Solo 401k provides checkbook control without a custodian or LLC

With tens of thousands of self directed IRA investors utilizing LLC structures to enjoy “checkbook control” authority of their self directed IRA investments, this post may serve as great news for those who aim to follow suit.

Solo 401(k) retirement plans can grant direct checkbook control without the use of an LLC or custodian.

The concept of custodian comes from Internal Revenue Code Section 408(a)(2) and is defined in Section 408(n). This entire IRC section 408 is devoted to Individual Retirement Accounts, or IRAs. The code basically explains that an IRA is normally a trust, and the trustee must be a bank. It then defines bank as a bank, trust company, or any company specifically approved by the IRS. This capacity of trustee to an IRA is known as “custodian”. This trustee role is simply that of investing the plan as directed by the accountholder.

A Solo 401(k) plan is a type of 401(k) that is designed for self employed individuals whose businesses have no full time employees. All 401(k) plans are qualified plans, and qualified plans do not have any special restrictions on who can serve as trustee.

Custodian and trustee

So the significant difference is that with a Solo 401(k), the participant can actually be the trustee and handle the investment transactions themselves. This can serve to simplify operating the plan because no third party is introduced. Such simplification can also serve to minimize third party fees.

Titling of Assets

If you’ve been researching or operating a self directed IRA, you may be familiar with how IRA assets must be titled. If Jeremy Smith had an IRA with Sunwest Trust, his IRA’s assets would be titled as:

Sunwest Trust, Inc. F/B/O Jeremy Smith IRA

“F/B/O” means “for benefit of”. To experience the benefits of checkbook control, some self directed IRA accountholders choose to create a special purpose LLC to be owned by their IRA but managed by them. So the membership units of the LLC would be titled as:

Sunwest Trust, Inc. F/B/O Jeremy Smith IRA

…and Jeremy (as manager of that LLC) would further invest the new LLC funds to purchase assets that would be titled in the name of the LLC.

To own and directly control retirement assets in a Solo 401(k) plan can be much simpler. Jeremy would simply have his plan setup to name himself as trustee. He would then direct the plan to purchase assets to be titled to:

Jeremy Smith Solo 401k Trust

…or whatever Jeremy chooses to name the trust that exists for the sole purpose of managing the assets for his Solo 401(k) plan. In this case, there is absolutely no need to setup an LLC for the purpose of gaining checkbook control.

This convenience is little known because conventionally 401(k) plans have served as an investment vehicle for large corporations with many participants. Solo 401(k) plans are much easier and less expensive to operate. In fact, Jeremy can serve the roles of employer, employee, plan participant, plan administrator, and plan trustee. Serving the role of employer and employee allows him to contribute up to $46,000 per year to his account (or $51,000 if he’s over age 50). If Jeremy’s wife works in his business, she can participate as well and contribute up to another $46k each year.

The Downside of Checkbook Control

You may hear about potential problems of checkbook control, such as recordkeeping and legal compliance. Firstly, the only reporting required for a Solo 401(k) is annual filing of Form 5500-EZ, and it is only required once plan assets exceed $250,000 in value. There are plenty of companies who will prepare this form for about $300.

The issue of checkbook control legal compliance is quite simple. All self directed accountholders and participants must avoid prohibited transactions. This requirement and responsibility rests solely on you as accountholder/participant regardless of whether you have checkbook control and regardless of whether you are using and IRA or Solo 401(k). See an elaborate explanation here.

The facts are that when using a self directed, self administered, self trusteed Solo 401(k):

  • meeting the reporting requirements is simple, and it’s inexpensive to have Form 5500-EZ prepared for you
  • there is no special or unique risk of legal noncompliance that would otherwise be eliminated by using a custodian

Conclusion

In my opinion, a Solo 401(k) where the same person serves all roles involved is the simplest, most effective and direct way for that person to self direct their retirement plan investments. It opens doors to the most flexible options possible. This allows for investment into foreign assets, investment clubs, tax liens, precious metals, and many other investments that some custodians optionally refuse.

So if you’re self employed (through your own Corporation, LLC, or even Sole Proprietorship) and you have no full time employees, the rules are bent in your favor with a Solo 401(k) – arranging and utilizing checkbook control is easier.

