Self-Directed Solo 401(k) is for owner-only businesses or those with part-time employees only.

Business types such as sole proprietorships, limited liability companies, closely held family businesses, partnerships and corporations can take advantage of what the Self-Directed Solo 401(k) has to offer–maximized savings at a low cost and the flexibility to invest in traditional and alternative investments tax-free or by deferring taxes.

Why a Self-Directed Solo 401(k)?

There are a number of features of the Self-Directed Solo 401(k) that make it appealing to business owners.

Higher Contributions

  • 2019 Annual contributions up to $56,000 with an additional $6,000 catch-up contribution for those over age 50.
  • Contributions can be made beyond age 70 1/2.

Borrow from your Self-Directed 401(k) (Tax- And Penalty-free)

  • Borrow up to $50,000 or 50% of your account value (whichever is less) for any purpose.  Loans must be paid back within 5 years.

Checkbook Control

  • Plan participants may have the option to have checkbook control over their retirement funds.

Roth Provision

  • A built in Roth provision is included which can be contributed to without any income restrictions.

Easy Administration

  • You are the trustee of the plan.

A Wealth of Investment Options

  • You can invest in real estate, private lending, limited liability companies, precious metals, tax liens, and much more!

Exemption from UDFI

  • With a Self-Directed Solo 401(k) plan, you can use leverage to purchase real estate, which may be exempt from.

Alternative Assets & Equity Investments

In addition to investing in stocks and mutual funds, our Self-Directed Solo 401(k) allows you to invest in many types of investments such as real estate, private equity, hedge funds, gold, private loans and much more–all by writing a check.

Access to Participant Loans

Self-Directed Solo 401(k) permits you to take a loan or borrow from your retirement funds. This comes in handy if you have a growing company. Loans can be processed from the Solo 401(k) at 50% of the account balance but cannot exceed $50,000.

Also, after the loan option has been exhausted, you may qualify to take a hardship withdrawal from the plan, provided certain criteria dictated by the IRS are met.

Self-Directed Roth Solo 401(k)

Our Self-Directed Solo 401(k) permits Roth contributions, also known as after-tax contributions because taxes are paid going in but not going out. Also, Roth 401(k) contributions are allowable regardless of income level, thereby affording taxpayers, who would not otherwise be eligible, to take advantage of the Roth component. For 2019, you can also contribute up to $56,000 to your Solo 401(k), of which $19,000 can be allocated as Roth contributions.  For age 50 and over there is an additional $6,000 catch-up contribution.

1: Plan

We compose a customized (IRS approved) Self-Directed Solo 401(k) Plan (also called Self-Directed 401k) for you.

2: Trust

The Plan that we compose contains a Trust, which appoints you as the Trustee of your Self-Directed Solo 401(k) – allowing you to make all investment choices.

3: Checking Account

You establish a checking account (in the name of the Trust) at any bank of your choosing. This checking account will be used for placing all investments or loans for your Self-Directed Solo 401(k) (we assist you through this process, but never have access to your account or funds).

4: Funding/Rollover

You will fund your Self-Directed Solo 401(k) by making an initial tax-deductible contribution or by transferring funds from one or more of your existing retirement accounts or IRA into the new checking account. After you open a Solo 401(k), we can facilitate the movement of funds to your new account at no extra cost.

5: Investing

You can begin investing your retirement funds directly into alternative (and traditional) investments – by simply writing a check.

401(k)/Profit-sharing plan for your business

For 2019, this plan allows you to stash away money tax-deferred or tax-free (Roth Solo 401k), up to $56,000 (comprises of profit-sharing contribution), $62,000 if age 50 or over.

Unlimited investment options

Put your hard-earned money to work! At no additional charge, you can choose your bank to establish a checking account for your Self-Directed Solo 401(k), which will be used to make all alternative investment purchases (e.g., real estate, private investments, private loans, etc.) by simply writing a check.

In addition, should you choose to also invest in stocks and mutual funds, we will provide you with the necessary account-establishment instructions with your Self-Directed Solo 401(k) plan document at the end of the sign-up process and will facilitate the establishment of a brokerage account for investing in stocks and mutual funds. You can also choose your own discount broker.

