May 23

How Does IRA Financial Group’s BACSS (or ROBS) Work?

The legality of using retirement funds to purchase employer corporate stock is firmly established in the Internal Revenue Code and under ERISA law. The IRA Financial Group’s in-house retirement tax professionals have spent the last two years developing an IRS and ERISA compliant structure for using retirement funds to acquire or invest in a business tax-free!  We call it the Business Acquisition Compliance & Support Solution (BACSS) also known as the Rollover for Business Startup or ROBS. Because the IRS has stressed the importance of compliance when using retirement funds to purchase a business, it is crucial to work with a company that is operated by a team of in-house tax and ERISA professionals who have worked at some of the largest law firms in the United States, including White & Case LLP and Dewey & LeBoeuf LLP to ensure the structure satisfies IRS and ERISA rules and procedures. The retirement tax professionals at the IRA Financial Group have developed a process that ensures speed and compliance, by using standardized procedures that work via phone, e-mail, fax, and mail. Your funds will be ready for investment into your new or existing business within 14-21 days.

Step 1 – Establishment of New Corporation

IRA Financial Group’s in-house tax and ERISA professionals will establish a corporation and ensure that the incorporation process is completed accurately in accordance with state law. Our in-house retirement tax professionals have significant experience with the incorporation process in all 50 states and the District of Columbia. Your corporation will be incorporated in the State where you will conduct business or in multiple states if the business will be conducted in more than one state. The IRA Financial Group’s retirement tax professionals will assist you in satisfying all internal corporate formalities, such as establishing a board of directors, appointing officers, and completing the corporate resolution and minutes. Upon the incorporation of the entity, our in-house retirement tax professionals will acquire an Employer Tax ID Number with the IRS for your new corporation.

Step 2 – New Corporation Adopts 401(k) Plan

The IRA Financial Group’s in-house ERISA professionals will establish an IRS approved 401(k) Plan for your new corporation. Plan documents will be drafted so that the new corporation will be the sponsor of the new 401(k) Plan. The Plan documents will appoint the new business owner as the trustee of the plan and will be customized based on the financial goals of you and the business. The Plan will be specifically drafted to allow for investment in your new corporation.

Step 3 – Rollover/Transfer of Funds to your New Corporation

The IRA Financial group’s in-house ERISA professionals will guide you through the process of opening a bank account for your new 401(k) Plan (the account can be opened at any local bank, credit union, or financial institution) as well as helping you complete the necessary transfer/rollover documents to transfer your retirement funds from your previous employer or IRA to your company’s new 401(k) Plan tax-free. Our in-house ERISA professionals will guide you through the entire rollover/transfer process so your retirement funds will be transferred to your new 401(k) Plan in an expedited and tax-free manner.

Step 4 – 401(k) Plan Invests in the new Corporation

The IRA Financial Group’s in-house retirement tax professionals will draft a customized stock purchase agreement detailing the 401(k) Plan’s purchase of new company stock. The IRA Financial Group will coordinate with the selected independent business appraisal to assure that the stock purchase agreement is in compliance with IRS and ERISA rules. Once the 401(k) Plan has purchased stock in the new corporation, the corporation will have the funds to purchase new business assets or help grow the business.

Step 5 – Compliance with IRS and ERISA Rules

Once your retirement funds have been invested in your new business, the retirement tax professionals at the IRA Financial Group will continue to work with you to ensure that the structure remains compliant with IRS and ERISA rules and procedures. In the case of a corporation with employees, the IRA Financial Group will work with a third-party administrator to ensure that the Plan remains compliant so that the structure continues to meet IRS and ERISA rules and requirements.

Work Directly with our on-site tax and ERISA professionals!

Each client of the IRA Financial Group is assigned an individual retirement tax professional who will customize a structure that satisfies his or her financial and retirement needs while ensuring the structure is developed in full IRS & ERISA compliance!

We have developed a process that ensures speed and compliance, by using standardized procedures that work via phone, e-mail, fax, and mail. Your funds will be ready for investment into your new or existing business within 14-21 days.

Call us today at 800-472-0646 to learn more about how you can use your retirement funds to start a new business or grow an existing business tax-free, in full IRS compliance, and without penalties!

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May 22

Why a Solo 401(k) is the Best Retirement Plan for the Self-Employed

Here’s a great article from Dough Roller touting the advantages of the Solo 401(k) Plan

If you’re self-employed, you have several retirement plan options available to you as an individual or small business owner. The best retirement plan for the self-employed, though, is probably the Solo 401(k).