Comments

  1. I had no idea you could manage retirement funds like that. It is certainly something I am going to check into.

  2. There are many articles on Solo 401Ks with checkbook control and many more on IRA/LLC setups. Every single one I have found is actually touting certain companies services. They are advertisements.
    This one (like some other articles) tries not to be an ad, but it fails to provide any information on how you can actually setup a totally self controlled Solo 401K. No do-it-yourself links and no links to companies that will set one up for a fee.
    It is great to state that it can be done and it is legal and it is the best thing since sliced bread. However, the information is not very useful without information that leads to the actual creation or conversion of the trust.
    I have searched and searched and I have only found one company (nabers) that will set up a nearly totally self-controlled Solol 401K. However, they charge just as much as a IRA/LLC setup and yearly fees of $400.
    We all need a company that will setup the account without any yearly fees.
    Why would I pay the setup and fees when for the same cost or less, I can a checkbook Solo 401K and have some outside administration and trustee work done for the money.
    It makes no sense unless there is a way to get one for less and with less or no yearly fees.
    Anyone have some links?

  3. Who can I hire to help me set up my solo 401k?

  4. DW,

    Hey it’s Jeff Nabers here, owner of Nabers Group and this site here. Let me fill in the answers to your questions…

    You’ve hit the nail on this head that the Solo 401k is great if you take action and actually set one up. I understand that you’re confused about how to set one up that has no maintenance fees. My objective here it to answer your questions so that you can take action!

    This is all actually very easy to clear up because after bringing the first self-directed, self-administered, self-trustee Solo 401k solution to the market in 2006, and after almost 4 years of offering the Solo 401k, I haven’t found a way to offer it without maintenance fees. Let me explain…

    A qualified plan (which is what a Solo 401k is) is run less by codified statutory parameters and more by parameters in the plan documents. So what your plan can and can’t do is up to your plan documents. While an IRA might have a 2 page plan document, a 401k often has 200 pages of documents.

    A Solo 401k may be simple and easy to use, but the 401k plan documents themselves are complex enough that anyone in their right mind will only use IRS approved documents.

    On that front, there are two options. The expensive option is to setup a plan and then submit it to the IRS for its individual opinion letter which is tedious, expensive, and involves waiting for the government to process paperwork.

    The instant, less expensive way is where a company like mine (Nabers Group) designs a plan document and then registers it in a special IRS program where we get one opinion letter that covers all of the plans we create and maintain.

    When a company like mine does this, we are legally required to maintain the documents (the responsibility cannot be put off on to you), and we are required to charge a fee for this. Even if we weren’t required to charge a fee, we’d have to do it anyways in order to stay in business because no company can pay expenses in providing a service without receiving income for providing that service.

    “Why not pay for an outside trustee to handle my plan?”

    1) It will cost you a LOT more money, provide zero benefit, and create the problems listed below
    2) They will limit your investment choices
    3) There will be uncontrollable delays in processing paperwork and following your investment direction
    4) Your assets will be in the hands of a government regulated entity in a time when the government is out of control and doing anything in wants… all while teetering on bankruptcy and looking for it’s next way to confiscate assets to keep itself running.

    That’s why you don’t see too many people blogging about how great their custodian Solo 401k is. Most custodian Solo 401k clients either remain oblivious to how much better a self-trustee solution is… or they end up coming to us later and regretting the thousands of dollars they flushed away and the hours of headaches they had in dealing with unnecessary paperwork and processing.

    “It makes no sense unless I can get a Solo 401k for less…”

    I would estimate our clients have been positively impacted by our services to the tune of tens of millions of dollars. And we’re a small company with a small client base that we take excellent care of.

    You might be missing the investment perspective of the decision to use a Solo 401k. If for every one dollar it costs you to execute a strategy, you get fifty dollars back… then getting tripped up on the one dollar is actually costing you a lot of money.

    I hope this helps :-)

    – Jeff

    P.S. If you’re not on our email list yet, getting on it will keep you in the loop. We are about to finish a special project that will make it possible to setup and have a Solo 401k for free. It’s not a contest or drawing… you’ll have 100% control over making sure it’s free for you.