Loan capability

This Self-Directed Solo 401(k) plan allows for personal loans. This is essential for growing companies.

The maximum amount that the Self-Directed Solo 401(k) plan can permit as a loan is (1) the greater of $50,000 or 50% of your vested account balance, or (2) $50,000, whichever is less.

For example, if a participant has an account balance of $60,000, the maximum amount that he or she can borrow from the account is $30,000.

Hardship withdrawal choice

Our Self-Directed Solo 401(k) plan gives you the option to withdraw from your Solo 401(k) under certain conditions, should you find yourself in financial hardship. Please contact us at info@turnkeyira.com or at 828-608-0539 if you would like more information on this option.

Compliance-approved plan documents

You will also receive plan documents, which are compliant with government regulations, and an IRS Determination letter confirming that this is a 401(k) plan that meets the requirements of a qualified plan .

Power to amplify tax-deductible contributions

Amplify your tax-deductible contributions through your Self-Directed Solo 401(k), up to $56,000 to be exact.  For age 50 and over there is an additional $6,000 catch-up contribution.

Access to more services

If your account exceeds $250,000, we can prepare your Form 5500-EZ at an additional cost.

Form 1099 Filing

Each time you take a disbursement from your Solo 401(k), you need to prepare a Form 1099 to report to the IRS the disbursement from the plan. We prepare this form on your behalf at an additional cost should you need this service.

A Self-Directed Solo 401(k) immediately broadens investing possibilities by permitting investing in any asset that is not disallowed under the IRS regulations. In addition to stocks, bonds, mutual funds and other securities here are some of the many investment possibilities available with a Self-Directed Solo 401(k).​

Real Estate

  • Residential Property
  • Commercial Property
  • Developed Land
  • Foreclosures
  • Rehabs/Flips
  • Mobile Homes
  • REITs

Promissory Notes

  • Mortgages/Deeds of Trust
  • Secured notes
  • Unsecured notes
  • Car Paper
  • Commercial Paper

Tax Liens/Tax Deeds

  • Tax Lien
  • Tax Deed

Others

  • Structured Settlements
  • Factoring
  • Accounts Receivable
  • Foreign Currency Exchange
  • Equipment Leasing
  • Businesses
  • Private Equity
  • Precious Metals
  • Crowd Funding
  • Bitcoin
  • Cryptocurrency

Self-Directed Solo 401(k) Contribution Limits and Types

With a Self-Directed Solo 401(k), depending on your salary and age, you could contribute $56,000 per year or $62,000 for those 50 or older in 2019.

 

Contributions to a Self-Directed Solo 401(k) consist of two types

Type 1

Elective Deferral (401k) also known as Employee Contributions. For 2019, the elective deferral increased from $18,500 to $19,000 as an employee (or $25,000 if you are 50 or older), even if that is 100% of your self-employed earnings for the year.  Contributions are made on a pre-tax basis, a Self-Directed Roth 401(k) allows you to invest some or all of your contributions on an after-tax basis.  Pre-tax contributions and their earnings will be taxed as regular income when withdrawn in retirement; Roth contributions will be tax-free in retirement.

Type 2

Profit sharing also known as Employer Contribution. For 2019, this amount cannot exceed $56,000.

If your business type is a Corporation, the maximum profit-sharing contribution is 25% of payroll income and still subject to the above profit-sharing amounts.

If your business type is a Sole Proprietor/Partnership, the maximum profit-sharing contribution is 20% of net income and still subject to the above profit-sharing amounts.

*IMPORTANT

For 2019, If you decide to take the full $19,000 for the elective deferral (Type 1), you are limited to making $37,000 in profit-sharing contributions (Type 2) so that your contributions do not exceed $56,000

 

Rollover Contributions and Direct Transfer 

You may “roll over” into your Self-Directed Solo 401(k) amounts you have in another 401(k), a governmental 457(b) plan or a 403(b) plan. You may also “roll over” amounts you have in an IRA (other than a Roth IRA) into your Self-Directed Solo 401(k).

There are no limits on the amount that you can Rollover or Transfer.

 

Claiming the Self-Directed Solo 401(k) Contribution Deduction:

Self-Directed Roth Solo 401(k) and voluntary after-tax contributions are not tax deductible, but pre-tax Solo 401(k) contributions are deductible. Claiming the pre-tax contribution deduction is driven by the type of self-employed business sponsoring the Solo 401(k) plan.

