Administration of Your Solo 401(k)

This is a topic that encompasses many moving parts…and, we are going to address one very small (but important) moving part in this process.  Further, we are going to keep the “concept” brief and to the point without belaboring the discussion.

The administration of your Solo 401(k) is important and a responsibility that should be taken seriously.  Many companies emphasize (and understandably so) that the Solo 401(k) is an easy plan to qualify for, participate in and administer.  And, while this is true on many fronts, many times people become enamored with the freedom and flexibility of controlling their own retirement assets and investment activities, that they lose sight of the fact that their plan is self-administered and many IRS and DOL regulations must be strictly adhered to.  Keep in mind that, in most cases, you will be the Trustee of your Solo 401(k) and have legal responsibility for fiduciary operation of the plan and maintenance with retirement plan regulations.

Participant Accounts Within the Solo 401(k)

One of these areas of self-administration is correctly segregating the funds within the plan.  Segre…what?!

For many individuals, their 401(k) plan will have and should have segregated funds within the plan.  Now, don’t worry, you will have all of the access to all of the funds within the plan, but these funds should be segregated within the plan as they may be administered, invested and distributed in different manners.

Let’s use a few examples:

  • Rollover Funds — How most people may initially “fund” their plan before making contributions.  But, most individuals are not aware that their rollover funds should be kept segregated from contributory funds and other types of funds within the plan.  A quick example, there are rules which permit , provided the plan documents permit the provision of life insurance within the plan as a permitted asset.  As Trustee of the plan, would you be able to provide proof that you complied with this rule if the plans’ funds were co-mingled in one big pot?!
  • Pre-Tax Contributory Funds — This may be the most used source of funding to the plan after rollover contributions.  Reason being is that most people making employee elective deferrals to the plan will probably make their contributions in a pre-tax manner.  If pooled together with other funds, how easily can you account for these contributions….especially, possibly, after years of making investments in the plan.
  • Roth (After Tax) Contributory Funds — You are required to keep Roth funds in a specifically designated, separate account within the 401(k).  Roth funds must be kept separate from other funds in the plan, so keep this philosophy and practice in mind with the plan’s other funds….it will only help you.
  • Profit Share Funds — Whether you are a sole proprietorship with your business, or incorporated as an entity (e.g., S-Corp), your business (the employer) may make profit share contributions on the participant’s behalf.  These contributions, when made to the plan, must be made in a pre-tax manner by the employer.  And, you got it, because they are and can be treated separately with different rules, you want to keep these in a separate account.

Okay, I KNOW what you are saying under your breath….and that is something akin to the fact that you don’t believe this is necessary and this sounds like too much work.  But, not only is it not difficult, these recommendations are to protect you (as Trustee) and the plan.  If you can easily and without question account for all of the funds in the plan,…you will thank yourself later.

When considering what company you may work with in establishing your Solo 401(k) plan, keep this concept in mind.  Many companies will tell you all you have to do is “open the 401(k) account at your local bank…is is as easy as that.”  And, in some respects, it is.  But, do yourself a favor and seriously consider a painless plan set-up that will provide you two great benefits:

1)  The ability, from one account, to make both traditional and non-traditional assets investments…yes, that is what I said!  Invest in stocks, bonds an mutual funds (of course, only if you want) and assets like real estate and precious metals…all from one account.

2)  Have one plan account that separates out for you the various types of contributory accounts that you may have within the plan.  Still have access to all of the funds, but segregate them.

Your self-directed Solo 401(k) plan is a wonderful retirement vehicle for you to have the flexibility to invest as you see fit.  With proper planning, you can account, operate and administer your plan in a manner that ensures your compliance with IRS regulations.  In this case, always think of sub-accounts!

As always, the information provided is intended to be educational in nature.  It is not intended, nor should it be interpreted as, any form of tax, legal, financial or investment advice.  You must always consult with your respective professional in all such matters.