Can I set up a Solo 401k bank account at an international bank?
Answer:
Yes, the Solo 401k trust can have a bank account at an international bank.
Setup
What happens when my spouse stops working for my business?
Answer:
If you and your spouse work in your business together and your spouse stops working in the business, (s)he can still participate in the plan in terms of directing their existing assets in the plan. Your spouse has all the rights of the participant except the ability to make contributions into the plan.
Your spouse does not need to transfer their funds out of the plan and stop being a participant. However, (s)he can not make contributions.
Performing a Roth conversion
IMPORTANT: Before performing a Roth conversion, please make sure to educate yourself on the mechanics and consequences of Roth conversions. This is a taxable event. We always recommend that clients speak with their accountant prior to performing a Roth conversion in order to understand the tax consequences.
For information on Roth conversions, we have several articles located in our Knowledge Base regarding the Roth; please see HERE and HERE.
If you would like to perform a Roth conversion, you will need to do the following:
- Complete the In Plan Roth Conversion form, located HERE under Miscellaneous Forms.
As Plan Administrator, you will need to keep the original as part of your recordkeeping.
- Report the Roth conversion through Form 1099-R. The Roth conversion will be included as part of this year's taxable income.
Note that you are not able to rollover funds from your previous pre-tax account(s) directly into the Roth bracket. If you decide to do the conversion, you will first have to move those funds into the pre-tax portion of your Solo 401k, and then do the conversion and move the funds into the Roth.
Finally, we do recommend keeping the pre-tax and Roth funds separate by opening two separate bank accounts. This is for ease of accounting.
Plan year different than employer fiscal year
Can the plan year be different than the employer fiscal year?
Answer:
Yes, the plan year can be different from the fiscal year, but you must then pay careful attention to the deadline for making contributions.
The deadline for depositing employee salary deferrals into the plan is relatively straightforward. However, the same cannot be said for the profit sharing contributions.
For profit sharing contributions, there are different rules depending on the purpose of the deadline. In other words, one set of regulations may specify one deadline for compliance purposes, but another set requires a different deadline for deduction purposes.
In order to deduct a contribution for a given year, it must be deposited by the due date (including extensions) of the company tax return.
For example, ABC Company is a calendar year tax filer. Its 2015 company return is due March 15, 2016, but can be extended to September 15th. If ABC Company does not extend the due date of its company return, it must deposit its contributions to the plan no later than March 15, 2016, in order to claim the deduction on its 2015 return. If ABC does extend, the deposit must be made no later than September 15th.
The Annual Additions limit refers to the total amount of contributions that can be allocated to a participant's account for a given limitation year. In most cases, the limitation year is the same as the plan year. In order for a company contribution to be treated as an annual addition for a given year, that contribution must be deposited no later than 30 days following the due date of the company tax return (with extensions).
For example, the ABC Company extends the deadline for the 2015 company tax return to September 15, 2016. The date by which they would need to deposit the profit sharing contribution in order for it to be treated as a 2015 annual addition is October 15, 2016, which is 30 days after the September 15th tax-filing deadline.
Checking and savings accounts for my 401k Trust
When my Solo 401K checking account was opened, a savings account was opened at the same time. When money from my rollover was deposited, it went into the savings, not checking. Is that OK?
Answer:
When our preferred banker sets up a bank account for your Solo 401(k) Trust, the bank may recommend setting up a savings account as well. The savings account can serve two purposes:
1. Some clients like to have the savings account to avoid putting all their money into one account for fraud or insurance protection.
For example, if the check book or debit card is lost or stolen, only one account would be affected.
Also, if more than $250,000 is in the Solo 401(k) Trust, having two bank accounts allows the trust to spread the money into multiple bank accounts so that FDIC insurance covers all the funds in the trust.
2. Money in the checking account will not earn as much interest as money in the savings account, and the trustee of the Solo 401(k) has a fiduciary obligation to earn as much money as possible from FDIC insured funds.
Both accounts are in the name of the trust, so you as the trustee can move the money from one account to the other whenever you choose, which can be done easily online.
