With a Checkbook Solo 401k account, plan owners have direct access to the account and can write a check to fund investments. But is it possible to obtain a credit card under the name of a Solo 401k plan? Find out in this Solo 401k Quick Tip video.
What happens if the business that sponsors a Solo 401k change from a sole proprietorship to an LLC or corporation? Jessica discusses the required changes in this Solo 401k Quick Tip video.
On today’s podcast, Ryan had Dmitriy Fomichenko as a guest. Dmitriy is a specialist in Solo 401Ks, and we talked all about that and why it is such a great retirement vehicle for you. We also go in depth on the differences between Solo 401Ks and SEP IRAs, as well as life insurance and the whole infinite banking concept. It’s really cool and I don’t think ever really talked about retirement on any of my channels, so for those of you wondering how you can have some tax savings or how you can put some money away, it’s a great episode and you definitely want to watch all the way through!
The IRS announced updates to 401K contribution limits for the 2022 tax year. While individual IRA limits were not increased, individuals with a Solo 401K have the ability to contribute more. The increases are some of the largest we have seen in many years.
2022 Solo 401K Contribution Limits
The plan maximum for a Solo 401K was increased from $58,000 to $61,000.
For those age 50 and older, the $6,500 catch up provision means a total of $67,500 can be set aside.
The employee deferral portion of Solo 401K contributions was increased from $19,500 to $20,500.
For purposes of employer profit sharing calculations, the employee compensation limit is now $305,500, up from $290,000.
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.
Under the SECURE Act, penalties have increased substantially. Effective for returns that are required to be filed after December 31, 2019, the SECURE Act increased the penalty to $250 per day, not to exceed $150,000 for a late-filed form.
But the penalties don’t stop there. In addition to the IRS penalty, the DOL can assess a civil penalty against a plan sponsor in an amount not to exceed $1,100 per day as a result of failure to timely file Form 5500.
Plan administrators may also face other penalties on incomplete filings unless they submit a statement of reasonable cause for failing to file a complete annual report and the DOL approves it.
This makes proof of mailing extremely important, even if it is mailed well before the deadline. Be sure to send using certified mail (such as Priority Mail), make sure it’s scanned in at the post office and save a copy of the label/receipt and the tracking history in your files. Tracking history is usually online for a limited time (several weeks), so it’s best to print it out upon delivery.
As always, if you need any assistance please don’t hesitate to contact our office.
In 2020 and prior years, Solo 401k plans could exclude part time W-2 employees who worked less than 1,000 hours from participating in a 401k plan. This all changes for both full-time employer 401k plans and owner-only Solo 401k plans starting on January 1, 2021.
The SECURE Act
Stemming from the Setting Every Community Up for Retirement Enhancement Act (SECURE Act), Solo 401k plans will be impacted by the three years, part-time (500 but less than 999 hours) employee rule that will allow part-time employees to choose to make employee elective contributions to the company-sponsored 401k plan.
2020 and Prior
Before the passage of the SECURE Act, non-owner W-2 employees (common law employees) who worked less than 1,000 hours during the plan year could be excluded from having the option to participate in a 401k plan and thus did not impact the owner-only businesses from setting up a Solo 401k plan. Only those years after 2021 are counted.
2021 and Future Years
The three year provision is effective for the 2021 plan year, but years before 2021 do not count for purposes of counting the three-year eligibility.
Long-Term, Part-Time Employee
A W-2 employee will be deemed a long-term, part-time employee once he or she completes 500 hours of service/work in three consecutive 12-month periods.
Does the SECURE Act nullify the 1,000 hours of service per year rule?
No. 401k plans must now have dual eligibility requirements. An employee can become eligible for the plan by fulfilling either: (a) the one year of service requirement (1,000 hours of service in one year), or (b) the three years of service requirement (at least 500 hours of service for three consecutive years).
The Solo 401k participant typically makes annual Solo 401k plan contribution when completing business tax return for the year. As a result, the Solo 401k participant can usually determine her IRC Sec. 404 deduction limits before making her Solo 401k contribution, thus preventing any excess Solo 401k contribution headaches.
10 Percent Penalty and Form 5330: When the Solo 401k participant contributes more than the allowable deduction for a given tax year, he is typically required to pay a 10 percent penalty on the over contribution amount also known as the excess nondeductible contribution amount pursuant to (IRC Sec. 4972). As such, this penalty amount must be reported to the IRS by the plan participant since he is the owner of the business by filing IRS Form 5330, Return of Excise Taxes Related to Employee Benefit Plans, and remit the penalty to the IRS. Please refer to IRC Sec. 404(a)(1)(E) as it details that the amount of the otherwise deductible contribution that exceeds the limitation for any given year shall be carried forward indefinitely and applied to subsequent years.
IMPORTANT: Even though excess nondeductible Solo 401k contributions may be returned to the Solo 401k employer under limited circumstances, the Solo 401k employer runs the risk of incurring substantially greater penalties by taking a reversion of plan contributions. The reversion penalty is typically as high as 50 percent depending on the circumstances pursuant to (IRC Sec. 4980).
First Determine Contribution Type
When removing excess contributions from a solo 401k plan, you first need to determine the type of contribution being removed. There are 2 (two) types of contributions that apply to a solo 401k plan.
