Small business owners and self-employed professionals are eligible to start a retirement plan much like their employed counterparts. There are plenty of retirement plans for self employed, with Solo 401k, also called self-directed 401k, being the popular ones. Self-directed 401k retirement plan offers higher annual contributions of up to $53,000 along with catch-up contribution of $6,000 for individuals above 50 years. It comes with a bunch of lucrative features, including alternative investments, lower maintenance charges, quick processing, participant loan, and checkbook control. We are going to discuss the checkbook control feature of your retirement plan and the mandatory steps to use it.
Retirement Plans for Self Employed: What makes checkbook control an important feature of self-directed 401k?
Self-directed retirement plans offer investment freedom, allowing you to invest in real estate, precious metals, tax liens, mortgage notes, commodities, and even private company shares. Checkbook control allows you to invest in any of these options by simply writing a check, hence, taking away the worries of custodial consent. Further, you can make time-sensitive investments, especially in case of commodities, precious metals, and stock market.
What you need to do to use checkbook control?
The IRS allows you to make purchases on behalf of the self-directed 401k plan, using checkbook control feature. However, you need to open a checking account in the name of the self-directed 401k and process all the transactions through this account. Any transactions made through your personal checking account are considered as a distribution, with applicable taxes and penalties. Moving further, any expenses involved in these transactions are to be paid through the self-directed 401k’s checking account. Once the investment starts generating returns, such as rent in case of real estate, these returns must be deposited in the same checking account. Make sure to deposit your annual contributions in this account and in case of multiple participants, you will need separate accounts for each participant.
While maintaining the checking account for your self-directed 401k, do not apply for a credit card for the account. It is best to consult your plan provider before contributing to the retirement plan and do not deposit your personal funds in this checking account. The same holds true for making any personal payments from the account, as the IRS will consider them taxable distributions, leading to early withdrawal penalties along with additional taxes. Retirement plans for self employed individuals offer participant loans, allowing the plan owner to borrow up to $50,000 or 50% of the account balance of the retirement plan. If you plan to borrow from your account, make sure to prepare loan documents with your provider and follow IRS rules detailing repayments and interest rate.