Also called an individual 401(k), it has similar advantages to the traditional, employer-sponsored 401(k) plans available to large companies. However, it brings with it more benefits because you’re self-employed.

How a Solo 401(k) Plan Works

A Solo 401(k) plan is essentially a 401(k) for a self-employed individual. But there are several features of the plan that distinguish it from the larger, employer-based 401(k) plans. These include:

  • Since you are the business owner, you act as both employer and employee on the plan.
  • A Solo 401(k) plan is just for the owner of the business and the owner’s spouse; it is not available for employees of the business.
  • The amount you can contribute to a Solo 401(k) are generally more generous than they will be for an employee participant in typical large company 401(k) plans.
  • You can set up a Solo 401(k) even if you are an independent contractor or a freelancer.

Solo 401k Contribution Limits

As an employee of the business, contribution limits to a solo 401(k) plan are exactly the same as they are for a traditional 401(k) plan. You can contribute up to 100% of your salary or up to the contribution limit, whichever is greater. The current contribution limit for 2017 is $18,000 of your salary, or up to $24,000 if you’re age 50 or older.

It’s here that being the employer comes in handy.But since you are also the employer in the solo plan, you can also contribute as much as 25% of your net income to the plan as a profit-sharing contribution. (See IRS examples of the

As an employer, you can also contribute as much as 25% of your net income to the plan as a profit-sharing contribution. (See IRS examples of the employer matching contribution — it varies by business entity.)

Solo 401k Contribution Deadline

One other important point about the solo 401(k) plan is that you must make your contributions to the plan no later than the end of the calendar year. That means that you must make your contribution no later than December 31 in order for the contribution to be deductible for the tax year in question.

This is unlike contributions to IRA plans, which allow you to make deductions up until the filing deadline for the preceding tax year.

Simplicity

One of the biggest advantages of a Solo 401(k) is that you can essentially set it up similar to a self-directed IRA. That means that you are free to choose your investment trustee. You can also select a discount investment broker. This will provide you with an opportunity for unlimited investments and very low fees.

This is unlike many traditional 401(k) plans, which often limit your investment options to a few mutual funds and charge high plan fees.

Very Generous Contributions

As I noted above, with the Solo 401(k) you can make both employee and employer contributions. So, let’s say you’re self-employed as a sole proprietor and report your income and expenses on Schedule C of your income tax return. If your net income from the business is $100,000, you can contribute $18,000 as an employee. But then you can also contribute 25% of the net profit as the employer.

This means that your total contribution could reach $43,000!

That’s an enormous retirement contribution based on a $100,000 income. If you are in the 25% federal tax bracket, for example, a $43,000 contribution could result in a tax savings of $10,750 (although it’s important to consult a tax expert to be sure).

This is much more generous than other types of self-employed retirement plans. For example, let’s take the contribution scenario above. In it, you are contributing 43% of your income to your retirement plan using the Solo 401(k).

SEP IRA

Under a SEP IRA, your contribution would be limited to 20% of the same income, or $20,000. (The SEP IRA provides for a deduction equal to 25% of your net income, after the deduction for the contribution is removed from your income… That means that the net contribution to a SEP IRA is effectively limited to 20% of your income.)

SIMPLE IRA

Under a SIMPLE IRA, your contribution limit is even lower. The maximum contribution that you can make as an employee is $12,500. (This bumps up to $15,500 if you are age 50 or older.) SIMPLE IRAs also provide for an employer match. As the employer in the business, you can provide either a 3% matching contribution, or a 2% non-elective contribution (up to $5,000). That means that your total contribution to the plan is limited to a total maximum of $20,500 per year.

Traditional IRA

And, of course, a traditional IRA or a Roth IRA limits your annual contribution to $5,500, or $6,500 if you are 50 or older.

The maximum contribution to any and all tax-sheltered retirement plans, including the Solo 401(k) plan, is $54,000 for 2017. However, with a Solo 401(k) plan, you can reach that maximum much more quickly than you can with other self-employed retirement plans.

There is one important limitation pertaining to S corporations: distributions paid from an S corporation are considered dividends, and are therefore not considered earned income. For this reason, you cannot make contributions to a Solo 401(k) plan that include your distributions from the S Corp.

