Checkbook Control 2.0 (for the self employed)

With 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.

Custodian and trustee

So the significant difference is that with a Solo 401(k), the participant can actually be the trustee and handle the investment transactions themselves. This can serve to simplify operating the plan because no third party is introduced. Such simplification can also serve to minimize third party fees.

Titling of Assets

If you’ve been researching or operating a self directed IRA, you may be familiar with how IRA assets must be titled. If Jeremy Smith had an IRA with Sunwest Trust, his IRA’s assets would be titled as:

Sunwest Trust, Inc. F/B/O Jeremy Smith IRA

“F/B/O” means “for benefit of”. To experience the benefits of checkbook control, some self directed IRA accountholders choose to create a special purpose LLC to be owned by their IRA but managed by them. So the membership units of the LLC would be titled as:

Sunwest Trust, Inc. F/B/O Jeremy Smith IRA

…and Jeremy (as manager of that LLC) would further invest the new LLC funds to purchase assets that would be titled in the name of the LLC.

To own and directly control retirement assets in a Solo 401(k) plan can be much simpler. Jeremy would simply have his plan setup to name himself as trustee. He would then direct the plan to purchase assets to be titled to:

Jeremy Smith Solo 401k Trust

…or whatever Jeremy chooses to name the trust that exists for the sole purpose of managing the assets for his Solo 401(k) plan. In this case, there is absolutely no need to setup an LLC for the purpose of gaining checkbook control.

This convenience is little known because conventionally 401(k) plans have served as an investment vehicle for large corporations with many participants. Solo 401(k) plans are much easier and less expensive to operate. In fact, Jeremy can serve the roles of employer, employee, plan participant, plan administrator, and plan trustee. Serving the role of employer and employee allows him to contribute up to $46,000 per year to his account (or $51,000 if he’s over age 50). If Jeremy’s wife works in his business, she can participate as well and contribute up to another $46k each year.

The Downside of Checkbook Control

You may hear about potential problems of checkbook control, such as recordkeeping and legal compliance. Firstly, the only reporting required for a Solo 401(k) is annual filing of Form 5500-EZ, and it is only required once plan assets exceed $250,000 in value. There are plenty of companies who will prepare this form for about $300.

The issue of checkbook control legal compliance is quite simple. All self directed accountholders and participants must avoid prohibited transactions. This requirement and responsibility rests solely on you as accountholder/participant regardless of whether you have checkbook control and regardless of whether you are using and IRA or Solo 401(k). See an elaborate explanation here.

The facts are that when using a self directed, self administered, self trusteed Solo 401(k):

  • meeting the reporting requirements is simple, and it’s inexpensive to have Form 5500-EZ prepared for you
  • there is no special or unique risk of legal noncompliance that would otherwise be eliminated by using a custodian

Conclusion

In my opinion, a Solo 401(k) where the same person serves all roles involved is the simplest, most effective and direct way for that person to self direct their retirement plan investments. It opens doors to the most flexible options possible. This allows for investment into foreign assets, investment clubs, tax liens, precious metals, and many other investments that some custodians optionally refuse.

So if you’re self employed (through your own Corporation, LLC, or even Sole Proprietorship) and you have no full time employees, the rules are bent in your favor with a Solo 401(k) – arranging and utilizing checkbook control is easier.

Reader Interactions

Comments

  1. Hello
    I have been researching self directed IRA-LLCs with check book control for my retirement investing. Now, I am reading about solo 401ks and how they could be better, ” if I’m self employed”. Can I create an LLC and become self employed (employed as an investor of my retirement funds). This would be similar to the IRA-LLC but using the solo 401k.

    Thanks for your reply

  2. Example A
    You create an IRA LLC (an LLC that is owned by your IRA and managed by you). To qualify for a Solo 401k you must have earned income from self employment. Paying yourself a salary for this purpose would create a prohibited transaction (self dealing).

    Example B
    You create an LLC to invest in real estate (or anything else) with personal (non retirement plan) money. As manager of the LLC you pay yourself a fee for running this LLC, and that earned income makes you eligible for a Solo 401k. You can then have your LLC adopt a Solo 401k plan, and then transfer (direct rollover) existing retirement funds into this new plan.

  3. Thanks, I think I understand. Let me expand on your Example B with some dollar figures to see if I could make this work.

