Updated: Apr 23, 2021
One of my favorite things to do is answer questions about Self-Directed Solo 401(k)s. No, really! I enjoy helping people understand how they work and how to stay compliant. I get all kinds of questions, but some come up quite often. Here is a quick Q&A* with the most common inquiries that I received in 2020.
Q: How does the company match work for Solo 401ks?
A: With Solo 401ks it is not necessary to have a match. Traditional group 401ks have matches so that the sponsoring company can incentivize and reward its employees by matching the employees’ contributions (up to a pre-designated percentage) which provides the added benefit of increased 401k funds. Since Solo 401ks are retirement plans for nonemployer business owners, there is no employee to incentivize. The business owner would utilize the profit-sharing contribution option to increase the 401k funds in their own account instead.
Q: What is the minimum amount that must be contributed to the Solo 401k in the first year and years to follow?
A: The Solo 401k account should be funded with ‘something’ within the first couple months of being adopted. There is no defined minimum amount, however, that needs to be contributed at that time or within the first year. I typically recommend contributing at least a few hundred dollars to get started so that the IRS sees the plan as in effect. After the initial funding in the first year, additional contributions in the years to follow can be in any amount up to the limit for that year. The amounts can change from year to year. If the account holder does not want to contribute anything in a given year, for whatever reason, that’s OK too.
Q: How soon can I start investing once a contribution is made or a rollover into my Solo 401k hits?
A: Once the funds have cleared, you can invest them as soon as you want. There is no time constraint as to how long the funds must be in the account (brokerage or checking) before they can be invested.
Q: If I have a real estate investment in my Self-Directed Solo 401k, do I need to do a 1031 exchange when I sell it and want to reinvest the gain into another property?
A: No. Solo 401ks and 1031 exchanges are similar in that they are both tax-deferral strategies. When pre-tax solo 401k funds are invested in real property and then the property is sold, the proceeds will go back into the Solo k account which allows the account holder to defer paying tax on the gain and reinvest the funds. The proceeds won’t be taxable until the account holder starts taking distributions, generally in retirement.
Part 2 can be found here.
*These answers are for informational and general-purpose use only. Please schedule a call with me to discuss your particular situation for a customized answer.