You Can Add a Solo Roth 401(k) to the Mix

Just as with a traditional 401(k), you can allocate part of the plan to a Solo Roth 401(k) plan. That will enable you to allocate up to $5,500 of your employee contribution to the Roth portion. If you are age 50 or older, up to $6,500 can go toward the Roth portion. The remainder of your allowed contribution will go into the regular portion of your Solo 401(k) plan.

The employer matching portion can only go into the regular part of your Solo 401(k), and not the Roth portion.

You Can Include Your Spouse

An owner cannot add employees to a Solo 401(k) plan. He or she can, however, add a spouse. Your spouse can make contributions based on his or her earnings from the business.

For example, let’s say that you have an S corporation. You take a salary of $50,000 per year, and your spouse takes an equal amount. You can each make a contribution of up to $18,000 on your respective salaries. As an employer, you can then match up to 25% of the same amount.

Converting the Solo 401(k) to a Traditional 401(k)

Many businesses start out as one-person affairs. The owner starts out working for himself and only adds employees as the business grows.

A Solo 401(k) plan really shines when you hire employees. Why? Because you can convert these plans to a traditional 401(k) plan as soon as you begin adding employees.

When you start adding staff, you can easily convert your Solo 401(k) to a traditional plan. As you do, you can enable your employees to participate in the plan. That’s a big advantage because offering a 401(k) plan — particularly as a small business — is an attractive advantage for drawing potential talent. Many employees prefer to work in a business that offers a retirement plan. With the Solo 401(k), you will already have a plan in place when that day comes.

As with all things related to retirement plans, be sure to consult a tax expert before making any decisions.

If you would like more information about the Solo 401(k) plan, please contact a 401(k) at the IRA Financial Group at 800.472.4646.

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May 18

Using Your IRA Money to Fund a Solo 401k

An individual who adopts a Solo 401(k) Plan may generally fund the Solo 401(k) Plan using two methods – the rollover process or by direct contribution.

Most Solo 401(k) Plan documents will allow for the rollover of IRA or other pre-tax employer retirement funds, such as a 401(k), 403(b), or 457(b). The IRA holder or plan participant may generally fund the new Solo 401(k) Plan by either a direct or indirect rollover. It is important to remember that Roth IRA funds may not be rolled into a Solo 401(k) Plan.

Direct Rollover of Retirement Funds to a Solo 401(k) Plan

When an IRA holder or plan participant directly rolls over eligible IRA or employer plan retirement fund to a Solo 401(k) Plan, the IRA holder or plan participant must generally initiate the rollover process with the financial institution that is holding the retirement funds. Upon receiving a direct rollover request form, which is usually submitted in writing, the current retirement account custodian would issue a check to the new Solo 401(k) Plan participant in the name of the receiving plan for the benefit of the individual. The 60-day rollover rule would not apply. Also, there would be no withholding because the rollover is not considered a taxable distribution.

Reporting a Direct Rollover to a Solo 401(k) Plan

A direct rollover of retirement assets to a Solo 401(k) Plan id reported on IRS Form 1099-R using distribution Code G, in box 7. The transferring financial institution would be the party required to file the IRS Form 1099-R with the IRS. The receiving financial institution is not required to report the rollover transaction.

How Does the IRS know The Retirement Funds Were Rolled into a Solo 401(k) Plan?

In the case of a transfer of retirement funds to an IRA, the IRA custodian receiving the transfer or rollover of IRA funds is required to report the receipt of IRA funds on an IRS Form 5498, which provides the IRS with the value of the IRA holder’s IRA account. The IRS would then be able to match the 1099-R with the Form 5498 offering the IRS a road map of the movement of funds.

Using Your IRA Money to Fund a Solo 401kHowever, when receiving a rollover of retirement funds, the receiving financial institution, which is the custodian of the newly established Solo 401(k) Plan is not required to report the rollover. So how does the IRS know that the funds were in-fact rolled over to a Solo 401(k) Plan. Firstly, the retirement account custodian transferring or rolling over the retirement funds to the new Solo 401(k) Plan, will file an IRS Form 1099-R and include Code G in Box 7, which will notify the IRS that the funds were rolled into another retirement account. In addition, if the Solo 401(k) Plan participant has plan assets in excess of $250,000, the Solo 401(k) Plan participant is required to file an IRS Form 5500-EZ. The IRS Form 5500-EZ will provide the IRS with the annual Solo 401(k) plan account value which will allow the IRS to match-up the funds that were rolled over and identified on the IRS Form 1099-R.