    I create an LLC for investment purposes. I use my own personal money to set up the LLC and the LLC now has $100 dollars in assets. Out of these LLC assets I payself $5 dollars.

    Am I now eligible for a solo 401k. Can I roll my retirement funds into the new plan. Once I roll the retirement funds into the 401k plan I can then manage that plan and invest using those funds. But the investment income is not the LLCs income it is the 401k plans income, is that correct.

  4. Theoretically, yes, but I don’t recommend you put that exact plan in action. There are no specific thresholds on how much money the business has to have or make, but to adopt a Solo 401k plan you should anticipate making significant contributions. The example above doesn’t suggest such a case.

    Don’t create a faux business just to do the 401k. On the other hand, if you create an LLC that you own and manage and put $20,000 in personal funds into it, use that money as a down payment on property, manage the property, and take a small salary, then that looks to be legitimate to me.

  5. Thank you very much. I really appreciate your info. I am planning on becoming a member of the IRA Association soon.

  6. Does the Solo 401(k) require an independent trustee, or can I can as trustee (saving a bunch of fees as well as administrative headache)? If the latter, where would one acquire a model plan? I note, for example, that in-service rollovers from the plan (a rollover where the plan beneficiary need not change employment or suffer cancellation of the plan in order to rollover plan assets to an IRA or other permissible target) are permitted by the IRC, but I don’t know of any third-party trustees whose plan documents permit it. In other words, a maximally permissive plan document would be very desirable. Of course, it would be best if said model plan had already been blessed by the IRS as conforming to the IRC, as such blessing is a formidable obstacle to anybody seeking to challenge the plan. In many states pension plans are protected from creditors only if the plan is operated in conformance with the IRC, and IRS pre-approval of the model documents creates a difficult to rebut presumption of such conformance.

  7. Oops. Had I read more carefully I would have seen that yes, I can act as the plan trustee. My question about the plan documents still stands.

  8. Hi Bob. It may not be apparent throughout my blog, but my company sets up “prototype” (meaning IRS approved) Solo 401k plans with maximum flexibility. For more information call us at 877-903-2220.

  9. Thanks for the info Jeff. I’ll check into your plans. I have a couple more questions:

    1) Can you write a blog entry about the meaning of “nonrecourse” as it applies to IRAs and 401(k) plans? Every nonrecourse loan I’ve seen isn’t really nonrecourse, they always contain carveouts for environmental problems and fraud. It isn’t obvious that contingent personal liability doesn’t run afoul of the IRC’s prohibition on personal guarantees just as a full personal guarantee does. It also isn’t obvious your 401(k) won’t blow up the moment you’re in technical default of the carveout. This is because as we all know, personal guarantees are per-se self-dealing whether or not the lender elects to recover under the guarantee. That strongly suggests your 401(k) goes kaput the moment the lender is eligible to make a demand under the guarantee, even if they allow you the opportunity to cure the problem first.

    2) Are there any SDIRA custodians that don’t charge annual, rollover-in, or rollover-out fees based on the size of the account or rollover? At some point (not in the near future thankfully) I’m going to want to rollover my Roth 401(k) to avoid RMD and I think value-based fees are a ripoff.

  10. Jeff, going all the way back up to Example A, what if my IRA only owns 49% of my company, I am the only employee and 2 other people’s IRA’s each own 25% of the company but they are not employed by it? Theoretically, can 49 cents of every 1 dollar my company makes go into my Solo 401k? If yes, what are the stipulations? If no, is there any safe way to structure something along those lines with a Roth IRA whereby you make a present-time income through its investment(s) but all or part of your income does not go to you but to your Roth IRA? Or does it still fall under “self-dealing”?

    My whole purpose for writing concerns the allowable flexibility regarding a Roth IRA. Does the face of any of your above information change if I have an existing Roth IRA that I want to self-control? I mean, I have a Roth IRA now and wnat to know if I can I use it to invest in any business I manage/own or a business I have yet to purchase or establish (maybe your answer is yes as long as I do not exceed 49% management or ownership?) and whereby 100% of the gains would go back into my Roth IRA tax-free? I think I am being clear. Thank you very much.

  11. @Bob.

    1) I’ve invited a non-recourse lender to comment. His input should be on here shortly.

