The trade-off for this control is that the buck stops with you. You get to wear all the hats. In addition to being the saver participating in the plan, you are also the plan administrator and investment manager.
If you were going to hire someone to manage your investments, you would expect them to provide you with statements and other information related to plan performance. You should expect nothing less from yourself.
Producing an annual statement for your plan does not need to be difficult, but it is an important part of successfully operating your Solo 401(k).
Why You Need a Statement
At this point you might be thinking. “I know what my plan is invested in. Why do I need a statement?”
While it might seem a touch redundant, there are several good reasons to produce a statement for your Solo 401(k).
Valuation. Tracking plan value from year-to-year is required. If your total plan assets exceed $250,000, you are required to file a 5000-EZ return. Fines for failure to file are steep, so you would hate to miss filing because you underestimated your plan value.
Required Minimum Distributions. If you are over age 72, then you are required to take a certain amount from your plan as a distribution. The calculation for required minimum distributions is based on the end-of-year value for the plan. An accurate valuation is necessary to comply with IRS rules.
Performance Tracking. You are your own investment manager. In order to know how your plan is performing, if you are selecting the right investments, and managing those investments effectively, some level of tracking is necessary. The exercise of producing a plan statement helps you take a step back and see how you are doing.
Applying for Loans. If you wish to purchase or refinance a personal residence, the lender will want a picture of your financial standing, including the value of your retirement plans. You will probably need to include a statement for your Solo 401(k) as part of your loan application process.
Estate Planning. When you have an IRA with a brokerage firm, all the investments are tracked by that firm. If you were to die, your plan beneficiaries would be able to contact the firm, take control of the account, and know what the account is holding. With a self-directed Solo 401(k) there is no 3rd party institution holding the investments. As such, it is important for you to keep records of plan holdings to ensure your beneficiaries will be able to take over the operation of your plan.
What To Include
A Solo 401(k) statement does not need to be fancy or formal, but there are certain things you will want to document. We recommend that you include:
Your plan name and address of record
Your name as the plan participant. You should create separate statements for each participant in the plan if your spouse also has an account.
The tax treatment of the account. If you have both tax-deferred and Roth participant accounts with your plan, you will want to document each separately. You can create separate statements or have sub-sections for each account on a single statement.
The date of the statement. You will typically want to produce at least an annual statement that reflects the plans holdings as of December 31st.
A listing of assets that includes the asset name, the asset value at the beginning of the statement period, and the asset value at the end of the statement period. The number of units held should also be reflected for assets where that is appropriate.
Plan contributions, with proper allocation to tax-deferred and Roth accounts if present.
Plan distributions taken during the statement period.
A listing of any rollovers into or out of the plan.
A record of any outstanding participant loans that includes the starting date, maturity date, initial loan amount and outstanding balance.
The total plan value at the beginning and end of the statement period.
How To Value Plan Assets
For general purposes, a reasonably accurate value is sufficient.
If you are performing a Roth conversion, or if your plan is subject to Required Minimum Distributions, you will need a certified value since there are tax implications associated with the value.
For non-cash assets, an estimate of value from a 3rd party with knowledge of the asset class should be used when possible.
- For real property, this will simply be a realtor price opinion (realtor comps). Tax assessed value and online valuation sites such as Zillow are not accurate and should be avoided.
- If the plan owns partial interest in a property or has a mortgaged property, only the equity value held by the Solo 401(k) is reported.
- A note is valued using the outstanding principal balance and any accrued but unpaid interest.
- Cryptocurrencies, commodities, and other similar assets will generally have a market-reportable spot price.
- If the entity holds an interest in a private placement such as another LLC, LLP, etc., the investment sponsor or general partner should provide you with a statement of the entity’s holding value. In many cases the value invested will apply, and income received from the investment will increase your plan’s cash balance.
- A bank or brokerage account within the plan will provide you with a statement value.
If an asset was purchased using a combination of participant accounts within your plan, this should be reflected on your statements. If you funded a note with 60% tax-deferred money and 40% Roth money, for example, the asset would be listed fractionally for each sub-account.
A Sample Statement
You can download a sample statement using the link below.
It is Worth the Effort
Having a statement for your Solo 401(k) plan is valuable in many ways. It may be a little bit of a hassle to create your first one, but once you do you will be glad you did.