Structuring a solo K

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jackal
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Structuring a solo K

Post by jackal » Sun Sep 02, 2018 9:00 am

If I design a custom solo K to include husband and wife and set up a trust account with a brokerage firm, what is the best way to set it up:
Assumption: Would use pretax contributions (401k+profit sharing), 401k-ROTH contributions and VAT contributions with moving the money to 401k ROTH or a ROTH IRA (Mega BD ROTH).

Ideal structure:
1. Just 1 account for husband and 1 for wife: Each pot would be prorated- 2 questions:
a. How is proration calculated. b. No way to designate bonds as being pretax only and stocks as being ROTH only, right?
2. 3 accounts for DH and 3 for DW: 1 for pretax, 1 for 401k ROTH, 1 for VAT for a total of 6 accounts set up as 6 trusts. It is a lot more accounts but make record keeping easier (or am I missing something?) and avoids holding bonds with ROTH. Is there a scenario when separating pretax contribution into 401k and Profit sharing contributions makes sense?

Any other way to structure the 401ks? What would you pick among available options and why?

Thank you.

Spirit Rider
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Re: Structuring a solo K

Post by Spirit Rider » Sun Sep 02, 2018 11:41 am

Vanguard only allows option 0.5. A single pooled account for all participants and sub-accounts. I vote for a minimum of option 2 at custodians that support this. Why go through the bother of calculating sub-accounts.

Also, technically there is also sub-accounting based the distributable nature of the accounts. There are possible employee elective deferrals, employee designated Roth contributions, employee after-tax contributions, employer contributions, pre-tax rollover contributions and designated Roth rollover contributions

If you have any intention of distributions/rollovers prior to 59 1/2 of any of the last three, i would be easier to have separate sub accounts.

jackal
Posts: 103
Joined: Thu Jan 14, 2010 7:24 am

Re: Structuring a solo K

Post by jackal » Sun Sep 02, 2018 5:06 pm

Spirit Rider wrote:
Sun Sep 02, 2018 11:41 am
Vanguard only allows option 0.5. A single pooled account for all participants and sub-accounts. I vote for a minimum of option 2 at custodians that support this. Why go through the bother of calculating sub-accounts.

Also, technically there is also sub-accounting based the distributable nature of the accounts. There are possible employee elective deferrals, employee designated Roth contributions, employee after-tax contributions, employer contributions, pre-tax rollover contributions and designated Roth rollover contributions

If you have any intention of distributions/rollovers prior to 59 1/2 of any of the last three, i would be easier to have separate sub accounts.
Thank you for your response.
Have a hard time understanding everything you mentioned.
Could you point me to some resources that could improve my understanding. Thank you!

Spirit Rider
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Joined: Fri Mar 02, 2007 2:39 pm

Re: Structuring a solo K

Post by Spirit Rider » Sun Sep 02, 2018 6:06 pm

jackal wrote:
Sun Sep 02, 2018 5:06 pm
Spirit Rider wrote:
Sun Sep 02, 2018 11:41 am
Vanguard only allows option 0.5. A single pooled account for all participants and sub-accounts. I vote for a minimum of option 2 at custodians that support this. Why go through the bother of calculating sub-accounts.

Also, technically there is also sub-accounting based the distributable nature of the accounts. There are possible employee elective deferrals, employee designated Roth contributions, employee after-tax contributions, employer contributions, pre-tax rollover contributions and designated Roth rollover contributions

If you have any intention of distributions/rollovers prior to 59 1/2 of any of the last three, i would be easier to have separate sub accounts.
Thank you for your response.
Have a hard time understanding everything you mentioned.
Could you point me to some resources that could improve my understanding. Thank you!
If you are acting fully as your own administrator. You are responsible for all IRS compliance and reporting including Form 1099-R on all distributions.

There are 401k compliance and plan rules on the distribution of each category . The IRS requires a 401k plan to have separate accounting for each. Note: that does not mean you have to have separate accounts, but rather you can separately account for each category. It is just much easier when they are in separate accounts.

