Solo 401k With an LLC
Solo 401k plans may be established by business owners of all forms. However, eligibility restrictions exist as the IRS treats businesses within certain groups as one for qualifying purposes.
This can provide greater investment flexibility across real estate, precious metals and cryptocurrencies while offering protection from personal creditors.
What is an LLC?
An LLC is a form of business organization designed to offer legal protection to its owners in case of legal suits, meaning creditors cannot attack personal assets owned by members in case of litigation.
LLCs differ from corporations by not being subject to as many restrictive ownership and management restrictions; additionally, profits can be distributed differently than with other business structures.
When investing a solo 401k into an LLC, all expenses and gains must go through its bank account rather than that of its members; similarly, investments must also be registered under its name.
When investing in an LLC, it is crucial to understand prohibited transactions and disqualified persons. You cannot purchase investments from an LLC of which either yourself or a family member owns more than 50%, as doing so would violate IRS rules and result in serious tax penalties. Furthermore, loans to an LLC with which you are associated cannot be granted without first consulting with them as it violates IRS guidelines and can lead to significant tax penalties.
How do I set up a solo 401k with an LLC?
If your business operates as a partnership with multiple owners, a Solo 401k plan may still be an option for you. Partners must be excluded by role rather than name as this would constitute discrimination. Your LLC assets will then be pooled together for investing with funds from your solo 401k and made in its name to provide extra protection from creditors.
Note, however, that any assets held within an LLC used to make solo 401k investments will need to be returned once you reach the required distribution triggering event. Furthermore, expenses and gains for investments made via LLC ownership will flow through its bank account rather than into solo 401k bank account.
Solo 401k plans provide you with “checkbook control” over your retirement assets, and can be combined with an LLC for maximum efficiency. We suggest reaching out to an established self-directed IRA custodian such as NuViewTrust to begin this process.
How do I fund my solo 401k with an LLC?
Step one in setting up an LLC is opening a bank account in its name, then funding your solo 401k with funds from this account. Be sure to transfer these funds directly from your solo 401k into its bank account.
Once your funds are in an LLC bank account, they can be invested in traditional or alternative assets, like real estate. Just keep in mind that any prohibited transactions – like lending money to an entity controlled by you or family members – should be avoided.
IRS allows individuals who operate businesses under LLC or C corporation structures to open solo 401k plans, although any employees other than yourself (and no debt taken on by it or dividend payments to its owners are allowed) are restricted from opening one. You also must report all income received through your business on your tax returns to stay compliant.
How do I register my LLC?
Self-employed workers find a 401(k) plan particularly suitable because it often allows higher and more flexible contribution limits than other retirement plans like SEP IRAs or traditional IRAs, plus it permits after-tax contributions.
Registering an LLC may be more expensive than registering as a sole proprietorship or general partnership, due to additional paperwork requirements such as annual reports and franchise tax payments; however, for many small businesses the additional expenses can be worth their while.
Once your LLC has been registered, you can establish a solo 401(k) through an online broker by providing your EIN and filling out paperwork. Most brokers offer various investment options and will supply a plan adoption agreement and account application; once this process has been completed you can begin contributing funds.
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