  5. @Phil – You can set one up here… Solo 401k Setup

  6. William A Peterson says:

    I wold like to rollover present IRA funds into a Totally Self Directed IRA (401) with my own checkbook control to purchase Real Estate purchases. Can your company set up this type of an account? If so, what are your initial fees for seting up this type of account, and can I select the bank (Chase) that would be utilized for the “checkbook”?

    William A (Bill) Peterson

  7. Bill,

    We’re actually about to run a special offer to our email list, so make sure you get on it.

    – Jeff Nabers

  8. Jeff,
    On August 11, 2010 you stated above “We are about to finish a special project that will make it possible to setup and have a Solo 401k for free. It’s not a contest or drawing… you’ll have 100% control over making sure it’s free for you.”. I am interested in setting one up for “free” and would like to know more about it?

  9. Hi, Kathleen.

    That program will be coming out in the first quarter of 2011. The basic premise is that you will get an affiliate account and get credited with referral fees to offset your 401k fees. To be kept in the loop you can get on our email list by submitting a contact form here:
    http://www.nabers.com/contact-us/new-client/

    Jeff

  10. I am confused about the discussions of set-up fee – many places such as Fideluty can set up solo 401k for free …

  11. I’ve read that both my spouse and I can contribute under out business formed under an S corp (we have no other employees other, only ourselves). Can I roll my previous rollover IRA and my wife’s rollover IRA (both are pretax from previous 401Ks) into the one solo 401K? And second, there is a sub Roth on the solo 401K, can we also rollover our roth acounts into this single solo 401K account? Thanks

  12. Jeff Nabers says:

    @QY – The Solo 401k that Wall Street companies like Fidelity setup have the features that give you financial power and control turned off. They only leave on the feature of being able to buy their “investment” products. So it’s basically apples and oranges. With the Wall Street version of the Solo 401k, you are allowed to buy their products and crash with their crash and the inflationary crash. With a real Solo 401k (www.nabers.com), you have all the powers possible!

    @Terry- Yes and yes :-)

  13. Jeff,
    I currently own a franchise with my wife 50% each. We formed a multi-member LLC to operate under. We have 1 employee part time with less than 1000 hrs. Can we use the solo401k plan as our retirement plan within the existing LLC? We would also like to roll over a 401k from a former employer, as well as 2 bank IRA CDs and 2 self directed plans in a brokerage account. See any issues here? We would like to invest the money in a rental property. Also would like to be able to take a loan from the solo401k down the road to re-build out the franchise fixtures when it is up for renewal. Thoughts?

  14. If I set up my solo 401k with myself as trustee/custodian and go to get a non recourse loan for the purposes of buying real estate with 30% down, would I encounter any problems with the non recourse lender???? Thank you

  15. Jeff — I understand that you can’t roll an IRA into a 401(k), only previous 401(k) funds. Would you please explain your answer to Terry? Thanks!

  16. For solo-401k checkbook control, would one open a personal checking account or a business checking account with whatever name you wish … ex. Name – 401k Trust? If a business acct is required, wouldn’t the name on the account have to be a registered business entity?

  17. Hi,

    It is my understanding that larger 401k/IRA plans like fidelity submit documentation to IRS about the amount and individual contributes to their retirement account each year for tax purposes. How is that handled in a solo 401k with checkbook features? If the only reporting requirement is when assets exceed 250,000, how is the amount contributed prior to this reported? I am also confused on the nature of the account that has to be set up at the local bank. Thanks!

  18. FORM TO OPEN BANK ACCOUNT SELF 401K IRA,SOLO

  19. V Scott says:

    The IRS bans a self directed 401K “owner” from holding the metals personally. How do you get around this??

  20. william says:

    what is the cost to set this up for the Nabers Group

  21. We (wife, daughter and self) have an LLC treated as a pertnership. Are we eligable for solo 401k? Would we each have one or is it combined for the business?

  22. Mike Smith says:

    If you set up a solo 401k plan with a husband and wife as the beneficiary, would you have two separate accounts for each and would each vest as separate beneficiaries on a trust deed? For example, if we were funding a trust deed investment totaling $100k, would the trust deed be Company 401k Plan FBO Mike Smith, as to an undivided 50% interest and Company 401k Plan FBO Michelle Smith, as to an undivided 50% interest.

    I could see how the account for a 401k plan with a husband and wife contributing different amounts could become a nightmare if the funds are in a single account.

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