Self directed 401k for husband and wife companies.

Can I have complete control over my 401k? Yes, as long as you follow the rules.

The problem is that most companies do not want to offer you checkbook control over your 401k. There are good reasons for this.  It is not just the administrative cost but the company has a responsibility for educating all employees about the investment options. So in practice all employers go with a plan sponsored by a brokerage firm or similar. The brokerage firm has an incentive to keep your money in their products, mutual funds, stocks, bonds, etc., the most risky of all investments. The typical employer only wants to offer a few options so for most people their 401k consists of five or six mutual funds. Maybe a bond fund, balanced fund, large cap, small cap, etc. And even worse there may be significant limitations on how many times you can change the allocation.

This is how Wall Street gets rich on the back of YOUR money.

So how can you control your 401k funds. I will discuss one option here. It is not for everyone as it requires you to have your own business. So if you are starting a company, or have a company, that company can sponsor a 401k plan. This is very easy if the company is just you, or you and your spouse. When you have employees you have to be in compliance with the regulations laid down by the Dept. of Labor. This includes things like non-discrimination etc. But if it is just you and your spouse it is very easy. Special plans are available for husband and wife businesses. (In later blogs I will show how our tax laws treat husband and wife businesses. They get the best tax breaks of all.)

The company sponsors a 401k plan, one person becomes the Trustee, the plan then opens accounts in the name of the husband and wife. These are called FBO accounts, that is “for the benefit of”. The reason for this is the way the law is structured. A pension plan is an individual plan within the 401k plan. There is no joint tenancy in a pension plan. You can transfer the pension funds by will between husband and wife, but the plans are treat husband and wife as individuals. This is the case on the tax side.

I will cover the differences between using an LLC and C corporation to sponsor the 401k plan in a later blog, as the amount that can be contributed is related to the salary compensation.

It gets better, now you are not limited to the allowable contributions, to the 401k and Roth 401k. In a business you can also contribute based on profit sharing. up to 25% of the companies profits can flow into the Traditional 401k. This makes for a great tax break.

If you are really profitable it gets even better. But more about that in a future blog.

3 Responses to “Self directed 401k for husband and wife companies.”

  1. We are a husband wife team with our own solo 401k for the business we are running. We have not been seeing any good returns in thtis account, which made us think of self sirected option. We would like to open a sel directed 401k account with investment in real estate and want to rollover our existing solo 401 k over the period of time.

    Our questions are:

    1. How do we open a self directed 401k account? Could you please provide us the links.

    2. We want to invest in real estate abroad. Is this possible.

    3. Our corp is an S-Corp . Do we need a C-corp only for self -directed 401k?

    Could you please guide us?

    Thank you

  2. You need to find a company that will allow the funds in your 401k to be self directed. Companies like Schwab and Fidelity do not allow this. I hesitate to give financial advice, but the question to ask is do you have checkbook control. The problem for you is compliance. You need to make sure you are in compliance with rules. There are companies that just set up the 401k open the accounts, and register the plan with the IRS. This means that profits from the account are not taxed. But they may not take responsibility for compliance. Other companies offer full custodial services and check every detail but that can be expensive as they charge for every check they write on your behalf, however, the IRS would never contest a custodian unless they suspected fraud on your part.

    Real estate is fine anywhere in the world not prohibited by other laws, like North Korea. So anywhere you can buy with cash you can buy with your 401k. However, you need to understand how the mortgage loan is taxed, do a search on UBIT and UDFI. You need a CPA help you with this, but not many CPAs understand the law as it relates to real estate investing inside a 401k.

    Any business entity can sponsor a 401k. Remember it is the business that owns the 401k plan. The employees become the beneficiary of an account in the plan. So an S-Corp, LLC, C-Corp etc. can all sponsor the 401k. The key to my blog post is that the rules for wife and husband businesses make managing the 401k much easier. In a future blog I will outline how you can save even more into a retirement plan, almost $200K each for your wife and yourself.

  3. Pension blogger…..just an FYI, Schwab WILL house a SD 401K. Just thought you might want to know. That is who I use on the SD 401K side of my business.

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