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The “Life” of a 401(k) Plan

October 20, 2014 by John Park Leave a Comment

Almost like a person, your 401(k) plan has its own “life” that can best be described as the plan’s establishment, operation and termination. For most individuals who are the Trustee of this type of plan, the plan begins and ends. Between these two dates is the operation of the plan. As you probably know, the establishment, operation and termination of the plan must adhere to various IRS and DOL regulations.

In comparison to a multi-participant 401(k) plan, the individual self-administered 401(k) plan has significantly fewer compliance reporting requirements. These requirements make an individual 401(k) plan ideal for the self-employed individual in that the plan is much easier to administer and operate than the multi-participant plan.

Establishment – The individual, self-directed 401(k) plan, like any 401(k) plan, must be established in compliance with IRS and DOL requirements. The primary tool involved in establishing the plan are the plan’s operating documents (e.g., Adoption Agreement, Basic Plan Document) accompanied with an IRS satisfactory opinion letter confirming that the plan documents meet the IRS’ requirements for a 401(k) plan. These documents must be written to be in operational compliance for the plan and the IRS must approve the plan’s documents.

Further, even with the proper documents in place, the plan and its assets must be appropriately cared for by establishing account(s) to hold and invest the plan’s assets and invest these assets in compliance with tax law. While the account for the 401(k) can be at any financial institution that will accept the plan’s funds, it is the responsibility of the plan’s Trustee to ensure that the assets are properly protected and invested.

Operation – The operation of the plan is of vital importance. While it is exciting to control the investments of the plan, the 401(k) Trustee assumes the responsibility of operating the plan in full compliance with IRS and DOL regulations.

Aspects of the plan that need to be addressed include: 401(k) plan documents, amendment, updating and re-statement of plan documents, plan investments, plan transfers and rollovers, employee and employer contributions, adherence to IRS and DOL Prohibited Transactions, plan tax reporting and plan termination.

Termination – For most individuals, the plan will be terminated at some future date. Like any “living” entity, the plan will be terminated once the business discontinues its business activities. It is important that the Trustee understands this and properly terminates the plan when needed.

Filed Under: Solo 401(k) Tagged With: 401k, self-directed 401(k), Solo 401(k)

Solo 401(k) Loans and Prohibited Transactions?

November 15, 2014 by John Park Leave a Comment

The ability to take a participant loan from any 401(k) plan, including a Solo 401(k), is an awesome feature to a 401(k) plan that permits such loans. Of course, there are rules to be followed with regard to securing the loan and repaying the loan in compliance with IRS regulations.  These rules include:

  • A loan limit of $50,000 or 50% of their account balance, whichever is less;
  • A loan repayment schedule of 5 years (or less) with an amortized loan schedule;
  • An on-going loan repayment schedule which is repaid on, at minimum, a quarterly basis;
  • No pre-payment penalties; and,
  • An interest rate that is consistent with current loan interest rates.  At minimum, the loan can be reasonable if it is the prime rate (at the time the loan is taken out) + 1%.

So, while the ability to take a loan from the plan has many significant benefits (link back to article on Solo 401(k) loans), one interesting benefit is one that very few people think of. It is a benefit that, when you initially think about it you may believe you can’t do…but you can. What is this benefit that you believe you can’t make?

Using your loan proceeds to make an investment or execute a transaction that would otherwise be treated as a Prohibited Transaction (IRC Section 4975) if it was done within the plan.

Now, let that soak in for a second. If there was always an investment that you wanted to make, or a transaction you wanted to enter into, but you couldn’t enter into the transaction because it would be a prohibited transaction, you can! This is also with the understanding that the transaction was entered into after the participant took a participant loan, and the amount kept within the permissible loan proceeds you can take from the plan with your participant loan.

You already understand this concept.  Let’s use a couple of examples:

1)  Purchase of a Car — Let’s say you qualify for the maximum loan from the plan….$50,000. And, you wanted to use these funds to purchase a vehicle that you would personally own and use. This would certainly be permissible, and you probably understand that. Your mind would most likely be wired that way.

2)  Giving Money to Your Mother — If you have done any research on self-directed plans and 401(k) loans, you understand that your mother would be a disqualified person to your plan. Your mind may initially think that you couldn’t take a loan out of your plan and turn around and give that money to your mother…I mean, she is a disqualified person, right?