 

Qualifying for a Self-Directed Solo 401(k) Plan: 

Q:  Who can open a Self-Directed Solo 401(k) plan?

A:  Generally, any business may adopt a Self-Directed Solo 401(k). The business need not assume any particular legal form. Thus, a self-employed business owner, a partnership, a limited liability company (LLC) or any type of corporation (including a Sub-chapter S corporation) may adopt a Solo 401(k).

 

Self-Directed Solo 401(k) Establishment Deadline:

Q:  When does the Self-Directed Solo 401(k) have to be opened?

A:  An employer must establish the plan by the end of the tax year for which the tax deduction is desired. For example, an employer operating the plan on a calendar-year basis must complete the plan documentation no later than December 31.

 

December 31, 2019 Self-Directed Solo 401(k) Setup Deadline QUESTION:

Q:  I will need to set up an account by end of year correct?

A:  If you are self-employed and open a Self-Directed Solo 401(k) plan by December 31, 2019, you will be able to wait until next year (2020) to contribute $56,000 plus an additional $6,000 if you turn 50 in 2019 or are already over age 50.  This essentially means that you simply need to sign the Solo 401(k) documents by December 31, 2019 so that you can wait until next year to both open the Solo 401(k) bank account and make both annual Self-Directed Solo 401(k) contribution types (employee and employer).

 

Change in Business Name Effect on Contributions QUESTION:

Q:  For 2020 I plan on getting paid through an LLC, does this have an effect on my Self-Directed Solo 401(k) if established this year? For 2019 I am an independent contractor with no LLC or corp set up.

A:  You can still setup the Self-Directed Solo 401(k) in 2020 under your sole proprietor business. Next year, we can update the plan to list the new self-employed business. All else would remain the same (e.g., same plan name, same bank account for the Solo 401(k), etc.). The 2020 annual Solo 401(k) contributions would be based on your new self-employment income and you would have until 2021 to make those contributions.

 

Profit Sharing Contribution QUESTION:

Q:  Does that mean that for 2019 my spouse and I could EACH contribute up to $112K in Type 2 contributions into our respective Solo 401(k) plans (so:  $56K *2 = $112K theoretical max contributions).

A:  Yes, provided you each separately have enough net self-employment income to satisfy said contribution amounts.

 

Salary QUESTION:

Q:  Does my spouse need to be paid a salary from the business before the business can make a Type 2 contribution on her/his behalf?

A:  Yes, in order for either spouse to contribute to the Self-Directed Solo 401(k) plan, whether employee or employer contributions, the spouse that wants to contribute to the Solo 401(k) plan has to have net self-employment income.

 

Employee Contribution QUESTION:

Q:  If my spouse already maxed out her/his Type 1 contribution from her/his ‘day job’, and assuming I had the necessary net business income, could I theoretically make the max $56K contribution entirely as a Type 2 contribution?

A:  First, your spouse’s contributions have no impact on your contributions because the contribution limits are per participant. However, correct that employee contributions (Type 1) are capped at $19,000 for tax year 2019 (plus a $6,000 catch-up if age 50 or older) between all 401(k) plans. Therefore, if your spouse has already maxed out the $19,000 employee contribution (Type 1) to her/his day job 401(k) plan, then she/he can only make the profit-sharing contribution (Type 2) to the Solo 401(k) plan and it would be based on her/his net self-employment income from the business that sponsors the Self-Directed Solo 401(k) plan. You on the other hand, can make both the employee (Type 1) and profit-sharing contributions (Type 2) to the Solo 401(k) plan if you have net self-employment income and have not contributed to any other 401(k) plan.

 

Do I have to Make Contributions QUESTION:

Q:  What is the minimum I should contribute every year to keep my Self-Directed Solo 401(k) in good standing with the IRS?

A:  While one of the benefits available under a retirement plan such as a Self-Directed Solo 401(k) plan is the ability to make annual contributions even if you are over age 70 1/2, you are not required to make annual Solo 401(k) contributions in order to continue with the Solo 401(k) plan.