In the case of a Solo 401(k) Plan participant that is not required to file an IRS Form 5500-EZ because the plan has less than $250,000 in plan assets, how does the IRS know that the plans were actually rolled over into the Solo 401(k) Plan. In this case, the plan participant would have to rely on the IRS Form 1099-R disclosing to the IRS by using Code G in Box 7, that the funds were rolled over to a retirement account. The Solo 401(k) Plan participant does have the option of filing an IRS Form 5500-EZ even if the plan assets are less than $250,000. By filing the IRS Form 5500-EZ, the plan participant would be able to disclose the value of the plan’s assets, which would correspond to the rollover amount reflected on the IRS Form 1099-R. In general, relying on the IRS Form 1099-R as the sole method of proving to the IRS that the funds were directly rolled over to a Solo 401(k) Plan is sufficient, however, if an individuals wants additional support to show the funds were directly rolled over to a retirement account, filing the IRS Form 5500-EZ could be helpful.

Indirect Rollover of Retirement Funds to a Solo 401(k) Plan

An IRA holder or retirement plan participant may generally initiate an indirect rollover by requesting a distribution. An indirect rollover means that the retirement funds are distributed first to the IRA holder or plan participant before they are ultimately rolled over to an IRA or qualified retirement plan. The indirect rollover process must be completed within 60 days. The indirect rollover is not a common method of funding a new retirement account and it can only be done once every twelve (12) months.

The check for an indirect rollover is issued in the name of the IRA holder of plan participant. The individual would then have 60 days to deposit the amount in an eligible retirement plan, such as a Solo 401(k) Plan to avoid taxation and penalties.

Reporting a Indirect Rollover to a Solo 401(k) Plan

Like an IRA distribution, a distribution that is intended to be rolled over to a retirement plan is reported on IRS Form 1099-R, generally using code 1 or 7, depending on the IRA holder’s age. The IRA holder would then have 60 days to roll the funds over to the Solo 401(k) Plan. The indirect rollover process is not recommended when it comes to rolling funds to a Solo 401(k) Plan since it could lead to IRS inquiry about the whereabouts of the rolled over retirement funds. Unlike an IRA which requires the receiving IRA custodian to report the value of the received funds on an IRS Form 5498, in the case of a Solo 401(k) Plan no such reporting is required. A Solo 401(k) Plan custodian is not required to report the value or activities of a Solo 401(k) Plan. The Plan participant would only be required to report the value of the Solo 401(k) Plan if the plan assets were in excess of $250,000.

When retirement funds are indirectly rolled over to a Solo 401(k) Plan, a withholding election is generally required, but the IRA holder may elect to waive withholding.

To learn more about the rules of rolling retirement funds to a Solo 401(k) Plan, please contact a retirement tax expert at 800-472-0646.

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May 16

How Are Roth 401(k) Withdrawals Taxed?

All distributions from Roth 401(k) plans are either qualified distributions or nonqualified distributions. If the distribution is a qualified distribution, the early distribution tax does not apply. The early distribution tax applies only to those distributions that are subject to income tax. Because all qualified distributions from Roth 401(k) Plans are tax free, they are also exempt from the early distribution tax as well.

A “ qualified distribution” from a Roth IRA is excluded from gross income. To be qualified, a distribution must satisfy both of the following requirements:

  • It must not occur before the fifth taxable year following the year for which a Roth IRA contribution was first made by the taxpayer or the taxpayer’s spouse.
  • It must be made after the account owner reaches age 59 1/2 or becomes disabled, be made to the owner’s beneficiary or estate after the owner’s death, or be a “qualified special purpose distribution.”

For more information about the Roth 401(k) plan, please contact us @ 800.472.0646.

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May 11

Pass-Through Tax Cut May Impact Small Business Owner Retirement Savings Strategies

This article originally appeared on Forbes.com

President Donald Trump’s plan to cut the tax rate to 15 percent for so called pass-through businesses, such as partnerships, LLCs and S Corporations, will help many small business owners reinvest in their business by saving on taxes.  President Trump also plans to cut the corporate tax rate to 15 percent.  While many applaud the President’s plan to cut taxes on businesses, which they believe will help stimulate the U.S economy as well as make American businesses more competitive globally, the discrepancy in tax rates between businesses and individuals could prove problematic, especially for retirement savings.

