The Big Idea

An old IRS Revenue Ruling makes Solo 401k's set up by banks, brokerages and self directed IRA custodians just as risky as IRA's in the event of a prohibited transaction... and it does not need to be that way.  Pay close attention for the problem and the solution.

Points To Ponder

• 401(k) plans (including Solo 401k's) can be set up as "Custodial" or "Trust" plans
  • "Custodial" plans are usually those set up by financial companies, including Self Directed IRA custodians
  • "Trust" plans are usually those where the employer/business owner directly manages the 401k
• IRS Revenue Ruling 71-153, in effect, says that Custodial-type 401k plans are not able to be "fixed" if a prohibited transaction occurs, but that Trust-type plans can be corrected
• This means that Custodial 401k plans are just as susceptible to the horrible risk of prohibited transactions as IRA's... and the risk there is catastrophically significant
• If you have a Solo 401k plan, your action items are:
  • Determine whether your plan is Custodial or Trust
  • If your plan is a Custodial plan, consider amending it so that it's a Trust-type of 401k plan
• Contact solo 401k attorney Tim Berry here to determine if your plan is a Custodial plan, and to have it amended if necessary
• Revenue Ruling 71-153 is a very old ruling, so an alternative legal opinion is plausible.  However, subsequent regulations have been issued which echo the verbiage in this ruling, so there's substantive reason to believe it remains relevant.

Resources

• Episode #250 of Self Directed Investor Talk (this show)
• Free Webinar that shows how many SDI Talk listeners are receiving very large credit lines at 0% interest for their real estate deals or businesses.  Check it out here.
• Solo 401k / Self Directed IRA attorney Tim Berry

Hosted on Acast. See acast.com/privacy for more information.