    2) I agree. I regularly recommend Sunwest Trust (www.sunwesttrust.com), and they have flat fees for single-asset (LLC) accounts.

  12. Dan,

    Your IRA can’t own any interest in a company you own or work for. This is a textbook prohibited transaction. There is an arrangement (QES 401k) that work with an exemption that allows plan investment into your own company, but it can’t be done with Roth IRA funds.

  13. Thanks for publishing this great blog!

    Does all the above apply equally to a ROTH Solo 401(k), please?

    I plan to engage in several activities, including commercial real estate, and plan to make pots of money since I’m in urgent catch-up mode. I figure a ROTH deal is better for me since I expect the asset growth to be far higher than the cash invested and I don’t want to have to pay taxes on that growth when I start pulling it out later on.

    If this makes sense, do you have all the IRS approved plan verbage available in your offerings?

    Thanks!

  14. Hi, again!

    Does this SOLO deal have to be limited to a single person or a married couple? I was thinking adding my 3 kids into my existing LLC as additional members, pluss possibly a couple of kids were foster kids of our years ago.

    Thx – Geoffrey

  15. @Geoffrey – A Roth Solo 401k isn’t a different type of plan and typically isn’t a separate plan. A Solo 401k can have a written provision allowing a “designated roth account”. This ROTH account isn’t a separate plan, it’s essentially a sub-account. So, yes all the above applies to a Solo 401k that makes use of a designated roth account.

    Yes, my company uses a “prototype plan” which means each plan we setup is covered by a blanket IRS determination letter we’ve received.

    Yes, a Solo plan must be limited to a single person/couple.

  16. Thanks, again!

    If I understand the “solo” aspect correctly, my wife and I would PERSONALLY own the Solo plan, which could contain an additional “Roth” sub-account. Our existing LLC would be irrelevant; however we could effect a transfer to have the Solo plan (or the Roth component of it) own the LLC, if we wished to. We could acquire new real estate holdings in their own new mini-LLCs, each one owned by either the Solo plan or the Roth component, depending on our long-term and tax intentions.

  17. . . . and we achieve checkbook control by doing everything inside the LLC(s) – or is there something else for achieving checkbook control?

  18. Re: Achieving checkbook control

    With a Solo 401(k) this is a simple matter of naming yourself as trustee rather than electing to hire an optional custodian.

  19. . . . or, since we already have an LLC that’s been running several years (losses every year, thus far), should be just use one of your plans to set up a Roth 401(k) inside our LLC?

  20. By “mini-LLCs” – I meant LLCs formed quickly for owning a newly acquired property that we might keep for a short or a longer time.

  21. Jeff,
    Could you explain in more detail that fraze: “There is an arrangement (QES 401k) that work with an exemption that allows plan investment into your own company, ”
    I own and manage RE property as a proprietor. Can I create SOLO 401(K) to lend me money to renovate that RE property?

  22. @Michael – I will do an elaborate post in the future that expounds on the subject, but for the time being the most direct way to gain a better understanding would be to call my office at 877-903-2220. I look forward to speaking with you.

    Jeff

  23. Jeff- I have money taken from a PERA account ( I was laid off from my PERA employer) I want to to invest that money in options. I have an LLC set up already that the options money flows in and out of. Can I set up a solo 401(k) and still use my retirement money to invest? Thanks for the reply

  24. Kent,

    Anything that could be rolled into an IRA can be rolled into a Solo 401k.

    If you roll your PERA funds into a Solo 401k, then:

    1. Setting up or using an LLC isn’t necessary, and
    2. If you were to use an LLC it couldn’t be one that is already setup with existing ownership or involvement by you as an individual because that would be a prohibited transaction.

    Call my office, and we’ll put together a due diligence kit customized to your situation. 877-903-2220. 🙂

    Jeff

  25. I have a home busines and looking into setting up a Solo 401k with checkbook control. How much will it cost me to set it up with you? What are the annual fees and any other fees? Where should I set up the checking account for this?

  26. Hey Jeff,
    Do you have an example basic i401k plan document that has IRS approval I can leverage to do what you have described above?? The ones from Schwab or other trust websites are too lengthy and not directed towards taking on all responsibilities oneself and then using a custodian just for investment purposes. If you could shoot it to my email that would be great!! thx matt

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