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President Trump has announced that he plans to cut personal income tax rates by reducing the number of individual income tax brackets from seven to three — 10, 25 and 35 percent.  Individual tax rates currently have a ceiling of 39.6 percent and a floor of 10 percent. Most Americans pay taxes somewhere between the two.  With corporate and business pass through tax rates at 15 percent compared with generally higher individual income tax rates for most Americans, various tax planning opportunities will present themselves, including the ability to structure business payments at a 15 percent tax rate versus taking compensation at a generally higher income tax rate.  For example, under the Trump tax plan, if an LLC owner has $100,000 of net income currently taxed at 35 percent, the allocated portion that is compensation would be taxed at 35 percent while the portion that is allocated as business income would be taxed at a 15 percent tax rate. Thus, taking compensation of $20,000 versus $60,000 could save a significant amount of taxes.  Furthermore, since retirement savings is based on the amount of compensation one receives and not on the amount of profits the business generates, the less compensation one receives will directly impact the amount of retirement savings that may be available.  For example, a husband and wife business partnership would be incentivized to take less compensation and allocate more of the available income to business income in order to reduce their tax liability.  If the partnership has established a 401(k) plan or SEP IRA, the maximum amount they would be able to contribute would likely be reduced since their maximum plan contribution amount is directly based on the amount of compensation they earned from the business in a year.

In general, many economists believe that cutting taxes for small businesses is a positive plan by the president.  However, sizable tax rate discrepancies between different forms and categories of income could create decisions that are more tax than business based and run counter to the principles of tax neutrality.  In addition, such circumstances will likely invite abusive tax schemes, as well as some unanticipated results, such as a potential cut in retirement savings for small business owners.

For more information, please contact the IRA Financial Group @ 800.472.0646.

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May 08

If a Couple Both Contribute to a Solo 401k, Can they Both Utilize the Loan Feature?

Yes. One of the main advantages of the Solo 401(k) Plan is that it allows participants to borrow up to $50,000 or 50% of their account value (whichever is less) for any purpose. Thus, you and your spouse would each be permitted to borrow up to $50,000 ($100,000 total) to be used for any purposes, including financing a business.

If a Couple Both Contribute to a Solo 401k, Can they Both Utilize the Loan Feature?

Benefits of taking a loan include –

  • Lend the funds to a third-party who will pay a higher interest rate
  • Invest in a real estate project that offers a higher rate of return than the low interest rate you must pay
  • To consolidate debt
  • To pay for college expenses
  • To pay for unexpected emergencies
  • Avoid distribution penalties and gain use up to $50,000 immediately with no restrictions
  • Invest in a new franchise or business
  • Make any alternative Investment that will generate a higher rate of return than the low Interest rate imposed on you, such as tax liens, private placements, or mortgage pools.
  • Invest in a transaction that would otherwise be a Prohibited Transaction under Internal Revenue Code Section 4975.
  • Quick, easy, and cheap access to a $50,000 loan to be used for any purpose

Please contact one of our 401(k) Experts at 800-472-0646 for more information.

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May 03

New Trump Passthrough Tax Plan Could Impact Retirement Savings for Small Business

Proposed 15% tax rate on business income could reduce Solo 401(k) Plan and SEP IRA contributions

IRA Financial Group, the leading provider of self-directed solo 401(k) plans, has issued a report that believes that President Trump proposed 15% tax rate for so called pass-through businesses, such as partnerships, LLCs and S Corporations, will help many small business owners reinvest in their business by saving on taxes, but could also result in less solo 401(k) plan or SEP IRA contributions for many small business owners. “Because business passthrough income will be taxed at a lower tax rate then compensation and since compensation is the basis for solo 401(k) or SEP IRA contributions for many small business owners, President Trump’s proposed tax rate of 15% could result in small business owners making less plan contributions,” stated Adam Bergman, a tax partner with the IRA Financial Group.

According to Mr. Bergman, since retirement savings is based on the amount of compensation one receives and not on the amount of profits a business generates, the less compensation one receives will directly impact the amount of retirement savings that may be available and could impact the amount of Solo 401(k) plan or SEP IRA contributions available to many small business owners.

