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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:

Why do I need to keep amending my plan?

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Qualified plans are governed by a set of Federal laws enacted by Congress and regulated by various agencies. The IRS is responsible for oversight of the tax aspects of retirement plans, and the DOL is responsible for reporting, disclosure and fiduciary aspects of retirement plans.  The result is a continual change in the laws due to changing legislation and regulations issued to oversee compliance with the laws. As a result, there are frequent changes in the law but in most cases they are not major ones. A requirement to have a qualified retirement plan is that it must be in writing. This means that as the laws change, your plan must generally be amended to reflect the changes.

My rollover was incorrectly reported as normal distribution on Form 1099-R

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When I set up my Solo 401k, I contacted my custodian to request a direct rollover from my existing IRA into my Solo 401k. Now the custodian sent me Form 1099-R for the rollover. Is this correct? If it’s reported as a distribution, how do I correct it?

Answer:

When you request a rollover, the custodian reports the transaction to the IRS by issuing Form 1099-R.

First, check the 1099-R to make sure it was completed correctly.

CORRECT

  • Box 1:  Rollover amount
  • Box 2.a:  Should be “0.00”
  • Box 7:  Should be “G”

Code G is for a “Direct rollover of a distribution to a qualified plan.” If the custodian entered “0.00” in Box 2.a. for the taxable amount and “G” in Box 7 for the Distribution code, they are telling the IRS that a direct rollover was performed and it was a non-taxable event. This is correct.

INCORRECT

  • Box 2.a:  Anything other than “0.00”
  • Box 7:  Anything other than “G”

If the custodian entered anything other than “0.00” in Box 2.a. for taxable amount, it is incorrect. Or, if the custodian entered a code other than “G” in Box 7 for Distribution code, it is incorrect.

If the 1099-R was not issued correctly, the custodian either did not process your request for a direct rollover correctly or misreported it on the 1099-R.

  • Contact the custodian and request that they reissue a corrected Form 1099-R.
  • Alternatively, you can request help from your CPA. Give the 1099-R to your CPA and inform him/her that the funds were rolled over directly into your 401k plan. Your CPA may properly offset that on your tax return by indicating that the funds were deposited into a qualified plan. In this case, the IRS will likely contact you asking you for proof that the funds were rolled over into your 401k.  Proof would include a bank statement for your 401k trust account showing the deposit of funds, your plan documents with IRS Determination letter, and a letter of explanation.

Note: IRS Form 5498 cannot be used to correct this error as it is not applicable to direct rollovers into a 401k.

Form 5498 is used for an indirect or 60-day rollover, in which a distribution is taken from your IRA and then deposited into another IRA within 60 days. This form is not applicable for the 401k and for direct rollovers. It is only applicable for IRAs.

Transferring personal property into Solo 401k Trust

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Now that I have my Solo 401(k) Trust set up, I would like to move investment properties that I personally own into my Solo 401(k) yearly, of course, taking into value the maximum contribution per year. What is the procedure to move properties into my Solo 401(k) instead of contributing in cash form?

Answer:

You are considered a Disqualified Person to your 401(k). Therefore what you described above is a Direct Prohibited Transaction:

"4975(c)(1)(A): The direct or indirect sale, exchange, or leasing of property between a Solo 401k Plan and a Disqualified Person"

Be sure that you have a good understanding of Prohibited Transaction. Violation of the rules will result in your entire account deemed distributed.

Solo 401k multiple loans

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I currently have one outstanding loan from my Solo 401k. I would like to pay it off and take another one (larger in size). Are there any problems with taking multiple loans in a short period of time?

Answer:

Once the 401k loan is paid off, there is a restriction on the amount of the second loan.  The amount for the second loan is reduced by the highest balance of the first Solo 401k loan in the previous 12 months.

Below is an excerpt from the IRS website regarding multiple 401k loans:

https://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-Loans

Jim, a participant in our retirement plan, has requested a second plan loan. Jim’s vested account balance is $80,000. He borrowed $27,000 eight months ago and still owes $18,000 on that loan. How much can he borrow as a second loan? Would it benefit him to repay the first loan before requesting a second loan?