 

Contribute for Spouse QUESTION:

Q:  Do I need to make equal Self-Directed Solo 401(k) contributions for me and my spouse or can they be different?

A:  Because a Self-Directed Solo 401(k) plan is only for owner-only businesses, equal contributions do not apply; therefore, just one spouse can contribute while the other does not.

 

Contribute to Self-Directed Solo 401(k) and Day-Time Job 401(k) QUESTION:

Q:  As a W-2 employee, participating in her/his employer’s 401(k) already, how much can she/he contribute to our Self-Directed Solo 401(k) plan each year? She/he is 58 years old.

A:  Your spouse’s ability to contribute to a Self-Directed Solo 401(k) depends on the self-employment income that she/he receives from the partnership.  Specifically, in order to determine how much she could contribute to the Solo 401(k) she/he would take the amount reported on her/his K-1 and reduce it by one half of the self-employment tax.  Of that number, she/he could contribute for 2019: (i)  up to $25,000 as an employee contribution (less any amount contributed as an employee contribution to her/his 401(k) plan sponsored by her/his daytime employer); and (ii) a profit-sharing contribution to the Self-Directed Solo 401(k) equal to 20% of that same number (i.e. from her/his K-1 -1/2 of the self-employment tax) provided that her overall contribution to the Solo 401(k) cannot exceed $62,000.

 

Self-Directed SIMPLE IRA and Self-Directed Solo 401(k) Contribution QUESTION:

Q:  I wanted to confirm if I’m correct in making contributions into my Self-Directed Solo 401(k) for this year. For this year, I’m guessing I will just deposit my annual contributions into the Solo 401(k) account?

A:  Have you made any Simple IRA contributions for 2019? If you have not, do not make it to the Self-Directed Simple IRA if the Simple IRA is also for your self-employed business, as the IRS rules do not allow contributions in the same year to both a Self-Directed Solo 401(k) and a Simple IRA.

 

Documenting Contribution QUESTION:

Q:  I set up the Self-Directed Solo 401(k) bank account and I deposited $18K for annual contribution for 2019. Do you need any information on this or would it just be year-end reporting?

A:  While we do not report contributions made to 401(k) plans to the IRS, we recommend that you include information about the type of contribution (example-whether it is a salary deferral or an employer contribution), so that we can record it accordingly on your account statements.  Any reporting to the IRS would be done when you file your tax returns.

 

Guaranteed Payments Partnership QUESTION:

Q:  Can you count guarantee payments from a partnership for purposes of the Self-Directed Solo 401(k) contribution calculation?

A:  It depends on whether or not those guaranteed payments are reported on the correct line of the K-1, as contributions to a Self-Directed Solo 401(k) plan must be based on earned income from self-employment activity not passive or investment income.

 

S-Corp Contribution QUESTION:

Q:  We are an LLC taxed as an S-Corp. It appears that I may make a Solo 401(k) contribution for myself and my spouse, but we have to take w-2 income from the company, Correct?

A:  Correct since earned income for an S-corp is reported on a W-2. Both the employee and profit-sharing contribution is based on W-2 wages, and each spouse, provided they receive W-2 wages from the self-employed business, can make Self-Directed Solo 401(k) contributions.

 

S-Corp Tax Return Amendment QUESTION:

Q:  I am a CPA – I have a client (s-Corp) who has a Self-Directed Solo 401(k). They went on extension but there was a mix-up and the return was filed without a Solo 401(k) deduction and without the contribution being made. Since it is still in the extension period can the contribution be made, and the return amended?

A:  Yes, since a timely business tax return extension was filed.  The Self-Directed Solo 401(k) contribution rules allow for contributions of both the employee and employer by September 15 if a tax return extension is timely filed. See IRS Publication 560 for more information surrounding the contribution deadlines.

 

Tax Deductible IRA Contributions if I have a Solo 401(k) QUESTION:

Q:  As my spouse and I are not contributing to our Self-Directed Solo 401(k) plan, does that mean that we are not active participants and IRA contributions are tax deductible? (We do exceed the MAGI levels.)

A:  Yes, you are still considered “covered by a retirement plan at work” even if you are not making Self-Directed Solo 401(k) contributions.

