Solo 401k Plan Note Investing
I have some questions about Solo 401k plan note investing and need some additional guidance. Here are questions I couldn’t find in the knowledge base or were inspired by those that I did find:
Question:
If I buy notes inside of my Solo 401k and need to enter an agreement to have a 3rd party to service and/or foreclose on the loan, etc., who signs as the servicing agreement with the 3rd party servicer?
Answer:
As plan trustee you are the only authorized person to execute all plan documents and any other documents related to the investments of the plan.
Question:
Can I pay 3rd party expenses related to the investment out of my pocket or must my Solo 401k pay that?
Answer:
All expenses related to the investments of the plan must be paid with the plan funds. Using personal funds out of your pocket to pay investment related expenses is considered Prohibited Transaction.
Question:
If I have to sign documents with 3rd parties that are associated with the plan’s investments, under what role do I sign the documents and checks (i.e., Plan Participant, Trustee, Administrator, Employer)? Which of the plan’s roles endorses checks received (i.e., Plan Participant, Trustee, Administrator, Employer)?
Answer:
In most cases in a Solo 401k the same person serves in all those roles: Plan Participant, Plan Trustee, Administrator and Employer. Plan trustee is responsible for signing all investment related documents, including signing checks, etc.
Question:
The knowledge base says that if I own another business with full time employees (even if it’s not the business adopting the plan) then I am not eligible for the Solo 401k. Then technically, any shares of publicly traded stock I own as a passive owner/investor would render me ineligible for the Solo 401k because they have full-time employees. Is that correct?
Example: I own 5% of ABC corporation which has full-time employees. I do not own any controlling interest of ABC corporation.
Answer:
If you minority shareholder and don’t have controlling interest of the corporation, then that rule does not apply to you.
Question:
If I bought non-performing notes inside the Solo 401k and personally contact and work with the non-performing borrower to work-out a loan forbearance, deed-in-lieu, or other, wouldn’t this be a prohibited transaction?
Answer:
The answer is going to be vague on this one as there are no clear cut guidelines when dealing with prohibited transactions. I have seen different views on this issue. Certainly if the individual is paid for his services this is a prohibited transaction. Even if he is not paid — there is a concern that the individual is receiving indirect compensation because he is performing services that would otherwise have to be paid for. Unfortunately, you will not know this until the IRS/DOL walk in the door and try to find a problem. It depends on how conservative you wish to be but if you decide to do so.
Question:
Loan from the Solo 401k: “A Solo 401(k) participant can borrow up to either $50,000 or 50% of their account value.” Can I borrow more than $50k if it’s less than 50% of the account value?
Answer:
You can borrow the lesser of two.
Example 1: Value of the plan is $50,000. Max loan – $25,000
Example 2: Value of the plan is $200,000. Max loan – $50,000