Can I use my Solo 401k to invest if I go out of business?
Answer:
If the business that adopted the 401k plan is no longer operating, the 401k plan, needs to be terminated. You have twelve months from the termination date to distribute the funds or roll them over to another plan.
I expect to own a separate business with full time employees. Will this affect my existing Solo 401k for a business I own where I'm the sole owner and the only employee?
One must first determine whether you are part of the CONTROLLED GROUP RULES set up by the IRS and Department of Labor. The Controlled Group Rules were created essentially to protect employees from a business owner or executive establishing a separate 401(k) plan for another business and thereby not offering those employees the benefits inherent in participating in a 401(k) qualified retirement plan.
The IRS and Department of Labor were concerned that business owners wanting to establish a qualified retirement plan, but not wanting the burden of having to provide benefits to all eligible employees, would create a new separate business which would have no employees other than the owner or executive and then adopt a Solo 401(k) plan for that company. Since the new company would be wholly owned by the business owner and would not have any full-time employees, the business owner could establish his or her own Solo 401(k) plan and, thus, enjoy all the benefits of having a qualified retirement plan without having to provide any benefit to the employees from the other company.
WHAT IS A CONTROLLED GROUP OF CORPORATIONS?
As per Internal Revenue Code Section 414, a controlled group is any two or more corporations connected through stock ownership in any of the following ways:
Parent-subsidiary group
Brother-sister group
Combined group
In certain situations it might be difficult to determine the controlled group status. Therefore, we recommend that you consult experienced CPA and/or a qualified ERISA attorney.
The resource below will be helpful:
https://www.law.cornell.edu/cfr/text/26/1.1563-1
I know the Solo 401k is only for self-employment businesses without employees (other than the owner). What if I want to hire employee(s) in the future?
The Solo 401k plan is an Owner-Only plan. You cannot set up a Solo 401k/ Owner-Only plan if you have full-time employees. (Full-time employees are defined as those who work over 1,000 hours within a 12-month period). The only exception is a spouse who also works for the business.
If you would like to hire employee(s) in the future, please remember that the employee must work under 1,000 hours in a 12-month period. Otherwise, you may become ineligible for the Solo 401k plan.
To ensure compliance, it is important that you, as the employer, do two things:
If you do hire full-time employees who meet the eligibility criteria, you must offer them the same benefits (e.g. a 401k plan). The Solo 401k is not set up to have any other employees besides the owner and his/her spouse. With full-time employees, you will have to terminate the Solo 401k plan and switch to a 401k plan which can include employees.
If you decide to terminate your Solo 401k plan, you will have to file a final 5500-EZ form with the IRS and transfer the funds out to another qualified plan. If you have assets in your Solo 401k plan such as real estate, you will need a self-directed type of plan or account to transfer your funds into. Most retirement plans will not accept assets such as real estate.
Self-directed 401k plans which include employees are expensive to maintain. Though it is possible, you may not want to go that route. Your two best options would then be:
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.
For my Solo 401K plan, if I have more than one employee besides me and my wife, do I have offer them a plan as well?
Answer:
You and your wife are considered owner-employees of the plan. If you have any other full-time employees (working over 1,000 hours per year), they cannot participate in this plan. You cannot have a Solo 401k if you have full-time employees working for you. You can have independent contractors working for you. Please consult your tax advisor, CPA or legal counsel to determine how you would need to structure the roles you need to fill where you’re hiring people to be independent contractors.
My parents are selling their business and retiring. They're going to make some money on the sale and are worried about taxes. They have earned income for this year to date from the business, so I am wondering if they can contribute the max to a newly opened Solo 401K and at least get the tax deferred until later. Or does it not make sense because they'll need to make mandatory withdrawals since they're 70. Is this something they should try to pursue?
Answer: Unlike a Traditional IRA which the regulations do not permit contributions once the owner reaches age 70 1/2, the solo 401k is not subject to this restriction. Therefore, the solo 401k participant can open a solo 401k and make contributions past age 70 1/2; however, he or she must commence taking required minimum distributions (RMDs) at age 70 1/2. Be aware of confusion surrounding the RMDs rule that allows participants in full-time employer plans who do not own 5% or more of the employer to delay taking RMDs past age 70 1/2 as long as they are still working. This exception to the RMD rules does not apply to solo 401k plans because the solo 401k owner is a 5% or more owner.
A 401k plan is an employer-sponsored plan, therefore in order to maintain your Qualified Retirement Plan, you must maintain a small business or some sort of self-employment activity in some legitimate form. If you shut down your current entity, but continue another type of self-employment activity and make earnings then we can amend the plan to reflect the change.
Can my spouse participate in my Solo 401k plan?
A spouse is eligible to participate in your plan if he or she is an employee of the company that adopts the plan.
Eligibility for a Solo 401(k) requires that there are no full-time employees in the adopting company other than owners, partners and their spouses. Independent contractors and part-time employees (who work under 1000 hours per year) are not considered full-time employees.
If your spouse is an employee of the company that adopts your Solo 401(k) plan, he or she is considered an “owner-employee” since the two of you are married. Another common occurrence is a husband and wife both owning and operating a business together. In both cases, both spouses can participate in the same Solo 401(k) plan.
Example
Let’s say Mary has a marketing company called “MMM Marketing”. Mary employs her husband, John, to do bookkeeping for the company. John can participate in the Solo 401(k) plan created for MMM Marketing.
Benefits of having a spouse participate in your plan
As long as your spouse is an employee of the company that adopts the plan, he or she can participate. Your spouse does not necessarily need to be an owner of the company.
Establishing separate accounts
If your spouse is participating in the plan, we recommend setting up a separate bank account in the name of the trust for the additional participant’s contributions and/or rollovers. This is best for ease of accounting. Each account can be labelled with "FBO" (for benefit of) for each participant. The same would apply when opening other types of accounts in the name of the 401k trust, including brokerage accounts.
What kinds of employees and contractors can my business hire?
Answer:
If your business has adopted a Solo 401k plan, you can employ part time persons and independent contractors. Part time persons are those who work under 1000 hours per year. Independent contractors are workers who receive 1099 compensation rather than W-2 compensation.
Can I set up a 401k for my business where I don’t have employees even if my wife has employees in her business?
Answer:
No, even if you are on paper don't own the business of your spouse, in the eyes of the IRS you own it 50/50, therefore neither of you are eligible to establish a Solo 401k plan.