You Asked, We Answered: Individual 401(k) for Small Business Owners

Whether you’ve attended one of our National Webinars or have not yet had the chance, this Q&A derived from those webinars will provide you valuable insight into Individual 401(k) retirement plans for self-employed business owners. Sometimes we are not able to get to everyone's questions, but that doesn't mean they aren't important. The following questions are modified from requests made by actual people, both current investors and those considering self-direction for their retirement saving needs.  

Q: Can you explain the setup cost and yearly fee for the Individual 401(k)?

A: To establish and maintain an Individual 401(k), for a yearly fee of $399, you will need the Plan Document, Adoption Agreement, and IRS Opinion Letter. Entrust will maintain and provide to the plan Trustee any required amendments to the Plan Document and provide the necessary restatement documents which occur every 6 years. Entrust also outlines the fee schedule based on whether the client chooses alternative investments or our securities platform, or both. Each asset type, from real estate to gold, has its own fee structure.  

Q: Does Entrust handle the required IRS paperwork for the Individual 401(k)?

A: IRS reporting for the Entrust Individual 401(k), including IRS 1099-R and IRS Form 5500 filings, is the responsibility of the Plan Trustee. 

Q: Can an Individual 401(k) be established to serve the same purpose as a self-directed Real Estate IRA?

A: Absolutely. It works the same as any other self-directed retirement plan, but instead of an IRA wrapper, it will be governed by 401(k) features.

Q: My wife and I plan to set up an Individual 401(k) by combining our separate SEP accounts to invest in real estate. But our combined SEP accounts will not be enough to purchase the property we have in mind. Can you recommend the best route, in terms of using loans from friends (i.e., having our combined Individual 401(K) buy/own the property and take loans from friends, or we buy/own the property as husband and wife, and take loans from our Individual 401(k) as well as from our friends)?

A: As a record keeper, Entrust cannot give advice on your specific situation. However, an individual’s IRA(s) can partner with other non-disqualified parties. If you need more funds to purchase an asset, seeking out a non-disqualified party would be an option.

Q: If I’m renting out my investment property owned by my Individual 401(k), where does the rental income go?

A: The rental income from the real estate owned by a retirement plan must go back into the retirement plan as interest, similar to having stock in 401(k) plans where the dividends are put back into the plan. If rental income is paid to the plan participant, that is considered a distribution. It will be reportable and taxable and may be subject to an early distribution penalty.

Is there a question about Individual 401(k) for small business owners you’d like answered? Our Learning Center is a valuable resource for discovering more about retirement plans for small business owners or attend our webinar in September focusing on Individual 401(k). If you already have a specific question, you can also comment below and we’ll get back to you as swiftly as possible.