Assets

November 26 2024

Liability protection for the 401k

What protection is available for a Solo 401k and its assets?

A Solo 401k and its assets can be protected through:

Federal protection in the case of bankruptcy

The Bankruptcy Code, Section 522, gives federal protection in the case of bankruptcy. This means that if a 401k participant declares bankruptcy, their 401k assets will be exempt. This is effective for bankruptcies filed after October 17, 2005.

State protection according to each state

Outside of bankruptcy, protection of the 401k depends on individual state laws. Most states give protection from creditors, but note the exceptions:

State	State Statute	Special Statutory Provision	State Exemption for Solo 401k from Creditors
Alabama	Ala. Code §19-3B-508		Yes
Alaska	Alaska Stat. §09.38.017	Exemption does not apply to amounts contributed within 120 days before the debtor files for bankruptcy.	Yes
Arizona	Ariz. Rev. Stat. Ann. § 33-1126C	Exemption does not apply to amounts contributed within 120 days before a debtor files for bankruptcy.	Yes
Arkansas	Ark. Code Ann. §16-66-220		Yes
California	Cal. Civ. Proc. Code § 704.115		Yes, but only to the extent necessary to provide for the support of the judgment debtor when the judgment debtor retires and for the support of the spouse and dependents of the judgment debtor, taking into account all resources that are likely to be available for the support of the judgement debtor when the judgment debtor retires.
Colorado	Colo. Rev. Stat. §13-54-102		Yes
Connecticut	Conn. Gen. Stat. §52-321a		Yes
Delaware	Del Code Ann. § 10-4915		Yes
D.C.	D.C. Code § 15-501(a)(9) & (10)		Yes
Florida	Fla. Stat. Ann. §222.21		Yes
Georgia	Georgia Code Ann. § 44-13-100(a)(2.1)		Yes
Hawaii	Hawaii Rev. Stat. § 651-124	Exemption does not apply to contributions made to a plan or arrangement within three years before the date a civil action is initiated against the debtor.	Yes
Idaho	Idaho Code §§ 11-604A, 55-1011		Yes
Illinois	I.L.C.S. § 5/12-1006		Yes
Indiana	Ind. Code Ann. § 55-10-2(c)(6)		Yes
Iowa	Iowa Code Ann. § 627.6(8)(e), (f)		Yes, it should apply to Solo 401K – statute referenced in case.
Kansas	Kan. Stat. Ann. § 60-2308		Yes
Kentucky	Ky. Rev. Stat. Ann. § 427.150(2)(f)	Exemption does not apply to any amounts contributed to an individual retirement account if the contribution occurred within 120 days before the debtor filed for bankruptcy. Exemption also does not apply to the right or interest of a person in individual retirement account to the extent that right or interest is subject to a court order for payment of maintenance or child support.	Yes
Louisiana	La. Rev. Stat. Ann. §§ 20:33(1), 13:3881(D)		Yes
Maine	Me. Rev. Stat. Ann. Tit. 14, § 4422(13)(E)	Exempt only to the extent reasonably necessary for the support of the debtor and any dependent.	Yes
Maryland	Md. Code Ann. Cts. & Jud. Proc. § 11-504(h)(1)		Yes
Massachusetts	Mass. Gen. L. Ch. 235 § 34A; 236 § 28	Exemption does not apply to an order of court concerning divorce, separate maintenance or child support, or an order of court requiring an individual convicted of a crime to satisfy a monetary penalty or to make restitution, or sums deposited in a plan in excess of 7% of the total income of the individual within 5 years of the individual’s declaration of bankruptcy or entry of judgment.	Yes
Michigan	Mich. Comp. Laws Ann. §§ 600.5451(1), 600.6023(1)(k)	Exemption does not apply to amounts contributed to an individual retirement account or individual retirement annuity if the contribution occurs within 120 days before the debtor files for bankruptcy. Exemption also does not apply to an order of the domestic relations court.	No
Minnesota	Minn. Rev. Stat. Ann. § 550.37(24)	Protection limited to $60,000 (adjusts for inflation).	Yes
Mississippi	Miss. Code Ann. § 85-3-1(e)Applies to solo 401k plans		Yes
Missouri	513.430	Exemption limited to extent reasonably necessary for support.	Yes
Montana	Mont. Code Ann. §§ 19-2-1004, 25-13-608, 31-2-106		Yes
Nebraska	Neb. Rev. Stat. § 25-1563.01Should apply to Solo 401(k) Plans unless plan established within two years of action		Yes, unless plan established within two years of action.
Nevada	Nev. Rev. Stat. § 21.090(1)(q)	Exemption is limited to $500,000 in present value held in an IRA or Solo 401k.	Yes
New Hampshire	N.H. Code Ann. § 511:2, XIX		Yes
New Jersey	N.J. Stat. Ann. § 25:2-1(b)		Yes
New Mexico	N.M. Stat. Ann. §§ 42-10-1, 42-10-2		Yes
New York	N.Y. Civ. Prac. L. and R. § 5205(c)		Yes
North Carolina	N.C. Gen. Stat. § 1C-1601(a)(9)		Yes
North Dakota	N.D. Cent. Code § 28-22-03.1(3)	Retirement funds that have been in effect for at least one year, to the extent those funds are in a fund or account that is exempt from taxation under section 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code of 1986. The value of those assets exempted may not exceed one hundred thousand dollars for any one account or two hundred thousand dollars in aggregate for all account.	Yes
Ohio	Ohio Rev. Code Ann. § 2329.66(A)(10)(b) and (c)		Questionable, the statute seems to exclude pension and other similar plans, but does seemingly carve out profit sharing plans for the exclusion.
Oklahoma	31 Okla. St. Ann. § 1(A)(20)		Yes
Oregon	2017 ORS 18.345		Yes
Pennsylvania	42 Pa. C.S. §§ 8124(b)(1)(vii), (viii), (ix)	100%, except for amounts (1) contributed within 1 year (not including rollovers), (2) contributed in excess of $15,000 in a one-year period, or (3) deemed to be fraudulent conveyances.	Yes
Rhode Island	R.I. Gen. Laws § 9-26-4(11), (12)	No protection for non-ERISA qualified plans.	No
South Carolina	S.C. Code Ann. § 15-41-30(12)	IRA exemption limited to the extent reasonably necessary for support. For Solo 401ks, not limited to the extent reasonable necessary for support.	Yes
South Dakota	S.D. Cod. Laws §§ 43-45-16 S.D. Cod. Laws §§ 43-45-17	Exempts “certain retirement benefits” up to $1,000,000.	Yes
Tennessee	Tenn. Code Ann. § 26-2-105	Distributions 100% exempt to the extent they are on account of age, death, or length of service and debtor has no right or option to receive other than periodic payments at or after age 58.	Yes
Texas	Tex. Prop. Code § 42.0021		Yes
Utah	Utah Code Ann. § 78-23-5(1)(a)(xiv)	Exemption does not apply to amounts contributed or benefits accrued by or on behalf of a debtor within one year before the debtor files for bankruptcy.	Yes
Vermont	12 Vt. Stat. Ann. § 2740(16)		Yes
Virginia	Va. Code Ann. § 34-34	Limited to interest in one or more plans sufficient to produce annual benefit of up to $25,000 (pursuant to actuarial table in statute).	Yes
Washington	Wash. Rev. Code § 6.15.020		Yes
West Virginia	§38-10-4	Principal 100% protected. Exemption for distributions limited to the extent reasonably necessary for support.	Yes
Wisconsin	Wisc. Stat. Ann. § 815.18(3)	Applies to Solo 401ks, but limited to the extent reasonably necessary for the support of the debtor and the debtor’s dependents.	Yes
Wyoming	Wy. Stat. Ann § 1-20-110(a)(i), (ii). No statutory exemption for IRAs. – only mentions retirement plans	No statutory exemption for IRAs. – only mentions retirement plans.	Yes