- Type 1 (one): Employee Elective Deferrals Contributions that exceed the annual limit
- Type 2 (two): Employer Profit Sharing Contributions
The Rules Are Different for Each Contribution Type
The rules for removing the employee contributions vs the employer profit sharing contributions are different and are discussed below.
Here is what the IRS code says regarding removing Employee Contributions
If the excess salary deferral is not returned on or before April 15 of the following year, the contributing participant must pay income tax on the deferral both in the year of deferral and in the year of distribution. The deferrals are not included as after-tax assets even though they have previously been included in income in the year of deferral (IRC Sec. 402(g)(1) and (Treas. Reg. 1.402(g)-1(e)(8)). The earnings on the excess will be taxed in the year of distribution. Any corrective distribution of less than the entire amount of the excess deferral plus income is treated as a pro rata distribution of excess deferrals and income (IRC Sec. 402(g)(2)(D), Treas. Reg.1.402(g)-1(e)(10)).
For the employer contributions (profit sharing), here is what the rules state:
- They will need to remain in the solo 40k plan and treated as contributions in future years. However, a 10% penalty will need to be paid on the over contribution amount also known as the excess nondeductible contribution amount pursuant to (IRC Sec. 4972).
- This penalty amount of 10% will need to be reported by the solo 401k owner by filing IRS Form 5330, Return of Excess Taxes Related to Employee Benefit Plans, and remit the penalty to the IRS.
- Please refer to IRC Sec. 404(a)(1)(E) as it details that the amount of the otherwise deductible contribution that exceeds the limitation for any given year shall be carried forward indefinitely and applied to subsequent years.
Can your retirement account own crypto?
Yes! Cryptocurrency and other crypto assets are allowed inside of the retirement accounts just like gold, real estate, stocks, bonds and ETFs.
IRS Thoughts on Cryptocurrencies
The IRS released notice 2014-21 on March 25, 2014 where they state they don’t exactly treat cryptocurrencies like currency, but rather more like property (real estate). This sparked a long debate between the Securities and Exchange Commission (SEC) and the Commodities & Futures Trading Commission (CFTC) on whose domain crypto assets fall.
In notice 2014-21, the IRS states, “virtual currency is treated as property for U.S. federal tax purposes” which also means any profits made on selling those currencies result in “general tax principles that apply to property transactions apply to transactions using virtual currency”.
To put it plainly, the IRS will charge capital gains taxes on any profits made by selling crypto assets, either short-term capital gains (treated as ordinary income) or long-term capital gains (generally 15-20% if the asset is held longer than twelve months).
IRS Perspective: Crypto assets in your 401k
The IRS doesn’t tell you what you (or your retirement account) can invest in; the IRS prefers to tell you what is prohibited.
Both section 408 and section 4975 of the Internal Revenue Code (IRC) detail what types of investments and what type of persons are prohibited from transacting with the retirement account.
Prohibited Transaction rules are designed so that neither the participant nor the retirement account can benefit from the other’s involvement. In other words, you can’t have a sweetheart deal for yourself or the retirement account. The Department of Labor and IRS have decided the easiest way to keep that from happening is to prohibit certain “disqualified persons” from transacting with the retirement account.
A disqualified person is defined in IRC Section 4975(e)2 and generally includes:
- The 401k plan participant (you)
- Your spouse
- Your parents and grandparents
- Your children and grandchildren
- Business or entity you (or your spouse) own or have a controlling interest
- Business or entity your parents own or have a controlling interest
- Business or entity your children own or have a controlling interest
Since the IRS considers crypto assets to be a capital asset, similar to real estate or stocks/bonds, the retirement account is allowed to buy, sell and hold crypto!
Steps to Using the Solo 401k to invest in Crypto
Crypto assets are purchased from a cryptocurrency exchange. These exchanges are highly regulated as they are the “onramp” from fiat currency (e.g. dollars, pounds, yen, etc) to crypto assets.
You can open a crypto exchange account in the name of your Solo 401k trust or through a Special Purpose LLC.
The crypto exchanges Gemini, Kraken, and Bittrex will allow you to open a crypto exchange account in the name of your 401k trust.
For all other exchanges, you’ll open an account in the name of the Special Purpose LLC connected to your Solo 401k. This structure is often called a 401k LLC, similar to the IRA LLC structure (Checkbook Control IRA).
Let’s go over the steps to getting crypto assets in your Solo 401k:
- Set up and fund the Solo 401k
- Open an exchange account to buy crypto assets
- The crypto exchange account will be in the name of your 401k trust, or use the Special Purpose LLC. This should be a brand new exchange account. You cannot use a pre-existing crypto exchange account. No personal funds are allowed in this new crypto exchange account, only retirement assets.
- Complete an Investment Authorization form for your records (located under "Miscellaneous Forms" as the "General Investment" form)
Helpful Hints on Buying & Storing Crypto in the Solo 401k
- Use cold storage (offline hardware wallets): This reduces your exposure to hacking on cryptocurrency exchanges
- Open a brand new exchange account in name of 401k trust (or special purpose LLC). Do not use an existing exchange account you opened in your name for retirement account holdings.
- Only use retirement funds from your Solo 401k, or 401k LLC for your retirement funds exchange account
- Never mix personal holdings with retirement holdings (online or offline)
- As your own 401k plan administrator, keep good records of what you purchased and when
- Never share your exchange login information, or your private keys with anyone
- Always buy crypto from reputable exchanges (you are not allowed to buy or sell crypto to or from any disqualified persons)