401k Plan Sub Accounts — Video

What this episode covers

Most of us, including me before I got my own Solo 401k set up, didn’t know about 401k plan sub accounts. A must have for most taxpayers. Download Audio   Transcript:   Within a 401K plan, a trustee, a participant has various means in which they can put money into the plan. The first one is what’s called elective deferrals. Think of it in simple terms as, it’s a bucket that you are personally taking from compensation that you have received and putting it into that elective deferral bucket as your contribution to the plan. Now, where we can actually separate that out is, what happens now if you want to make an elective deferral in traditional pre-tax manner, where you get the tax write off. You can do that. What happens also if you want to make it in a Roth after tax contribution. You can potentially do that as well. What about if you want to roll over funds into the plan? That’s another bucket. What happens if your business is very successful and you wish to make profit share contributions from the company? That’s another bucket. So you can kind of see where I’m going with this, is that there’s different buckets of funds. So why are we talking about buckets? Somebody might say, why wouldn’t we just put all those funds into one plan, into one account? Here’s why, because there’s different rules that affect those different sources of funds. When you establish a self-directed 401K, you really want to look at it from the standpoint of making sure that you have sub-accounts under your master plan that is there for roll overs, is there for Roth, is there for pre-tax, is there for profit share. That’s dotting the I’s and crossing the T’s, and as I always explain to a client, you always want to think of it this way, since the IRS treats those funds different, even though they’re all within the same 401k, even though you have the control of the funds within that plan, there’s different accounting that has to be done for each one of those plans. By having them in separate sub-accounts, you’re now able to be able to show anyone what you’ve done with those accounts, what you did with those funds, where the funds came from, and as I always explain to somebody, if you were ever sitting across the desk from an IRS agent, is it better to have more detail or less detail? At the end of the day, self-directed 401K’s are awesome, but again remember, when you have those different buckets of funds, you want to keep them in separate buckets for accounting and reporting purposes.

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