This wonderfully straightforward question has a very twisty answer. After all, retirement plans are anything but dull.
First, a bit of referential background to establish our foundation:
- 401(k) Plans are described and governed by the rules and regulations in Section 401 of the Internal Revenue Code
- IRA’s, that is Individual Retirement Accounts, abide by rules in Section 408 of the Internal Revenue Code
While the two retirement plans are often similar, they have some distinguishing characteristics that change the operation of each plan drastically.
First, let’s define an important term:
A custodian is a person or entity with fiduciary responsibility over assets. Depending on the situation, a custodian might simply be a bank or brokerage account, or it can be defined as someone who has fiduciary responsibility, or authority, over assets.
With respect to IRA plans, the Internal Revenue Code is very clear there needs to be a custodian who acts in a fiduciary role—that is a bank or trust company—that’s responsible for your assets. The required presence of a custodian is why you’re not allowed to simply be in charge of your own money with an IRA. You must have a third-party custodian acting as a fiduciary, accepting responsibility over your assets, and also deciding when and where the assets can be invested.
The lack of freedoms in the legacy financial system of custodian 401k and IRA plans is what often drives new clients to Nabers Group to set up a self-directed Solo 401k plan. These investors are looking for freedom to invest their money, on their terms, without having to ask permission of a third party.
However, with an IRA, that’s simply not possible as the third-party custodian/fiduciary/trust company role is written right into the tax code.
Freedom and Control with a Solo 401k
As we now know, 401(k) plans live in a different section of the tax code. Therefore, when the code refers to a custodian, it is simply referring to where the assets are held, rather than who has governing authority over those assets. Keep in mind, you must still have a custodian somewhere holding the assets—that is, you can’t just stuff your 401k dollars under your mattress. The funds still must be held in what the IRS would consider a bank or trust company (a regulated body).
Therefore, with a Solo 401k plan, if your funds are liquid (cash), they may be “in custody” of a regulated bank or brokerage account. If your funds are invested in an asset such as bitcoin or real estate, they are “in custody” of you as the plan trustee.
The terminology for the “controlling party” in a Solo 401k is the plan trustee.
“Trustee” is to a 401k plan as “custodian” is to an IRA. The trustee is the party who decides where, how, and when trust funds assets are spent and invested.
With a Solo 401k in particular—you are allowed to be your own trustee.
Nabers Group as your IRS-approved document provider is not the trustee of your Solo 401k plan because we never touch your money, we never handle your assets, and we’ll never tell you what to invest in.
But Where Does it Actually Say I Can Be My Own Trustee in the Tax Code?
For this answer, we have to both read between the lines, and infer our next steps from the IRS.
The Employee Retirement Income Security Act of 1974 (ERISA) was a federal regulation created to regulate employer-sponsored benefit plans. ERISA was enacted in an attempt stop unfair practices in employer-sponsored retirement plans.
With any 401(k) plan, large or Solo – there exists a trust which holds the retirement plan assets.
In a typical large company 401k, the participating employees will invest their money into the 401k plan by putting their funds into that one trust account. Because so many different people’s funds are in one trust, certainly they can’t all be their own trustee. Not only would it be an administrative and bureaucratic nightmare, but having multiple trustees of one trust fund could lead to untoward practices with the group’s co-mingled funds.
With traditional large 401k plans where multiple participant’s funds are mixed in a single trust, there exists a third-party administrator (TPA). The job of a TPA is to ensure fair practices of everyone’s co-mingled funds. The TPA is a non-biased third party tasked with keeping records of the 401(k) plan funds, and completing any required paperwork and reporting for the plan.
All 401k plans that are subject to ERISA, have a trustee and an administrator.
When the Pension Protection Act passed in 2006, the door opened for small businesses without employees to have their own 401k plan.
Small business 401k plans are called one-man plans, self-directed 401k, self-employed 401k, individual 401k, or a Solo 401k. These plans are designed for small businesses without any employees. If there are no employees in the business, no outside participants (other than the business owner) will have funds in the trust.
If only the business owner (or perhaps business owner and spouse) has funds in his 401k trust, the business owner may act as his own trustee.
The ERISA act has four titles, which detail the rules regarding fairness, testing and regulations regarding 401(k) plans.
Title 1 of ERISA, which discusses non-discrimination testing, does not apply to the Solo 401k plan. Testing is not applicable in a Solo 401k plan because only the business owner (and potentially spouse) have funds in the plan. This makes the administration and reporting of a Solo 401k plan far simpler than a standard corporate 401(k) plan.