But, remember, the loan is a loan and not an investment of the plan. Where you could not loan your mother money as an investment from the plan as she would be a disqualified individual, you could take the loan and do whatever you wish with the proceeds. Again, remember, it is a loan to you, the participant, and NOT an investment from the plan. You can, in effect, do whatever you wish with those funds.

It is interesting that in using these two examples, most everyone would agree that in example #1 there would not be any problem…but, if you did not give example #2 much thought, your first blush reaction might be that it could be a problem. But, the simple fact is that as long as the funds are received by the participant as a legitimate participant loan AND the participant fully complies with the repayment schedule and criterion, the participant can do whatever they wish with the funds.

Just an interesting way of looking at Solo 401(k) loans and some of the freedom you have with this tool. Just remember to follow the rules.

As always, the information is intended to be educational in nature. It is not intended, nor should it be interpreted as, any form of tax, legal, financial or investment advice. You must always consult with your respective professional in all such matters.

 

Filed Under: Solo 401(k) Tagged With: 401(k) loans, Solo 401(k)

Top 10 Solo 401(k) Benefits

September 24, 2014 by John Park Leave a Comment

There are many advantages to establishing a Fulcrum Self-Directed 401(k) plan. While the list can be expansive, think of the following benefits as your “Top Ten List” for why you should consider establishing a solo 401(k).

1)   Freedom of Investments – Want to invest in any asset not prohibited by IRS and DOL regulations…now you can! The power of investing into non-traditional assets and not just being limited to investing into traditional assets that your broker recommends. You can invest in WAY more than what Wall Street is offering you!

2)   Diversification –  You have it with the Fulcrum Self-Directed 401(k)! Why be limited to diversification within the world of stocks, bonds and mutual funds? Is that true diversification? What about real estate? What about precious metals? Don’t you think that you should have a menu of investment choices that is not limited? You can!

3)    Control – YOU are the 401(k) Trustee, not some other individual or company. You can dictate the operation of your plan and the investments you have to choose from.

4)    Protection – Protect your retirement plan against market fluctuation and volatility. Why rely solely on your broker to protect your retirement funds from such volatility?

5)    Investing with others? – You can! While one must follow all IRS Prohibited Transactions, you now have the ability to potentially invest with certain family members, friends, business associates and strangers (if you want).

6)    Rollovers and Transfers – Did you know that, general speaking, you can rollover or transfer practically any other retirement plan funds into your new 401(k)?! You can! One notable exception is the impermissibility to rollover Roth IRA funds. However, the ability to rollover or transfer practically any other retirement plan funds into your 401(k) gives you immediate funding for your plan and the investment activities of the plan.

7)    Contributions – Not only can you make a high level of annual contributions (up to potentially $57,500), you can make contributions in both a pre-tax (traditional) or after-tax (Roth) manner….or even a combination of the two. Being the self-employed participant of your Solo-K plan, you can decide the tax-favored manner in which you make your contributions.

8)    Plan Loans – You have the freedom and flexibility to take participant loans from the plan. Sure, there are IRS rules (think of duration, interest rate, etc.) to be followed, but YOU have the freedom to make that choice. Borrow up to $50,000 or 50% of the account balance (whichever is less) for any purpose you desire.

9)    No Custodian Fees — As you may already know, a self-directed IRA will have custodian fees associated with the IRA LLC. With you self-directed 401(k) plan, you will avoid a custodian fee.

10)  Other Plan Benefits – There are many. Solo 401(k) benefits were intended for to provide extensive benefits to an employer sponsored plan. With the individual, self-directed 401(k) plan, you have a tremendous amount of benefits, including asset protection.

If all this sounds good and you’d like a free consultation, give me a call at (866) 331-6350.

Filed Under: Solo 401(k) Tagged With: 401k, self-directed 401(k), Solo 401(k), solo 401(k) benefits

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About John Park

John

As co-founder of Fulcrum Self-Directed, John Park believes in the power of self-directed plans tempered by the individual responsibility to operate the plan in compliance with IRS and DOL regulations. As such, Fulcrum Self-Directed is in a unique position to assist a client in establishing an IRS compliance self-directed plan, while guiding clients with their responsibility to operate and administer their plan.

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