Using a Solo-K LLC for your Investments

An IRA is required to use an LLC (or similar structure) to have checkbook control, but a Solo-K is not. However, a Solo-K may elect to utilize an LLC for plan investments, but it is not required to do so. And, it may be of great benefit to you. Think of the visual of an LLC account being the “investment arm” of the Solo-K. There are some wonderful benefits to the Solo-K having an LLC for investment purposes.

Do I Create the LLC?

No, PGI will do this for you if you elect to add it to your plan. PGI will ensure that all state regulations have been met in the creation of the LLC. As manager of the LLC, the LLC the LLC will be responsible for any on-going annual fees, filing reports if any.

Solo-K LLC – Solo-K Establishment

Makes sense, right?! I mean, you cannot very well create the LLC without first having the Solo-K plan.

Solo-K LLC – Funding

Your plan’s account is now opened at a local bank or participating brokerage firm. You will “seed” the account with new contributions or rollovers (e.g., IRA, previous employer’s 401(k)). When conducting a rollover, you will want to make sure you comply with IRS rules on correctly rolling over the funds as a non-taxable rollover. This will also include reporting the rollover on your 1040 in the year in which the rollover occurs!

Solo-K LLC – Establish the LLC

While the LLC account will need funding from its member, the Solo-K plan, the LLC can be established at any time after the plan has been established with its EIN (the Solo-K will have its own EIN). Please remember as Manager of the LLC and Trustee of your Solo-K, you will be responsible for ensuring the plan is responsible for any on-going fees or annual reports, if any, associated with your Solo-K LLC.

Solo-K LLC – Securing an EIN for the LLC

As long as you know your Solo-K LLC is going to be approved/processed by the governing State’s Secretary of State, the EIN can be secured at any time. The EIN, just like any identification number, is the identifying number for the LLC, and the Solo-K will have its own. This will be one of the documents utilized to open the LLC account at your local bank. The EIN for the LLC is definitely not the EIN for the plan.

Solo-K – Prepping/Executing the Solo-K Operating Agreement

The establishment of the LLC, through its Operating Agreement, is the glue of a compliant LLC structure. The Operating Agreement is what spells out how your Solo-K LLC must be operated. An actual “living” document, the OA spells out the IRS rules which govern the operation of the Solo-K LLC. In short, the plan must adhere to all provisions of the OA…the Solo-K LLC and its manager cannot execute any activities not expressly permitted through the executed OA.

Solo-K LLC – Open your LLC Account

Congratulations! Your Solo-K account will soon be funded, you have your Approved Articles of Organization (e.g., States may call the entity something other than Articles (Certification of Formation, as an example)), the EIN for the LLC and the Operating Agreement. Now it is time to open your Solo-K LLC account at your local bank or credit union. Your bank or credit union will most likely ask for all three of these documents to open the account, although some financial institutions may not require to review the Operating Agreement.

Solo-K LLC – May Bank won’t Open

Most banks, with the correct explanation, will open the LLC account; however, they are not legally required to do so. And, some banks will not open the LLC account as it is owned (member) by a retirement plan. If the bank does not open the account (with proper explanation), simply open at another bank.It is as simple as that.

If the bank asks you if the LLC account wants a credit card for its use….do not accept. This would be a prohibited transaction for a variety of reasons.

Solo-K LLC – Funding of LLC Account from Solo-K Plan

It’s now time to fund the LLC account so you can start investing! You will write a check or execute a wire transfer from the Solo-K plan to fund the LLC. You will not use personal funds to open the account. This is a prohibited transaction. While some may consider this a minor point…it isn’t.

Unique Issue to Wires — Obviously, if the Solo-K plan wrote a check to fund the LLC account, it would not be made payable to you, rather the LLC. In most cases, you will open the LLC account by taking this funding check and LLC documents (i.e., Operating Agreement, Approved Articles, EIN) to the bank at one time. However, you can wire funds to open the account as well. If you wish to wire the funds between institutions, I would always recommend that you make sure the bank will open the account pending the wire transfer (vs. requiring a personal deposit from you).

Solo-K LLC — Start Investing!

After all these steps, you may not have the energy! But seriously, you are now ready to make investments on behalf of your Solo-K through its newly-established and funded Solo-K LLC. Keep in mind that any investment made by the LLC will be in the name (titling) of the LLC, not the 401(k) plan, and certainly not you personally (and, sometimes, people do this!). Likewise, any returns will be made back to the LLC that made the investment.

Noted Exceptions

Like most all things in life, there are exceptions.

  1. Moving Funds Back to Solo-K Plan — You will undoubtedly be in a situation where you may wish to move funds (e.g., excess funds in the LLC) back to the Solo-K plan. As an example, you may be in-between non-traditional asset investments and want to move excess funds back to your plan held at a brokerage firm to invest in traditional assets (e.g., mutual funds). This would be permissible…just keep good records of the transaction(s);
  2. New Contributions — Keep this visual in mind: the Solo-K-owned LLC is not the Solo-K. It is an asset owned by the Solo-K. Therefore, contributions cannot be made to an asset the Solo-K plan owns. The contribution would be made to the plan, and can subsequently be invested into the Solo-K LLC, if desired;
  3. Required Minimum Distributions (RMDs) from the Solo-K — Similar premise. RMDs can only be from the plan, not an asset owned by the Solo-K; and,
  4. Solo-K Participant Loan — You know what I am going to say! Again, if a participant loan is desired to be taken from the plan, it cannot be made from the Solo-K LLC. Any participant loan executed would need to come directly from the Solo-K plan.