Because only your money is in the 401k trust, you are able to act as administrator of the Solo 401k Plan and trustee of the Solo 401k trust. Therefore, you are allowed to direct your own assets and where you want the money to be invested.
How Does This Work On A Practical Level?
The Solo 401k consists of two parts—1) the 401k Plan, which is a complex set of IRS-approved documents we prepare and amend each year, and 2) the 401k Trust, where the funds actually reside (typically a bank, brokerage account, or both).
Many Nabers Group Solo 401k accountholders have a little of everything from real estate to private lending and stocks and bonds.
In practice, this can manifest as two bank accounts (one for Roth funds and one for traditional funds), a brokerage account for traditional equities, a bitcoin exchange account, private lending accounts, and more.
All of the above named accounts fit under the umbrella of the Solo 401k Trust, with the tax ID number that’s coded to the Solo 401k Plan.
This way way, you can have multiple accounts, but they’re all under that one trust structure, and you are the trustee.
25 Responses
Thanks for your valuable efforts for writing this post! I was searching for the Trustee of solo 401k. Got the answer!
Is there any harm with my solo when I invest the funds, to title myself when signing, as Trustee/Custodian or Trustee/Administrator?
Hi Ed – great question. You’ll want the asset titled in the name of your 401k trust. However, you may sign as the trustee and it’s OK to write “trustee” after your name.
In a multi-member LLC, who is the trustee and the administrator?
Are there any restrictions on the number of trustees and administrators per multi-member LLC?
For example, if the LLC has 6 owners, would there just be one plan administrator, and then each member is the trustee of their own distinct 401k account?
Hi Sophia, great question! Before we begin, please note we are prohibited from giving tax, legal or investment advice. Always work with your CPA and/or legal counsel when you’re dealing with retirement accounts 🙂
With our self-directed Solo 401k plan, we establish a new “solo” plan for each member of the multi-member LLC. Therefore, each member is his own administrator and trustee. This allows the funds to remain truly “Solo”. In your example, we’d establish 6 distinct Solo 401k plans, and exclude the other members from participating. We exclude by role title, since it is discrimination to exclude someone by name.
Therefore, if your business has a President, Vice President, Treasurer, etc – we’d create a plan for the Treasurer, and exclude the president and VP, and so on. This way, only the trustee named in the plan documents has his funds in the trust, and is able to self-direct those funds without involving the cost and bureaucracy of a third-party administrator.
My solo401k partners with other individuals or their self-directed ira accounts in a joint venture. We buy mortgage debt and use a personal property trust with each partner as the beneficiary. Since I am the trustee of my solo 401k, is there any issue or regulatory problems with myself acting as trustee for the personal property trust entity on this joint venture?
Hi Bob, great question. You’ll want to work with your CPA and/or legal advisor here. Remember that just replying to a comment can’t be tax or legal advice! That said, it might be prudent to have someone else act as trustee. This way, the IRS doesn’t think you are self-dealing in acting as trustee for the trust holding your retirement assets. Remember you always want to keep “arm’s length” distance to ensure there are no prohibited transactions. Again, work with the legal advisor helping you structure these deals to make sure you are on the right side of the IRS!
Can I transfer funds from my employer’s sponsored 401k plan to a solo 401k while I’m still employed with them?
Excellent question and the answer is MAYBE! You’ll want to ask if your employee will allow a “partial in-service distribution”. It may be possible to get some (or all) funds out, but you’ll need to check with your current plan provider.
What kind of information do you as a company provide for filing taxes at the end of the year?
Also, how does it all get reported on my end tax wise? Do I report every line item I’ve spent? I’m trying to understand how complex the reporting needs to be especially when trading crypto’s.
Thanks for your message, Carol! We provide full support to our clients with respect to filing and any reporting for the Solo 401k. Remember, the Solo 401k doesn’t have a tax return so fortunately the reporting is quite straightforward. As your own 401k plan administrator, you want to keep track of the records of the plan so you always know how much money is coming in and going out. Somewhere (spreadsheet, Quickbooks, our record keeping software), you’ll keep track of every line item of funds in your 401k plan, just like you do for your own business bookkeeping. Fortunately, with crypto trading you can often download your statements/history of trades so it’s actually pretty easy to keep track of your funds history! Reach out to us if we can help more and keep going! 🙂
Can I hold another IRA dedicated to Cryptocurrency inside of the Solo 401 IRA ?
