Let’s get right to the point!
There are two main options—an IRA or a 401(k)—depending on your qualifications (see which one you qualify for). Following is the basic process, regardless of which you choose.
Step 1: Create your IRA Account
As the assets of the IRA must legally be held through an IRS-approved, IRA custodian, the first step is to establish the IRA account with a passive IRA custodian which will permit the IRA to purchase all assets of an IRA LLC for investment purposes. The IRA will accept transfers and rollover funds from other plans that are permitted to transfer/rollover funds to your IRA, and you will be able to make new contributions to the plan as well. As one might imagine, all transfer and rollover funds must be originally received by and through the IRA (custodian account for the IRA).
After establishing the IRA account, the IRA custodian, if requested, will request funds in transfer from a transferring (i.e., originating) IRA custodian. This is termed as a direct transfer and is a transaction directly between the two custodians. If the funds are being rolled over from an old 401(k) plan or some other type of qualified plan (e.g., 457 plan) or IRA, the IRA account owner will request that these funds be rolled over to the new IRA account. Typically, this will be done as a ‘direct” rollover, meaning that the transferring custodian will make a check payable to the new IRA custodian fbo (for the benefit of) the individual’s IRA account.
Step 2: Create an LLC to hold the IRA account assets
A self-directed IRA with checkbook control is created through an IRA LLC. Please note that an IRA LLC is a marketing term and not specifically-named IRA account by the IRS.
While your IRA account is being created and the IRS-approved custodian is requesting funds in transfer (or funds are being rolled over to the new IRA), Fulcrum Self-Directed will create a special purpose entity (the LLC) to hold the funds of your IRA in the newly-established IRA LLC. This will include the state filing for the LLC, the IRS filing and the preparation of the special purpose LLC Operating Agreement. This special purpose Operating Agreement is an important document which has specific guidelines and protocol for how the IRA LLC is to be operated to comply with IRS regulations. All documents used by Fulcrum Self-Directed have been pre-approved by the IRA custodians utilized for such plans…..no concern that plan documents will not be accepted for your IRA LLC.
Step 3: Funding your IRA LLC with IRA Funds/Assets
Once your IRA account has funded, Fulcrum Self-Directed will assist you in the facilitation of the transfer of funds from the IRA account to the IRA LLC account, meeting all requirements of the IRA custodian. In most cases, you (or your designee) will be the manager of your IRA LLC and your IRA will be the sole member of the special purpose, pass-through LLC. To review what plans can be transferred or rolled over into an IRAs, please review this IRS chart.
Step 4: Execute your Due Diligence and Invest!
As manager of your IRA LLC, you now have the freedom and flexibility to make investment choices on behalf of the IRA. No more waiting on a custodian to review and process your request to make investments with your IRA funds! No more paying transaction fees and possibly account balance fees (have never understood why someone should pay more in fees just for growing their IRA account balance!) to the IRA custodian. Make decisions as you see fit! Invest in assets that are most familiar to you and in which you have a high degree of comfort.
A Fulcrum Self-Directed IRA LLC permits your IRA to be managed by you or a designee of your choosing. The IRA (and the IRA only) owns 100% of the assets of the LLC.
I’ll be happy to walk you through the steps of your individual plan creation process. Give me a call at (866) 331-6350.
Step 1: Create your 401(k) Account
At the outset please note that the following steps are not strict timetable steps, as these steps are more fluid and usually operate simultaneously with each other. But, let’s provide structure to the steps so you have a feel for the normal progression in establishing, funding and operating your plan.
All of the assets of the 401(k) must legally be held through the 401(k) plan’s trust. Unlike the IRA, the 401(k) does not need a custodian for the plan, and you (or your designee) can serve as the Trustee of the trust.
To possibly simplify your understanding of the steps in establishing your plan, you should know the difference between establishing your 401(k) plan and where you “house” the account. The plan must be established with written documents that have been approved by the IRS. The account can be established at any bank or financial services company. It is important to note that while the account can be established at practically any financial institution, the financial institution is not required to open the account.
Similar to the IRA, the 401(k) will accept transfers and rollover funds from other plans that are permitted to be transferred/rolled over to your plan…sans a custodian. The plan will be established with respective 401(k) sub-accounts to accept all different sources of funds/contributions (e.g., rollover, pre-tax, Roth, profit share) for the plan. To review what plans can be transferred or rolled over into a 401(k) please review this IRS chart.
Regardless of where the account is “housed”, you will have checkbook control of your account, which takes us to…..
Step 2: Create…or not…an LLC to hold the 401(k) account assets
Unlike the self-directed IRA where you will need to create the IRA LLC, your 401(k) plan has the option of opening an LLC account for the 401(k). Think of this account being more of the “investment account’ of the 401(k). Do you need the LLC? No. Might you want the LLC? Yes, possibly for several reasons. But the beauty of the 401(k) plan is that you will not be required to open an LLC account unless you want to.
Step 3: Creation of Plan Documents for your 401(k)
The secret sauce of the plan. Compliant written documents for the plan that have IRS approval. Yes, these documents are required for your plan and FSD prepares the documents for the plan. In addition, if your plan is establishing a 401(k) LLC, FSD will secure the LLC, file the EIN and prepare the documents for the LLC as well. As it relates to the plan’s documents, FSD will prepare the following:
Solo 401(k) Plan Documents
The following documents are provided to the Trustee of the Solo 401(k) plan. A document description is available:
- Adoption Agreement
- Action by Board of Directors
- Appointment of Trustee
- Basic Plan Document
- Beneficiary Designation
- Deferral Document for Employee Elective Deferrals (Employee Contributions)
- EGTRRA and PPA Amendments
- Employer Identification Number (EIN) secured from the IRS
- Loan Application (for participant loans)
- Loan Policy and Procedures
- Loan Promissory Document
- Roth Conversion Amendments and Conversion Documents
- Summary Plan Description (SPD)
- Trust Agreement
- Rollover Acceptance Document
- IRS Determination letter stating that this is a Prototype Plan that meets the requirements of a qualified plan
Also, there are many documents that may become applicable to your plan in the future that FSD will provide. These include, but are not limited to the following:
- Death Distribution Document
- Hardship Distribution Document
- In-Service Distribution Document
- Regular Distribution Document
- Required Minimum Distribution Document
Finally, as Trustee of your Solo 401(k) are you wanting a 401(k) LLC established for the plan? Then keep in mind that FSD will:
- Create the LLC for the plan
- Secure the Approved Articles for the LLC
- Secure the IRS EIN for the LLC
- Prepare the Operating Agreement for the single-member LLC
- All of this is included in your set-up
Step 4: Execute your Due Diligence and Invest!
As Trustee of your Solo 401(k), you now have the freedom and flexibility to make investment choices on behalf of the plan. No more waiting on a custodian to review and process your request to make investments with your Solo 401(k) funds! You simply write the check from your 401(k) account or the 401(k) LLC account.
In this new and exciting world, no longer do you need to be concerned with paying transaction fees and possibly account balance fees…you won’t have these fees! No more being penalized by growing your account balance. Invest as you see fit and have the ability to make high level of contributions! You now have control of the retirement checkbook…you just need to follow the rules.
Give me a call. I am more than happy to provide a full and transparent description of the 401(k) process so you can determine the extent of benefits provided by this plan. Give me a call at (866) 331-6350 or email me at firstname.lastname@example.org and we can review your situation.