Living trust as primary beneficiary
Is there a way to make my living trust the primary beneficiary of my Solo 401k?
Yes. On the beneficiary designation form, you can name your living trust as the primary beneficiary.
Setup
Active vs. passive income
What is the difference between active, or earned, income and passive income?
How can I determine if I have earned income?
Can I contribute my investment income to the Solo 401k?
Active, or earned, income is earned from your business activity. Passive income comes from investments that you hold.
Active/earned income
- Your eligibility for the Solo 401k is based on having an active self-employment business
- Contributions to your Solo 401k can only be made from your compensation from your active self-employment business
- Compensation is active/earned income
Defining compensation
- The IRS describes types of active/earned income below:
https://www.irs.gov/credits-deductions/individuals/earned-income-tax-credit/earned-income
Passive income
- Passive income cannot be contributed to your Solo 401k
- Some/all of your investment income can potentially be designated as earned income under the direction of your CPA. Please consult with your CPA to determine if your management or administrative work for your investments can be designated this way.
Contributing to Solo 401k from multiple companies
I want to be able to contribute to my Solo 401k from multiple companies to maximize the contribution potential. How can I do this?
Contributions to your Solo 401k can only be made from the adopting business of the plan. Check your plan documents for which adopting business is listed.
If you have multiple companies, you will want to choose the company that generates the most income to be the adopting business of the plan. Or, you may want to consult with your CPA on structuring your companies with a holding company:
- Set up a holding company for the separate companies, and
- Make that holding company the adopting business of the Solo 401k
Holding company
- The holding company is established to own the other companies
- It does not do business itself
Subsidiary companies
- The holding company owns the other companies, which are subsidiary companies
- The subsidiary companies conduct business
- These are pass-through entities (i.e. they don't pay taxation at their own level, the earning is passed through to the parent/holding company)
- If the subsidiary companies are single-member LLCs, for example, then the member would be the parent/holding company.
Your Solo 401k will need to list the holding company as the adopting business of the plan, which may require an amendment if your plan was already established with a different adopting business.
Does my Solo 401k need to be registered into public record?
The bank says I have to register my Solo 401k trust into public record. What do I do?
When opening a trust checking account, some clients have been told by their banks, “Your trust needs to be registered with [the state/government organization].” While this may be a bank's policy (and an uncommon one), it is not the law.
Difference between state-filed entities and trusts
Entities such as corporations and LLCs are created through filing with the state, e.g. filing Articles of Incorporation with the Secretary of State office. The filed document is then used to open a bank account for the corporation or LLC. Many banks are familiar with these types of entities.
A trust, on the other hand, is a private instrument that is brought into existence by the involved parties signing the trust agreement. The trust agreement does not need to be filed with the state/ government office or as public record for any reason. Trusts are not state-granted privileges; instead they are instruments granted by common law.
Established on a federal, not state, level
Your Solo 401k is established on the federal level, not the state level. As a retirement plan trust, the Solo 401k is covered by the IRS Opinion Letter that was included in your set of plan documents. The plan is also registered within our document system.
The plan is not registered with the state nor as public record. If requested, you can submit a copy of the plan documents to your bank, such as the Adoption Agreement and the IRS Opinion Letter.