While you can still contribute to a Traditional IRA, your Traditional IRA contribution deductions will be reduced (phased out) if your AGI is a certain amount.

For 2019, if you are covered by a retirement plan, your deduction for contributions to a Traditional IRA is reduced (phased out) if your AGI is:

  • More than $103,000 but less than $123,000 for a married couple filing a joint return or a qualifying widow(er),
  • More than $64,000 but less than $74,000 for a single individual or head of household, or
  • Less than $10,000 for a married individual filing a separate return.

 

Vesting and Safe Harbor QUESTION:

Q:  We can have all contributions vest immediately correct? And I can do profit sharing etc. without worrying about any Safe Harbor provisions (because this is a Self-Directed Solo 401(k). So as long as I do not have any employees I will have full flexibility correct?

A:  A Self-Directed Solo 401(k) is not subject to the safe harbor rules since it is a 401(k) for owner-only employees. Same with vesting, all contributions are fully vested immediately because it is a 401(k) plan sponsored by a self-employed business with no common law employees.

 

Already Paid Payroll Tax Through Employer QUESTION:

Q:  I think I should be able to contribute more to my Self-Directed Solo 401(k) than is shown in online calculators because I have already paid all my payroll taxes through an employer so my SE tax due is only $798 (per Turbo tax (not yet filed) vs. $2,104 (shown in the online calculator) which reduces how much it says I can contribute.

A:  While you have already paid all of your payroll taxes (i.e., social security and Medicare) through your W-2 employer, this has no impact when calculating the Self-Directed Solo 401(k) contribution as the contribution still requires the reduction of 1/2 of self-employment tax if the self-employed business is a sole proprietorship.

In other words, the fact that you have already paid some or the maximum payroll tax through your day job  means that you may or may not owe additional social security and Medicare tax, but this does not mean that 1/2 of self-employment tax does not need to be reduced from Schedule C when performing the Solo 401(k) contribution calculation.

 

Existing Self-Directed Solo 401(k) QUESTION:

Q:  If I have an existing individual 401(k) plan at a brokerage, can I adopt your plan as a restatement of my existing plan? Do I need to do that by end of this year in order to make after-tax non-Roth contributions (which are not stated as an option in my current plan)?

A:  Yes, you would need to change/restate the individual 401(k) to our Self-Directed Solo 401(k) plan this year in order to preserve the right to make Roth and/or after-tax contributions for 2019 by your tax return deadline next year.

 

State/City Tax Contributions QUESTION:

Q:  For contributions, is the Self-Directed Solo 401(k) also tax exempt for state and local income tax purposes? Non-income tax?

A:  Pre-tax contributions to a 401(k) are exempt from federal taxes as well as most state and local taxes.  You may wish to check with your state and/or local tax agencies.  Here is a link to the state tax agencies: https://www.irs.gov/tax-professionals/government-sites

 

Flow of Contributions QUESTION:

Q:  I know that since my self-employed business is an S-corporation that the contributions are based upon W-2 earnings, but do they have to come out of payroll or can they be made from my personal bank account?

A:  From a Self-Directed Solo 401(k) perspective, what matters is that the contributions (employee and employer) are made based on W-2 wages. Therefore, regardless if the funds first flow from the Corporation bank account to your personal bank account and then to the Solo 401(k) plan, it will still satisfy the Self-Directed Solo 401(k) contribution rules (i.e., both the employee and employer contributions were made by your business tax return due date and were based on W-2 wages from the S-corporation).

 

Extension Apply to Both Contribution Types QUESTION:

Q:  My LLC filed for a tax extension-does that mean I do not need to make any contributions (including my personal share) until the extension deadline?

A:  Self-Directed 401(k) contributions (both employee and employer) deadlines are based on the type of entity sponsoring the Solo 401(k) so you are correct. Please see the following.

