Investing

May 30 2022

Calculating plan assets

Dmitriy Fomichenko Assets, Investing, Maintenance, Reporting Requirements

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)
________________________________________________

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

May 15 2022

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

Dmitriy Fomichenko Investing, Maintenance, Real Estate, Reporting Requirements

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.

September 28 2021

Hands off my IRA

Dmitriy Fomichenko Investing, Knowledge Base

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/

March 18 2020

Brokerage account for Solo 401k

Dmitriy Fomichenko Assets, Bank Account, Investing

I’d like to set up a brokerage account in the name of my Solo 401k Trust to trade options and buy some stocks. Are there any clauses or designations in the application process I need to look out for while setting up my accounts? Can I fund the brokerage account with a check from my Solo 401k Trust checking account?

Answer:

Yes, you may open a brokerage account in the name of your Solo 401k Trust.

When opening the brokerage account, make sure to:

Clarify to your broker is that you are not opening a new retirement account.

Opening a retirement account with a conventional financial brokerage firm means you’re asking them to create and administer a retirement account. This is not what you need since you have already established your Solo 401k through our plan documents.

The role of the brokerage firm is simply to provide a brokerage account for your already-established, self-directed Solo 401k plan. The brokerage firm is not involved in the administration of your Solo 401k. They do not function as custodian, trustee, or fiduciary of your Solo 401k plan.

Some brokerages may label this type of account as "non-custodial" or "non-prototype."

Use the 401k Trust name for the account
Use the 401k Trust EIN for the account

For more details on the brokerage account setup process, speak with a representative at the brokerage you are considering. Each brokerage may have a slightly different process for opening accounts in the name of a trust.

We provide contact information, instructions, and links to applications for several brokerages here:

Bank Account Set-up

Once established, the brokerage account for your Solo 401k Trust can be funded by a check from your Solo 401k Trust checking account and/or a rollover.

February 10 2020

Buying property with owner financing

Dmitriy Fomichenko Investing, Non-Recourse Financing

Can I buy a property in my Solo 401k from the owner who is willing to owner-finance?

Answer:

Yes, as long as the loan is non-recourse you may use owner-financing. Be sure to instruct escrow/title company/attorney preparing loan documents that there is no personal guarantee.

December 26 2017

Liability protection

Dmitriy Fomichenko Investing, Real Estate

How do I protect the 401k from liability in the purchase of a property? Would it be possible to remove the "401k" from the name so the property records do not reflect that a 401k plan is investing in real estate?

Answer:

IMPORTANT: Please note that we are not qualified to provide tax, legal or investment advice. This information is intended as general guidance only. You should always consult with an experienced asset protection attorney regarding your personal situation.

Having "401k" in the name would not necessarily create extra liability. There is no liability for you without some kind of liability event. If there was an event for which your 401k was liable, the liability would exist regardless of having the "401k" in the name.

There are two possible liabilities that you need to be aware of:

If there is personal liability against you as an individual, your 401k assets would be protected under federal law. Judgement against you personally or creditors who are after you would not be able to touch your 401k assets.

A second possible liability could arise as a result of owning asset in your 401k, such as rental property.

Again, not having a 401k as part of the name does not reduce your liability. The 401k trust in itself is not a vehicle designed to provide liability protection.

If liability is a concern for you, I would recommend the following:

Make sure you have an adequate amount of liability insurance
In addition to liability insurance, you can obtain umbrella liability insurance coverage. This comes in increments of $1MM.
Assets can be isolated into separate LLCs

You can also utilize a land trust to achieve the anonymity.

November 1 2017

Office equipment for Solo 401k use

Dmitriy Fomichenko Investing, Maintenance, Prohibited Transactions

Can I purchase a fax machine/scanner using my Solo 401k bank account? This will be used exclusively for the properties that I will purchase using the Solo 401k. It will not be used for any other personal purposes.

Answer:

We strongly recommend against doing so.

While your intention may be to use this scanner/copier/printer/fax machine exclusively for the Solo 401k, the machine will be located in your home. This makes it likely that either yourself or someone else in your household will use the machine for personal benefit, even without meaning to or without you knowing. This would create a prohibited transaction.

October 26 2017

Accredited investor

Dmitriy Fomichenko Assets, Investing

I'm considering investing my Solo 401k into an investment that only allows accredited investors. How does the Solo 401k qualify to be accredited?

Answer:

In order for a Solo 401k to qualify as an accredited investor, the 401k owner must qualify:

1. Annual income of over $200,000 single, or $300,000 married, in each of the past 2 years.

2. Net worth in excess of $1,000,000, not including equity in investor’s personal residence.

September 1 2017

Depreciation

Dmitriy Fomichenko Investing, Real Estate

Can I claim depreciation expense on a property owned by my 401k?

Answer:

No. You could if there was taxable income, but because rental income from the property owned by your 401k is sheltered from taxes, there is nothing to deduct it against. It also does not affect your personal income tax.

August 16 2017

Investing in cryptocurrencies

Jessica Youngstrom Assets, Investing

Can I invest my Solo 401k funds in Bitcoin and other cryptocurrencies?

Answer:

Yes, your Solo 401k plan can invest in Bitcoins and other cryptocurrencies. The IRS allows investing in Bitcoins and other cryptocurrencies, considering them a form of property only. The profit generated from the sale of Bitcoins will be considered as capital gains only, hence preventing them from triggering unrelated business income tax (UBIT) or similar tax consequences.

If you are planning to invest in Bitcoins, here is a detailed post to help you get started.

https://www.sensefinancial.com/invest-bitcoins-sdira-solo401k/