Modified from online article

What a Solo 401k is not protected through

The Solo 401k is not protected through ERISA and Internal Revenue Code Section 401k(a)(13(A)), which center on “anti-alienation."

Because the Solo 401k is a plan for an owner (and potentially, the owner’s spouse) only, it does not fall under the protections given by ERISA and the Internal Revenue Code Section 401k(a)(13(A)).

Other plans are also not under the protection of ERISA and the Internal Revenue Code Section 401k. These include IRAs, government plans, and most church plans.

However, even for those plans that are under ERISA and the Code, there are still exceptions, such as in the case of divorce. Retirement assets are subject to division in a divorce and child support proceeding.

Adding protective measures to your Solo 401k

In addition to the federal and state protection described above, you can also add protection by:

Making sure you have an adequate amount of liability insurance
Adding umbrella liability insurance coverage, in addition to liability insurance. This comes in increments of $1 MM.
Isolating assets into separate LLCs

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.

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

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.

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.

February 2 2016

Titling of assets in the Solo 401k trust

Dmitriy Fomichenko Assets, Investing

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

January 3 2016

What can a Solo 401(k) invest in?

Dmitriy Fomichenko Assets, Investing

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.

October 12 2015

Peer to peer lending using Lending Club

Dmitriy Fomichenko Assets, Investing

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

April 29 2015

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

Dmitriy Fomichenko Assets, Investing

Yes. You can use your 401k as a bank and lend money to other non-disqualified persons. Your Solo 401k would receive principal and interest just like a bank. The account holder (or trustee) chooses the borrower, principal amount, interest rate, length of the term, payment frequency and amount, and whether the note is secured by collateral or not. For recordkeeping please use appropriate form from the list of Miscellaneous Forms.

Benefits of 401k loans

You have strategic control over the person/entity to whom you lend money as long as the person/entity is non-disqualified
Lending is an asset that you have experience with and understand
The return on your money is pre-established
You choose lending terms and collateral with which you are comfortable
Loans can potentially yield a cash stream

Important things to know

The 401k loan must be a real economic transaction
A 401k Trust is its own financial and legal entity, and it is separate from your personal finances
As a separate legal entity, your 401k Trust has it's own name
The 401k Trust is the lender, not the plan participant. Therefore, all income goes back to the 401k Trust
All 401k loan documents must be in the name of the 401k Trust, not your personal name
For the documents associated with your 401k loan to be complete and legal, they need to be signed by plan trustee
Plan trustee can hire professional help to generate loan documents (promissory note, deed or trust or mortgage, etc.) and/or loan servicing, all expenses for this process will be paid by the 401k

April 27 2015

Investing in precious metals

Dmitriy Fomichenko Assets, Investing

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

Answer:

Precious metals such as Gold, Silver, Platinum and Palladium can be purchased inside of a retirement account. If you choose to do so within your Solo 401k, you can enjoy tax-deferred profits going back into your retirement account. Keep in mind, however, that the coins cannot be “collectibles"; these are not permitted within the Solo 401k according to Internal Revenue Code Section 408.

January 5 2015

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

Dmitriy Fomichenko Assets, Investing

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.