  • If the entity type is a Sole Proprietorship, the annual Self-Directed Solo 401(k) contribution deadline is April 15, or October 15 if tax return extension is timely filed.
  • If the entity type is an LLC taxed as an S-Corporation (calendar year), the annual Self-Directed Solo 401(k) contribution deadline is March 15, or September 15 if tax return extension is timely filed.
  • If the entity type is an LLC taxed as a Partnership (calendar year), the annual Self-Directed Solo 401(k) contribution deadline is March 15, or September 15 if tax return extension is timely filed.
  • If the entity type is a Partnership (calendar year), the annual Self-Directed Solo 401(k) contribution deadline is March 15, or September 15 if tax return extension is timely filed.
  • If the entity type is an S-Corporation (calendar year), the annual Self-Directed Solo 401(k) contribution deadline is March 15, or September 15 if tax return extension is timely filed.
  • If the entity type is a C-Corporation (calendar year), the annual Self-Directed Solo 401(k) contribution deadline is April 15, or September 15 if tax return extension is timely filed.

 

Do Direct-Rollovers Impact Annual Contribution Limits QUESTION:

Q:  I would like to move $35K into my Self-Directed Solo 401(k) from an existing IRA. Would that have any impact on my contribution limits this year? And, is there a certain form I should use?

A:  No, direct-rollovers from an IRA to a Self-Directed Solo 401(k) plan do not count towards your annual contribution to the Solo 401(k) plan. You can directly rollover unlimited amounts from an IRA to a Solo 401(k) plan without affecting your annual Solo 401(k) contribution limits. We will prepare an IRA transfer form as your Self-Directed Solo 401(k) provider.

 

Mega Back Door Roth Solo 401(k) Contribution Limit QUESTION:

Q:  If I contribute to my day-job (full-time employer) 401(k) plan, can I do the Mega Roth IRA rollover thru my Solo 401(k)? (IE, contribute the maximum to the other 401(k) and get their company match), contribute extra to the Solo 401(k) plan, and then immediately roll it over to a Roth IRA?

A:  Yes, see the following.

  • The overall limit in 415C (i.e. $55,000 for 2018, and $56,000 for 2019) applies on a per employer basis provided that the employers are unrelated.
  • This limit is applied without consideration of contributions made to a plan sponsored by an unrelated employer.
  • The elective deferral limit in 402G (i.e. $19,000 for 2019) applies only to elective deferrals and does not impact after-tax contributions.
  • Here is an Example:
    • For 2019, individual contributes $19,000 of the elective deferrals to a 401(k) plan sponsored by his/her W-2 employer & additional matching and profit-sharing contributions are made up to the limit of $56,000.
    • Individual has an S-corp side business with no employees that generates self-employment income (i.e. compensation) greater than $56,000.
    • Individual can contribute after-tax contributions up to $56,000 to the Solo 401(k) sponsored by side business.

Once the Self-Directed Solo 401(k) has been funded, the Solo 401(k) participant loan can be processed immediately so no waiting period applies.

Who may borrow money from his or her Self-Directed Solo 401(k) plan?

Assuming the Self-Directed Solo 401(k) plan contains loan provisions that allow for participant loans, as my Turn Key plan document does, as trustee you are permitted to borrow from your Solo 401 (k). This option became effective beginning January 1, 2002. See [I.R.C. 4975(f)(6)(B)(iii); ERISA 408(d)(2)(C), 29 U.S.C. 1108(d)(2)(C)]

What is a reasonable rate of interest for Solo 401(k) loans?

As long as the Self-Directed Solo 401(k) loan interest rate is consistent with the interest rate charged by commercial lenders for a loan made under similar conditions, the interest rate is considered reasonable.

Based on the testimony of a DOL expert, rates considered reasonable by the DOL for loans secured by a participant’s Solo 401(k) account balance range from:

  • A certificate deposit rate plus 2 percent.
  • To the prime rate plus 1 percent.

Should the Self-Directed Solo 401(k) plan loan interest rate be reviewed each time a new Solo 401(k) loan is made?

Yes. The DOL regulations require that the reasonable rate of interest standard must be reviewed each time a loan is originated, renewed, renegotiated or modified.

As such, a Self-Directed Solo 401(k) plan sponsor cannot simply choose a loan rate at the time the plan is setup and use that rate continuously. Loan rates must be reviewed and updated as often as needed to confirm that they remain uniform with commercial lending practices.

How is the Self-Directed Solo 401(k) participant loan secured?

Up to 50 percent of the present value of a participants account balance can be used to secure a loan. This is determined at the time the Self-Directed Solo 401(k) loan is made.

