Solo 401K Utalization
Our property management LLC established a SOLO401K based on IRS Pub 560. We are the Fiduciaries and Sole participants in the Plan. DW is a Real Estate Professional, the manager, and receives a salary. Last year Elective Deferrals and Co-Side Match where contributed. I currently receive no renumeration from the business. Our written statement allows Pre-Tax Rollovers. Phew.. my question is whether I am a Participant in this Plan. I would like to Directly Rollover Pre-Tax IRA contributions to my Plan brokerage account, isolating basis for a subsequent ROTH conversion. As much of your Forum deals with managing oversights and snafus, I wish to avoid committing a Prohibited Transaction.
Thank-you Alan et.al. for clearly addressing such queries. I learn each time I scan this Forum.
Regards,
Tom
Permalink Submitted by Alan Spross on Wed, 2012-06-06 04:21
I am not aware of any IRS guidance on your question. Therefore, from a pragmatic standpoint, if your solo K account will allow you to complete the pre tax IRA rollover, then you probably have effectively isolated your basis for a Roth conversion.
The potential problem obviously is how the IRS would view the fact that you have this solo K account and never worked in the business and therefore your plan effectively does not allow any deferrals for you. Doing the IRA rollover would make it look like this account was created solely to receive the IRA money and might constitute a fraudulent transfer of sorts. The IRS has not sorted out quite a few potential problems brought on by all the portability options that have proliferated over the last decade and are therefore behind the curve.
If you complete the transfer, it is very unlikely that the IRS will ever know that your solo K plan never received anything but an IRA rollover, so your risk probably lies in the plan coming to the attention of the IRS for some other reason. To establish more credibility, you might consider performing some services for the business so your account could receive deferrals for at least one year. You also need to include an explanatory statement with your tax return explaining the IRA to solo K rollover because the IRS tries to match your 1099R from the IRA to a Form 5498, however the plan does not issue 5498’s. This causes the IRS to think you did not complete any rollover and send you a tax bill. To prevent this, include the statement and hope they read it.
Permalink Submitted by Denise Appleby on Wed, 2012-06-06 13:53
To add to Alan’s response…It depends.
Consideration must be give as to how the LLC files, whether as a corporation or a partnership. The fact that you stated that the company established the plan, suggests that the company files as a Corporation. But as you know, it is never wise to make any assumptions when it comes to the tax code.
This response is assuming that the entity files as a corporation. If it is not, please let us know.
Whether you are allowed to rollover amounts depends on the terms of the plan document. The plan can allow any employee to rollover amounts, or it may limit rollovers only to employees who are participants. The plan document would define when an employee becomes a participant. An employee can be a participant, even if he or she does not receive a salary for the year.
It may be a legal requirement that you receive a salary from the company- I am not sure. I recall reading something about that from the IRS. I defer to your accountant regarding that issue.
Permalink Submitted by tomtom on Thu, 2012-06-07 05:10
Thank-you
Each of you addressed my question to a level helping me sort the pragmatic utilization of our plan.
As if my employ 403B allowed rollovers; loans, annuities as payout and I chose to fund it only by
IRA Rollover (no deferrals/ match..) I could ideally utilize the 403B many ways.
So it depends. On our Written Plan Statement. Which I will now review…
Our accountant is a bit aghast by our solo SOLO401k initiative. I love PUB560- to me it spells out
the intent is increased small business/ family business savings for the common man. Self funded future.
Our LLC does not function as a corporation as far as I understand. Salary limits my net basically as
unrealized depreciation and owner loans. DW’s salary funded her SimpleIRA- now rolled into the
SOLO401K. Her 50% depreciation molds our Effective Tax Rate.
These plans are an ideal means to fund the future. Friendly in many ways, liquid and self directed.
As a fiduciary there is no intent to compromise the Qualified Plan. The intent is to fully utilize the QP.
So. Looks like after 18 years daddy is gonna get an LLC salary! Knock down my 403B deferral, make a
SOLO401k deferral contribution. Move on.
Your replies have been invaluable.
Regards