Similar to our lives, there is an actual life cycle of a Solo 401(k) plan as well. And, that is how you want to think about your Solo-K plan. If you do, it will certainly help cement in your mind how you are to operate your plan moving forward. It is important that you fully understand this analogy to fully grasp the idea of your role as the Individual 401(k) plan Trustee.
As individuals, we are born, live our life and, eventually, pass away. A 401(k) plan has, in effect, this same cycle. But instead of being born, living and passing away, you may want to think more in terms of:
Establishment (Birth) — The plan has its birth when it is either “adopted” by the sole proprietor or business owner of an incorporated entity. The plan is adopted through its Adoption Agreement, securing of an EIN for the plan and the adoption of all of the plan documents. You, as the business owner (parent), give birth to the plan by adopting (giving birth) to the plan.
Operation/Execution (Life) — Okay, your baby is born. You have established the plan, and you may have even funded the plan with a rollover from an IRA or previously-employer’s 401(k) plan. Not it needs to live its life. This will include making sure that you comply with IRS regulations on 401(k) elective deferrals and, potentially, business profit sharing contributions. It will certainly include investing plan assets and not violating IRS Prohibited Transactions. It will decide on where you wish to “house” your account….too many people automatically assume (and have been told by certain self-directed 401(k) facilitators) that they want to open their Uni-K at a local bank…that may not be in your best interests.
Termination (Death) — Just as none of us will live on forever, in most cases, neither will the plan. It will, at some point in time, pass away when you, the business owner, shuts down (either voluntarily or involuntarily) your self-administered 401(k) plan.
If you keep this “life cycle” in mind, you will find that it just may assist you in the establishment, operation/execution and termination of your plan. Just like any “life”, you will want to do your best to foster, promote and grow your plan in all three cycles.
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.