In this week’s episode, IRA Financial’s Adam Bergman Esq. answers questions about distributing a property from a Solo 401(k), after-tax Solo 401(k) contributions, and funding a 401(k) with cryptocurrency.
Question 1 from Elena D: I have a Solo 401(k) – I am a trustee. I am planning to purchase and rehab a property. After the rehab, can I sell it to myself or transfer to my name through the refinancing with the mortgage company and return money back into the Solo 401(k) account?
If you are not yet age 59 1/2, you are not allowed to take a distribution from your Solo 401(k) plan. It doesn’t matter if it’s real estate, stocks, cash, or any other investment. Further, you cannot sell the property to yourself, since that would be deemed a prohibited transaction. You can decide to close out the 401(k) plan, and then transfer the property to an IRA. From there, you can distribute the property from the IRA, but you will owe taxes and a 10% penalty if you are under age 59 1/2.
Now, if you are at least age 59 1/2, then yes, you can take an in-kind distribution from the plan of the property. You pay taxes on the fair-market-value. You would then switch the title from your Solo 401(k) to yourself. You now own the property personally. However, you cannot transfer it back to the plan. Of course, if you still have self-employed income, you can continue to contribute to the plan, so long as you do not exceed the annual limits.
Question 2 from YouTube: Could a self-employed person deploy a combination strategy of using the deferred 19.5k, 20% of compensation via profit sharing and then contributing the 57k shortfall (let’s say 20k for this example) to the after-tax bucket and then converting only that 20k to the Roth IRA?
So long as the plan documents allow it, yes you may do so. There are essentially three “buckets” for Solo 401(k) contributions: the employee deferral, the employer profit-sharing contribution and after-tax contributions. The employee deferral allows you to contribute up to $19,500 or $26,000 if at least age 50 in pre-tax or Roth funds. This can be made on a dollar-for-dollar basis. The profit-sharing contribution can only be made with pre-tax funds and is based on a percentage of your earnings.
The last bucket is generally not found in workplace retirement plans, so you probably need a Solo 401(k) to make after-tax contributions to the plan. Those contributions can be made (dollar-for-dollar) up to the maximum limit for Solo 401(k) plans. For 2020, the limit is $57,000 if you are under 50 and $63,500 if age 50+. Those limits increase by $1,000 in 2021. After contributing to the first two buckets, you can choose to make after-tax contributions up to the limit, and then convert those funds only immediately to a Roth IRA.
Question 3 from YouTube: Can I fund my Solo 401(k) using cryptocurrency or must contributions be made in US dollars?
Simple answer – No. Cryptocurrencies are considered property by the IRS – just like stocks and real estate. Currently, you cannot contribute property to your retirement plan. You must use American dollars to contribute to your Solo 401(k) plan. You can invest in cryptos within your plan, assuming it allows for it, but you cannot fund it with them. This might change in the future, but not likely.
AdMail – Keep it Coming
We hope you enjoyed the latest episode of AdMail. Mr. Bergman will continue to respond to questions each week so long there is a demand for them! If you have any questions for him, email him at firstname.lastname@example.org.
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