is cross-collateralization and it is prohibited.

One important rule to keep in mind is to be able to partner with your 401k you must have no NEED to do it. Meaning if you can do the deal without the 401k you can partner with it and if the 401k can do the deal without you then it can partner with you. So basically the main reason people want to partner with the 401k (to be able to use "all" your money to do a deal that you might not be able to otherwise) is an exclusion.

Such transaction is also known as "enabling" and is prohibited. Enabling means using IRA/401k funds to enable a personal investment (or vice versa). If you are ever audited you will be asked to prove you did not need personal fund to make the investment - that you had enough cash in your retirement account that you could have used, but chose to use personal funds to include it in a good investment opportunity.   If, on the other hand, you've pulled together all cash in your retirement account and are still short of the amount needed, so are using your personal funds to cover that gap, then it would be considered enabling.

If enabling is a non-issue, there are a couple of other things to keep in mind:

  1. Expenses generated by the property must be paid proportional to ownership.  If there is a tax bill due, the bill has to be paid by you and your IRA/401k, proportional to ownership percentages.  Similarly, any income generated by the property need to be split proportionally between you and your IRA/401k ownership.  If you don't have a property manager collecting the rent, your tenants will have to write out TWO rent checks each month - one to you and the other to your IRA/401k.
  2. You and any disqualified parties are prohibited from using the property, living in the property, or making any repairs or doing maintenance or upkeep on the property.  You'll need to hire outside vendors for these items.
  3. You will not be able to obtain financing to acquire this property, it must be paid in cash.

Insurance on property owned by Solo 401k

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I'm in escrow to buy rental property with my Solo 401k trust. How should I take the insurance?

Answer:

The property insurance should be obtained in the name of the Solo 401k trust (the owner of the property).

Sometimes an insurance company may insist that the insurance be in your name as an individual. As trustee of the plan, you can obtain insurance in your name.  However, be sure to ask the insurance company to add the trust as other interest.

Can you open a Solo 401K when you’re 70 years old?

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My parents are selling their business and retiring. They're going to make some money on the sale and are worried about taxes. They have earned income for this year to date from the business, so I am wondering if they can contribute the max to a newly opened Solo 401K and at least get the tax deferred until later. Or does it not make sense because they'll need to make mandatory withdrawals since they're 70. Is this something they should try to pursue?

Answer: Unlike a Traditional IRA which the regulations do not permit contributions once the owner reaches age 70 1/2, the solo 401k is not subject to this restriction. Therefore, the solo 401k participant can open a solo 401k and make contributions past age 70 1/2; however, he or she must commence taking required minimum distributions (RMDs) at age 70 1/2. Be aware of confusion surrounding the RMDs rule that allows participants in full-time employer plans who do not own 5% or more of the employer to delay taking RMDs past age 70 1/2 as long as they are still working. This exception to the RMD rules does not apply to solo 401k plans because the solo 401k owner is a 5% or more owner.

What happens if sponsoring company shuts down

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What are the options for my Solo 401K plan if the company that sponsors the plan shuts down (I am no longer self-employed)?

Answer:

A 401k plan is an employer-sponsored plan, therefore in order to maintain your Qualified Retirement Plan, you must maintain a small business or some sort of self-employment activity in some legitimate form. If you shut down your current entity, but continue another type of self-employment activity and make earnings then we can amend the plan to reflect the change.

If, let's say, you quit all of your self-employment activity and get a full-time job, and that is the only income you have (W2 wages working for someone), then the Qualified Plan must be terminated. You will then have the option of rolling over your account into an IRA.

Using both spouse’s accounts under the same 401k

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Both my wife and I have separate accounts under our Solo 401k. Can I use funds from my account together with my wife’s account to make the investment?

Answer:

You can pool funds together from different accounts under the same 401k into single investment. The key here is that all of the expenses of the investment and profits from the investment must be distributed according the ownership percentage for each individual account. The same would apply if you were using your pre-tax funds of your 401k together with Roth 401k funds.

What about  the mechanics, e.g. do I write two separate checks from respective accounts towards the investment?

This would depend on the type of investment that is made. If it is just a single transaction in a passive investment such as trust deed which will not have any expense payment after that then two separate checks would work. If however, you are buying rental property which would require ongoing expenses and will have recurring rent deposits, creating and using separate operating bank account for that particular investment might be a better option. This way you don't have to split every single income and expense item, which would be cumbersome.

 

What is the six-year restatement period?

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In the past the restatement cycles have been somewhat disorganized. The IRS has now created a systematic six-year cycle. Pre-approved plans must be restated every six years to incorporate the interim amendments and any discretionary amendments that have been adopted since the last restatement. At the end of this six-year period, there will be a two- year window in which to update the plan document.

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