Nabers Group Solo 401k vs. Custodian Solo 401k December 12, 2008
Posted by Jeff Nabers in : Self Directed IRA Solo 401k , add a comment
After being asked “What’s the difference between your Solo 401(k) and one offered by a custodian?” for the umpteenth time in the past few months, I figured it’s about time to write a post about it.
Why custodians exist
IRAs are governed by section 408 of the Internal Revenue Code. There they are defined as a retirement savings account trust where the trustee is a bank or a trust company (a trust company is basically a bank that holds assets but doesn’t make loans). This role is often referred to as custodian. Self directed IRAs have been in use for decades, and so self directed IRA custodians have been around for decades as well. For IRAs, there is no choice… you must hire a custodian to serve as trustee to your IRA.
The trustee role of a self directed IRA
The term “custodian” comes about in IRC Section 408 because when a bank or trust company serves the trustee role, they are not being trustee in the traditional sense. Usually the trustee of a trust makes decisions and has discretion over handling the income and assets of that trust. With an IRA, this normally isn’t the case. The bank or trust company is not making decisions or providing any other services other than custody (holding assets as an intermediary), and that’s why they are usually referred to as “custodian” – because they don’t provide any services other than custody.
Solo 401(k) is not required to have a custodian
Internal Revenue Code Section 401, which governs all 401(k) plans, does not issue any restrictions on who can serve as trustee. Not too many people have figured this out yet because the self directed Solo 401k wasn’t available until 2006. The benefits of a Solo 401k (such as higher contribution limits and reduced administrative requirements) come from the fact that you can play multiple roles. You can make higher contributions by serving the roles of employee/participant and employer. But it doesn’t stop there. The participant can also serve as administrator and trustee.
The role of administrator for a Solo 401k
An administrator simply keeps records. For a self directed Solo 401(k), a diligent investor is already keeping the records that an administrator would. These include bank statements, brokerage statements, copies of real estate purchase contracts and leases, and generally whatever paperwork accompanies a transaction of the plan. Since the self directed investor should already keep these records, it isn’t necessary or beneficial to hire another company to also keep the same records. Hiring an administrator for a self directed Solo 401k simply introduces unnecessary, undesirable fees.
The role of trustee for a Solo 401k
The trustee is simply the person or company who handles the transactions of the Solo 401k trust. As an investor, if you were to hire a custodian, (more…)
Penalty Free Early Distributions May 23, 2008
Posted by Jeff Nabers in : Money, Personal Enjoyment, Self Directed IRA Solo 401k , add a commentProbably one of the must unknown facets of retirement planning is that you can distribute before age 59 ½ for any reason without paying the extra 10% early distribution tax. How?
Substantially Equal Periodic Payments
- Set a distribution schedule calculated using IRS tables
- The schedule must have regular payments of a certain consistent amount.
- You must make receive these distributions from your retirement account either until you reach age 59 ½ or for a 5 year period… whichever is longer.
Internal Revenue Code Section 72(t) is where the extra 10% tax for “early distributions” (before age 59 ½) is imposed. However, if you read on to IRC 72(t)(2)(A)(iv) it is explained that the 10% tax is not applicable to any distribution that is part of a series of Substantially Equal Periodic Payments – or SEPP for short.
To give you an idea of how this works using calculations from IRS life expectancy tables, let’s examine a fictional case study with round numbers for simplicity:
Jared is considering early retirement at age 45, and over the years he has grown his IRA to an asset value of $2,000,000. He isn’t sure whether he wants to completely retire, work part time, pursue a career change, or start a new business. Let’s take a look at his options… (more…)
Checkbook Control 2.0 (for the self employed) May 13, 2008
Posted by Jeff Nabers in : Self Directed IRA Solo 401k , 28commentsWith tens of thousands of self directed IRA investors utilizing LLC structures to enjoy “checkbook control” authority of their self directed IRA investments, this post may serve as great news for those who aim to follow suit.
Solo 401(k) retirement plans can grant direct checkbook control without the use of an LLC or custodian.
The concept of custodian comes from Internal Revenue Code Section 408(a)(2) and is defined in Section 408(n). This entire IRC section 408 is devoted to Individual Retirement Accounts, or IRAs. The code basically explains that an IRA is normally a trust, and the trustee must be a bank. It then defines bank as a bank, trust company, or any company specifically approved by the IRS. This capacity of trustee to an IRA is known as “custodian”. This trustee role is simply that of investing the plan as directed by the accountholder.
A Solo 401(k) plan is a type of 401(k) that is designed for self employed individuals whose businesses have no full time employees. All 401(k) plans are qualified plans, and qualified plans do not have any special restrictions on who can serve as trustee.
So the significant difference is that with a Solo 401(k), the participant can actually be the trustee and handle (more…)
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