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

You can utilize the checkbook control feature that our Self-Directed Solo 401(k) plans include to make investment purchases in alternative investments, such as real estate, precious metals, trust deeds, tax liens, etc., by writing a check from the Self-Directed Solo 401(k) bank account. Just make sure that you understand the do’s and don’ts before you make the investment.


Do:


· Open a trust checking account in the name of the Self-Directed Solo 401(k), not your personal name. If you do, it will be considered an immediate and taxable distribution.

· Open separate Self-Directed Solo 401(k) checking accounts for:

  • Each participant/account holder who will be making contributions to his/her own account(s), and

  • A separate account for each type of contribution that each participant/account holder will be making - pretax, Roth and/or after-tax.

· Deposit gains, such as real estate rents or sales proceeds, earned through the Self-Directed Solo 401(k)’s investments into the account that the investment is/was originally held.

· Use the account funds to pay expenses associated with investments held in the Self-Directed Solo 401(k), such as property taxes and repairs.


Don’t:


· Deposit personal funds in Self-Directed Solo 401(k) checking account(s) unless they are truly Self-Directed Solo 401(k) contributions from self-employment income, and they are eligible to be contributed.

· Use all of the funds in your account to purchase an asset that will require funds to pay for future expenses. For example, don’t use all of the money available to buy a rental property because you will need money left over in the account to pay for things like insurance, property taxes and repairs.

· Open a credit card for your plan/account in the name of the Self-Directed 401(k) or in your name.

· Transfer/rollover funds from your Self-Directed Solo 401(k) account to an IRA, or another plan, without first checking with your Self-Directed Solo 401(k) plan provider. You will need to ensure that the rules allow for it and make sure that the necessary forms are filed since it’s a reportable transaction to the IRS on Form 1099-R.

· Use funds from your Self-Directed Solo 401(k) account for personal expenses as it’s considered a taxable distribution.

· Pay yourself a salary, for any reason, using funds from the Self-Directed Solo 401(k) account as it will be considered a prohibited transaction.

· Commingle investment gains generated by one account with another account. For example, a rental property held in the Roth account cannot deposit the rents into the pretax or after-tax account.

· Process a Self-Directed Solo 401(k) loan without first preparing the participant loan application and payment schedule (promissory note) documents (provided by your plan provider,) that conform with the IRS rules.

Having checkbook control over your Self-Directed Solo 401(k) is one of the key benefits for having this kind of plan, but it can cause headaches if not administered properly. Speak with a plan specialist today to ensure that you're following the rules.


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