There are three basic distributable classes:
  • IRS regulations prohibit the in-service withdrawal/rollover of employee elective deferrals, employee designated Roth contributions and non-vested employer contributions (there are none in a one-participant 401k), before age 59 1/2.
  • IRS regulations permit but do not require a 401k plan to a allow the in-service withdrawal/rollover of employee after-tax contributions and vested employer contributions before age 59 1/2.
  • In-service withdrawal/rollovers of rollover contributions are generally allowed at anytime.
  • I suggest a minimum of a pre-tax sub-account (employee elective deferrals and employer contributions), an optional designated Roth sub-account if you want to make Roth contributions/IRRs and an optional employee after-tax sub-account if you want to make after-tax contributions.
I don't know if there is anyone place that all this information is provided, but I think you should be able to find the individual points on the IRS website.

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tfb
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Re: Structuring a solo K

Post by tfb » Mon Sep 03, 2018 2:16 am

jackal wrote:
Sun Sep 02, 2018 9:00 am
If I design a custom solo K to include husband and wife and set up a trust account with a brokerage firm, what is the best way to set it up
Consider hiring an administrator as the prerequisite. The administrator can do the internal accounting when you just have one pooled account for all participants and all contribution types (this is how large companies do it). Or the administrator will tell you how many accounts to open, i.e. whether your option 2 is good enough or you need more accounts.
Harry Sit, taking a break from the forums.

jackal
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Re: Structuring a solo K

Post by jackal » Mon Sep 03, 2018 7:52 am

Thank you for the clarification. Talked to a couple of companies.
The first was suggested on bogleheads(discount401k) and the firm stated they would provide plan documents and help with basic questions but would not track contributions or growth. This was much cheaper than the second service that would also provide complete record keeping.
I was thinking of going with the former, opening separate accounts for each contribution type for each person so the broker statements are essentially the records. I am assuming one plan document can mention multiple accounts. The brokerage said I would need to create a separate trust for each bucket. It does make sense but want to make sure I’m not messing up some rule.
Thank you.

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tfb
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Re: Structuring a solo K

Post by tfb » Mon Sep 03, 2018 9:52 am

jackal wrote:
Mon Sep 03, 2018 7:52 am
Thank you for the clarification. Talked to a couple of companies.
The first was suggested on bogleheads(discount401k) and the firm stated they would provide plan documents and help with basic questions but would not track contributions or growth. This was much cheaper than the second service that would also provide complete record keeping.
I was thinking of going with the former, opening separate accounts for each contribution type for each person so the broker statements are essentially the records.
If between "much cheaper" and the second service is still in the several hundred dollars range, I would use the second service but ask about the option to open separate accounts for recordkeeping. Someone who is able to provide complete recordkeeping likely offers a more complete set of services you will need.
Harry Sit, taking a break from the forums.

Spirit Rider
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Re: Structuring a solo K

Post by Spirit Rider » Mon Sep 03, 2018 12:00 pm

jackal wrote:
Mon Sep 03, 2018 7:52 am
The brokerage said I would need to create a separate trust for each bucket. It does make sense but want to make sure I’m not messing up some rule.
There should only need to be one "trust" whether there is a single pooled account or multiple accounts. Are you sure you understood the brokerage correctly.

In fact, a one-participant 401k plan is not an ERISA plan and does not require the plan sponsor to have an actual state chartered trust. All that is required is a plan "trustee", which typically will be you.

I am still of the opinion that almost all one-participant 401k plan sponsors should have a TPA for compliance and especially for after-tax contribution limits and distribution reporting at least the first couple of years of a custom 401k.

You don't know what you don't know.

jackal
Posts: 103
Joined: Thu Jan 14, 2010 7:24 am

Re: Structuring a solo K

Post by jackal » Thu Sep 06, 2018 8:48 am

Thank you! You guys rock as always!

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