Hi Bryan. Great question. IRAs don’t exist inside of 401k plans. However, your Solo 401k can hold crypto inside the 401k trust or through a Special Purpose LLC. Additionally, our Solo 401k plans automatically include Roth sub-accounts so your crypto holdings can be pre-tax or Roth.
Hi, I have an LLC for a real estate investment company. I do various types of deals, including wholesales, fix and flips, and rentals. I would like to use my Solo401k for providing capital to my LLC to purchase real estate in all cash offers. Usually, the all cash offers are the ones that can generate the greatest return. The property will be recorded under the LLC name and sold after 3 months. When I sell the property, would I be required to distribute the capital gains entirely to my Solo401k since I used the Solo401k funds as the capital to purchase it? I would like to distribute a portion of the gain as pass through income. Is this possible? What is the best way to manage the distribution of revenue? Thanks!
Hi James, thanks for your message. The IRS prohibits you from using Solo 401k funds to invest directly into an LLC you own. You are a disqualified person to your plan so using your Solo 401k funds to invest in your own LLC would be a prohibited transaction and carry a hefty fine! If you need access to capital for your LLC, we’d recommend you take a participant loan from your Solo 401k plan. This way, you can use the cash for your LLC and pay the Solo 401k back. This keeps your transaction neat, clean, and compliant!
Cardano $ADA is a cryptocurrency that you hold in a wallet and stake for rewards.
I’d be interested in opening a sdIRA if able to purchase Cardano and sort in the Daedalus wallet.
Thanks for your comment, William. Our Solo 401k and Freedom IRA allow you to buy and hold any cryptocurrency (including Cardano/$ADA) and on any wallet. Check this article out for more!
I have a trust account with a bank where I am the trustee of my own Solo-401K account.
I am trying to rollover some funds from an existing former employer 401K plan to my solo-401K trust account.
What is the proper way rollover the funds without incurring any tax penalty.
Should the check from my 401K be made out to the name of my trust, my solo-401K plan or myself?
Should the check be deposited directly to the trust account or into my personal account first and then transferred to the trust account within 60 days?
Hi John, great question! The releasing custodian should make the rollover check payable to your Solo 401k trust. That check should then be deposited into the bank or brokerage account, also in the name of the 401k trust (and using the 401k trust EIN, if you have one). Do not deposit the check into your personal account, or it could be treated as an indirect rollover. If the check is payable to your 401k trust, and deposited into your 401k trust bank account, it should be a direct rollover. Make sure you work with your Solo 401k provider (like Nabers Group!) as we will provide a sample 1099-R for you to share with your releasing custodian so they properly document a (non-taxable) direct rollover.
Hi
I opened a solo 401k for entity type as sole proprietorship with my name as plan sponsor and my and my wife’s name as trustees. Initially, I intended this to for my self 401k funds rollover as I left my ex-employer and started working for self. But, now my wife would also like to move her IRA account funds to this solo 401k trust (obviously under separate account from bank custodian).
My question is – can we do this without any amendment to my solo 401k plan documents because as my spouse she can participate this plan OR do we have to update the plan documents to include her name as plan sponsor?
Thank you!
Hi Raj, thanks for your message! It doesn’t look like Nabers Group set up your Solo 401k plan documents, so I can’t speak to whether an amendment is necessary for your specific plan. With a Nabers Group plan, we can add your spouse at any time (complimentary). If yoru wife works in your business, then she is eligible to participate in the company retirement plan as an employee benefit. If you’d like to explore whether restating to Solo401k.com and Nabers Group is the right fit, one of our experts will be happy to help and you can schedule time with us here: https://www.solo401k.com/consult
Can I have the solo401k for index funds at Vanguard and the real estate/hard money loan part with you? Would this be under your companies umbrella?
Hi MP, yes you sure can! Your Solo 401k is like an umbrella and can have multiple deposit/investment accounts. You might choose to open a Solo 401k with us and then establish a Vanguard account for your traditional equities (stocks, bonds, funds) and a separate bank account for your real estate deals and hard money lending. Our Solo 401k plan lets you have access to it all 🙂
Thanks for clarifying! I know under IRS rules only one solo 401k is allowed so sounds like this would be one solo401k with sub accounts…
I’ve read that 401k plans are shielded/protected by law from lawsuits/debt collectors, etc. Is this true and if so, are http://www.solo401k.com 401ks be similarly protected? Thank you!