Therefore, if a Solo 401(k) participant borrows one half of his or her account balance and then takes a Solo 401(k) hardship distribution before the loan is repaid, he or she will still be in compliance with this rule.

Must the Self-Directed Solo 401(k) administrator examine the creditworthiness of each Solo 401(k) borrower?

No. the DOL does not require plan administrators to review financial statements or other indications of creditworthiness of each Self-Directed Solo 401(k) participant who wants a loan.

Are there any restrictions on how a Self-Directed Solo 401(k) loan is used by a participant?

No. In fact, as long as the employer does not place any restrictions on use of the loan that would benefit itself, a fiduciary, or other party in interest, there is no reason why a participant cannot independently make the decision to use loan proceeds in a way that would benefit the employer or other restricted party.

Does the DOL impose any other restrictions on Self-Directed Solo 401(k) participant loans?

Yes. The parties to a Self-Directed Solo 401(k) loan agreement must intend to repay the loan [DOL Reg. 2550.408b-1 (a)(3)(i) For this reason, it is important that the plan administrator be diligent in ensuring amounts due on participant loans are timely made.

How may taxation of Self-Directed Solo 401(k) participant loans be avoided?

The following three conditions must be met in order to avoid taxation of a participant loan at the time the loan is made.

  1. The loan must be paid in full within five years, unless the loan is used to acquire a principal residence of the participant. See [I.R.C. 72(p) (2) (B)]
  2. The loan must require substantially level amortization of principal and interest, with payments required at least quarterly. For example, a loan for a five-year term that requires payments of interest only until the end of the term, and a balloon payment at the end, does not qualify. [I.R.C. 72(p)(2) (C)
  3. The loan is evidenced by a legally enforceable agreement and the loan is limited to a dollar limit equal to the lesser of

(a) $50,000, reduced by: The highest outstanding balance of loans during the one-year period ending on the day before the date a loan is to be made less the outstanding balance of loans on the date the loan is to be made.

(b) The greater of: One half of a participants vested accrued benefit; or $50,000.

Maximum Self-Directed Solo 401(k) Loan Amount

Generally, the maximum amount that an employee may borrow at any time is one-half the present value of his/her vested account balance, not to exceed $50,000. The maximum amount, however, is calculated differently if an individual has more than one outstanding loan from the plan.

What happens if the Self-Directed Solo 401(k) Loan amount exceeds allowed amount?

If the principal loan amount exceeds allowed amount, the amount of the loan that exceeds the limit will be deemed a distribution and thus taxable to the participant.

Applicable tax reporting the Self-Directed Solo 401(k) Loan amount exceeds allowed amount

If a Solo 401(k) loan is treated as a taxable distribution, it will be subject to a 10 percent early distribution penalty if the employee is under age 59 1/2. See IRC Sec. 72t.  If a Solo 401(k) plan loan fails to satisfy the loan regulations and is considered a deemed distribution, code L is to be used on Form 1099-R Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., to report the distribution.

DOL & IRS Self-Directed Solo 401(k) Loan Requirements

  1. The loan must have level amortization, with payments at least quarterly.
  2. The loan generally must be repaid within five years.
  3. The loan must not exceed statutory limits.
  4. Bear a reasonable rate of interest.
  5. Be adequately secured (DOL Reg. 2550.408b-1(a)(1)).

Self-Directed Solo 401(k) Loan Repayment Terms

IRC Sec. 72(p)(2)(C) requires that the loan amortization schedule provide for substantially equal payments to be made at least quarterly.

Self-Directed Solo 401(k) loan grace period for late payment

Effective January 1, 2002, Treas.Reg.1.72 (p)-1, Q&A 10, provides for a cure period that allows a loan participant to avoid an immediate deemed distribution following a missed payment. The cure period may not extend beyond the last day of the calendar quarter following the calendar quarter in which the required payment was due.

Self-Directed Solo 401(k) Loan Repayment Period (5 years and greater)

Loans must generally be repaid in full within five years from the date of loan origination (IRC Sec. 72(p)(2)(B)). An exception to the five-year payback rule exists for loans used to purchase a principal residence of the participant. If a participant wants a repayment period longer than five years, plan administrators should obtain a sworn statement from the participant certifying that the loan is to be used to purchase the participants principal place of residence (a principal residence, has the same meaning as the term under IRC Sec. 121).