Jim will only be able to take a second loan if your plan’s terms allow it. You’ll find how to determine the maximum amount Jim may borrow in IRC Section 72(p)(2)(A). The law treats the portion of the loan that exceeds the maximum amount as a distribution. Generally, any previously untaxed amount of the distribution is taxable. We’ll use the facts in your question to calculate Jim’s maximum allowable loan balance.

The new loan plus the outstanding balance of all other loans cannot exceed the lesser of:

  1. $50,000, reduced by the excess of the highest outstanding balance of all Jim’s loans during the 12-month period ending on the day before the new loan (in this example, $27,000) over the outstanding balance of Jim’s loans from the plan on the date of the new loan (in this example, $18,000), or
  2. The greater of $10,000 or 1/2 of Jim’s vested account balance.

Maximum second loan if amount still owed on first loan
Jim’s current loan balance is $18,000. This amount plus the new loan cannot exceed the lesser of:

  1. $50,000 – ($27,000 - $18,000) = $41,000, or
  2. $80,000 x 1/2 = $40,000

Jim’s total permissible balance is $40,000, of which $18,000 is an existing loan balance. This leaves a new maximum permissible loan amount of $22,000 ($40,000 - $18,000).

Maximum second loan if first loan repaid
Because the law bases Jim’s maximum loan on all of his loans during the 12 months prior to the new loan, there isn’t a significant advantage for Jim to pay off his first loan before requesting a second. If Jim repaid the $18,000 before applying for the second loan, he would be limited to the lesser of:

  1. $50,000 – ($27,000 – 0) = $23,000, or
  2. $80,000 x 1/2 = $40,000

In this case, the maximum permissible loan amount would be $23,000.

Paying for marketing to find a seller

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Can my Solo 401k pay for marketing to find sellers to buy a home to rehab within the plan, such as Google PPC, website, direct mail, hiring someone to put out bandit signs, etc?  Can the plan pay for an "advisor" - who is not a disqualified person - to mentor/advise on all aspects of acquisition/rehab/sales of a real estate asset the plan would be owning?  If this is a gray area, how would I make this work to the satisfaction of the IRS?  Again, I would never jeopardize the legality of the plan, however, I would like to use it to its max.

Answer:

The activities that you are describing seem like an running active business in your plan. Your 401k can invest in passive investments.  However, if you engage in an active business with your plan, you are opening yourself up to issues such as Unrelated Business Income Tax (UBIT) and more. If you intend to pursue this, you will need a knowledgeable CPA to guide you through the complexities of running an active business within your 401k.

I suggest you keep with the main purpose of the plan- investing for the long term. You can work with a wholesaler and have someone else do the marketing, etc. Acquiring the property and holding on to it as long term rental would be the safest and simplest for the plan.

Credit card for my Solo 401k plan

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Now that I set up my Solo 401k, can I get a credit card for my plan to pay for the investment related expenses and to earn rewards?

Answer:

No. If the bank offers a credit card for your Solo 401k Trust, then you personally will be required to sign the guarantee. You are not allowed to extend any credit to the plan since you are considered a "Disqualified Person" with respect to your 401k. If you did so, it would constitute a "Prohibited Transaction," and your plan would be deemed disqualified. 

Be sure to review the Prohibited Transaction section to ensure that you have good understanding of it. As a fiduciary of the plan, it is your responsibility to avoid any prohibited transactions.

Property expenses which cannot be paid using trust name

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How do I pay real estate property expenses which cannot be paid using the trust name, like utilities.  Do I write myself a check after paying those expenses from my personal account?

Answer:

All expenses related to investments owned by your retirement account must be paid from the retirement account. You cannot pay those expenses with personal funds and then reimburse yourself from the 401k.

Most utility companies will allow you to open the account in the name of the trust.  The bills can then be paid with your Solo 401k Trust checking account, using a check, debit card, or online banking.

If for some reason you are unable to open the account in the name of the trust, then you as the trustee can open the account in your name.  However, payment still must come out of the 401k trust's account using the methods described above.

 

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