Correcting Solo 401k Trust EIN
While doing my taxes this year, my accountant realized that my Solo 401k trust has the same EIN as my business. After reviewing the paperwork you originally sent me, I realize that I made an error when I setup my Vanguard account. I gave them my business EIN instead of the trust EIN. Can I rectify this by just giving Vanguard the trust EIN?
Answer:
Contact Vanguard and explain that you originally provided them with the incorrect EIN and ask to correct it. Provide them with the copy of the letter from the IRS reflecting the correct number. Make sure as well that the account name is correct by comparing it with your plan documents.
How to choose a business to adopt your 401k plan
If you have more than one business that you own, the following can help you choose which one you use to adopt your 401k plan.
The business must have no full time, non-owner W2 employees. In fact, if you have any full time, non-owner employees that receive a W-2 in any businesses that you or your spouse own, you are not eligible for a Solo 401k at all. This is true even if you have other businesses that do no have any employees.
- Part time employees (W-2 employees who work less than 500 hours per year) do not affect Solo 401k eligibility
- Independent contractors (workers who appropriately receive a 1099 instead of a W-2) do not affect Solo 401k eligibility
- Other business owners who work for the company (such as your spouse) are also acceptable when determining Solo 401k eligibility.
Contributions to the 401k plan must come from earned income from the adopting employer. This is an important consideration. If you have a business that generates a lot of passive income, but no earned income, you will not be able to make contributions to any retirement plan, including the Solo 401k, from that business.
Adopting your Solo 401k plan with the business that provides you with the largest amount of earned income will maximize the contributions you can make to the plan.
Remember, you can adopt the Solo 401k with any entity type such as a sole proprietorship, a corporation, or an LLC. You do not have to have an established LLC or corporation to adopt the Solo 401k plan. If, for instance, you have an LLC that holds rental properties and generates very little earned income but you also work as an independent contractor as your main source of income, you can adopt the plan as a sole proprietor and make contributions based on your 1099 income.
Recharacterization of Roth conversion
Last December, my accountant grossly miscalculated my tax liability estimate, which led me to believe that a Roth conversion could be made with a manageable tax impact. Later, when she prepared my tax returns in April, I discovered that my tax liability was actually much higher, and that the tax impact of the Roth conversion was too great to make it worthwhile. Can the Roth conversion can be reversed through timely recharacterization within my Solo 401k plan?
Answer:
No. You cannot undo the Roth conversion.
The "Participant's Election" section of the In-plan Roth Conversion Amendment states that the in-plan Roth conversion is irreversible and cannot be undone or recharacterized in any manner. To not follow the terms of the plan (as stated in the amendment) would be an operational failure of the plan.
The Internal Revenue Bulletin: 2010-51 published December 20, 2010 (also listed as Notice 2010-84) provides Guidance on In-Plan Roth Rollovers:
https://www.irs.gov/irb/2010-51_IRB/ar11.html
In the Question/Answer section, it states the following:
Q-6. If a participant elects an in-plan Roth rollover, can he or she later unwind the in-plan Roth rollover, as can be done with rollovers to Roth IRAs?
A-6. No. The recharacterization rule in § 408A(d)(6) applies only to contributions to IRAs.
There is no way to reverse the Roth conversion. You will have to declare that as your taxable income and pay the taxes. Please consult with your CPA for details.
Converting property in 401k to Roth
My Solo 401k Trust owns a rental property. If I determine that it is better to pay the taxes on the value in the 401k now, could I convert the property and other cash in the account into a Roth 401k without selling and liquidating the property?
Answer:
You can convert property and other assets in your 401k into Roth. This will be taxable event so I strongly suggest you discuss this with your CPA.
For a Roth conversion of property, 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.
You will then need to complete a Roth Conversion form (located in Miscellaneous Forms). Your 401k will need to issue a 1099-R Form to you in the year following the conversion, and you will have to declare that as taxable income on your tax return.
Can a sole proprietorship sponsor my retirement plan?
Do I need to incorporate or can I adopt a Solo 401k plan as a sole proprietor?
Answer:
Any type of business structure can legally adopt the Individual or Solo 401k Plan, including a corporation, LLC, partnership or sole proprietorship. If your new business activity is going to take the form of sole proprietorship, then you can adopt the new plan as a sole proprietor.