Self-Directed Solo 401(k) Proper Loan Documentation

Plan loan documents should contain sufficient information to clearly demonstrate that the loan program is intended to satisfy DOL and IRS regulations.

Self-Directed Solo 401(k) Loan Agreement

The loan must be confirmed by a legally enforceable agreement (Treas. Reg. 1.72(p)-1, Q&A 3(b). According to regulations, the loan agreement must clearly identify an amount borrowed, a loan term and a repayment schedule.

Other Suggested Forms

Using the following forms further contribute to a smooth and successful Self-Directed Solo 401(k) loan program:

Loan application form
Payment authorization form

Reporting Self-Directed Solo 401(k) Loan Defaults | IRS Form 1099-R

If a Self-Directed Solo 401(k) loan is defaulted, the loan value at the time of default is taxable and reported to the plan participant and to the IRS on IRS Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Distribution code L is used only for defaulted loans when there is no offset of the plan balance as a result of a distribution triggering event under the plan. If an offset occurs, the actual distribution is reported as usual (i.e., according to the age of the participant), code L would not apply.

First Year Fee:  $895

Maintenance and Servicing Fee:  $150/annual

The annual fee covers annual plan document fees including the Year 2020 Required IRS Plan Update where you will be required to sign all new IRS approved plan documents, as well as future IRS required plan updates.

Establishment Services Includes:

  • Adoption Agreement
  • Basic Plan Document
  • Summary Plan Description
  • Appointment of Trustee
  • Beneficiary Designation
  • Loan Procedure
  • Loan Documentation
  • Transfer Request Forms for incoming funds transfer
  • IRS Registered Tax ID (EIN) with Tax Exempt Status

Under Compliance Services Include:

  • Expert Client Support
  • Assistance with filing of taf forms 5500-EZ and 1099-R (if required)
  • Maintenance of Plan Documents to ensure IRS-compliance
  • Provide Transfer/Rollover Forms
  • Assistance with Rollover/Transfer
  • Interim Plan Amendments as required by the IRS
  • Assitance Establishing Solo 401(K) Bank Account

The Do’s and Don’ts of Self-Directed 401(k) Checkbook Control

The Do’s

  • Do open checking account in the name of the Self-Directed 401(k) not your personal name as it will be considered an immediate and taxable Self-Directed 401(k) distribution.
  • Do open multiple Self-Directed 401(k) checking accounts if both Solo 401(k) trustees will be making contributions to the Solo 401(k), and/or one or both trustees will be making both traditional and Roth Solo 401(k) contributions.
  • Do deposit gains from the Self-Directed 401(k) investments; for example, real estate gains such as rents or proceeds from the sell of real-estate property.
  • Do pay expenses associated with investments held in the Self-Directed 401(k), such as rental property repairs.
  • Do make annual Self-Directed 401(k) contributions to the Self-Directed 401(k) checking account(s). Note that if both trustees are participating in the Self-Directed 401(k), each respective trustees’ contributions need to be deposited in their respective Self-Directed 401(k) checking accounts.

The Don’ts

  • Do not deposit personal funds in Self-Directed 401(k) checking account(s) unless they are truly Self-Directed 401(k) contributions from self-employment income and you qualify to make them.
  • Do not obtain a credit card in the name of the Self-Directed 401(k) or in your name.
  • Do not deposit funds from Self-Directed 401(k) to your IRA without first checking with your Solo 401(k) provider if the rules allow for it or without filling out the necessary forms and understanding that it’s a reportable transaction to the IRS on Form 1099-R using letter “G” in box 7.
  • Do not pay personal expenses with funds from your Self-Directed 401(k) as it’s considered a taxable distribution.
  • Do not pay your self a salary with funds from the Self-Directed 401(k) as it will be considered a prohibited Solo 401(k) transaction.
  • Do not commingle Roth Self-Directed 401(k) contributions and investment gains with Traditional Self-Directed 401(k) funds.
  • Do not process the Solo 401(k) loan without first having your Solo 401(k) provider prepare Solo 401(k) participant loan documents and payment schedule that conforms with the IRS Solo 401(k) rules.

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