The solo 401(k) Plan, also known as the individual 401(k) Plan or self-directed 401(k), is an IRS approved qualified retirement plan that was created specifically for the self-employed. The IRS created the solo 401k Plan to be a cost effective retirement solution for the self-employed or a business owner with no employees. A solo 401K is perfect for sole proprietors, small businesses and independent contractors such as consultants. A solo 401k plan offers the same advantages as a self-directed SEP IRA, but without having to hire a special custodian or create an LLC. With IRA Financial Group’s IRS approved solo 401(k) plan, a plan participant can make annual contributions up to $54,000 or $60,000 over the age of 50, as well as borrow up to $50,000 tax-free, and make traditional as well as tax deferred alternative asset investments, such as real estate.

The IRA Financial Group was founded by a group of top law firm tax and ERISA lawyers who have worked at some of the largest law firms in the United States, such as White & Case LLP, Dewey & LeBoeuf LLP, and Thelen LLP.

IRA Financial Group is the market’s leading provider of self-directed IRA LLC and Solo 401(k) plans. IRA Financial Group has helped thousands of clients take back control over their retirement funds while gaining the ability to invest in almost any type of investment, including real estate without custodian consent.

To learn more about the IRA Financial Group please visit our website at http://www.irafinancialgroup.com or call 800-472-0646.

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May 01

President Trump’s Recent Proposed Corporate Tax Rate Reduction Expected To Increase Popularity of Rollover Business Start-Up Solution

Trump plan to reduce corporate tax rate to 15% could make it more tax efficient for thousands of Americans use retirement funds tax-free to fund a business via ROBS

IRA Financial Group, a provider of Rollover Business Startup Solution (“ROBS”) solutions, expects to see a boost in the popularity of the ROBS solution based on President Trump’s tax plan, which calls for a reduction in the corporate tax rate from 35% to 15%.

President Trump’s Recent Proposed Corporate Tax Rate Reduction Expected To Increase Popularity of Rollover Business Start-Up SolutionThe rollover business start-up (“ROBS”) arrangements typically involves rolling over a prior IRA or 401(k) plan account into a newly established 401(k) plan, which a start-up C Corporation business sponsored, and then investing the rollover 401(k) Plan funds in the stock of the new C Corporation. The funds are then deposited in the C Corporation bank account and are available for use for business purposes. The ROBS 401k solution is a tax efficient way for any entrepreneur looking to use IRA funds to buy a business or franchise without incurring any tax or penalty from an IRA distribution. “With a reduction in the corporate income tax rate from 35% to 15%, operating a business via a C Corporation will become more tax efficient and should increase the popularity of the ROBS IRA solution with entrepreneurs looking to use retirement funds to buy a business,” stated Adam Bergman, a partner with the IRA Financial Group.

The IRA Financial Group was founded by a group of top law firm tax and ERISA lawyers who have worked at some of the largest law firms in the United States, such as White & Case LLP, Dewey & LeBoeuf LLP, and Thelen LLP.

IRA Financial Group is the market’s leading provider of self-directed IRA LLC and Solo 401(k) plans. IRA Financial Group has helped thousands of clients take back control over their retirement funds while gaining the ability to invest in almost any type of investment, including real estate without custodian consent.

To learn more about the IRA Financial Group please visit our website at http://www.irafinancialgroup.com or call 800-472-0646.

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Apr 26

If You Have a Solo 401k, Do You Need to Pay a Custodian?

If You Have a Solo 401k, Do You Need to Pay a Custodian?No. The most significant cost benefit of the Solo 401(k) Plan is that it does not require the participant to hire a bank or trust company to serve as trustee. This flexibility allows the participant to serve in the trustee role. This means that all assets of the 401(k) trust are under the sole authority of the Solo 401(k) participant.  A Solo 401(k) plan allows you to eliminate the expense and delays associated with an IRA custodian, enabling you to act quickly when the right investment opportunity presents itself.

Please contact one of our 401(k) Experts at 800-472-0646 for more information.

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Apr 24

Distribution Rules for an Individual 401(k) Plan

An Individual 401(k), also known as a  Solo 401(k) or One Participant 401(k) plan, is a great retirement plan for accumulating retirement wealth through high contributions and alternative asset investment opportunities. However, there are times that one needs to access their Solo 401(k) plan funds either voluntarily or as required by law.

In the case of an IRA, the IRA owner may take distributions from his or her IRA at any time. The determination of whether the distribution is taxed depends on the type of IRA (i.e., traditional or Roth), the age of the IRA owner, and in the case of a Roth IRA, the duration of time the account has been established. However, when it comes to taking funds out of a 401(k) plan, there are certain rules and requirements that must be satisfied before a distribution can be taken.

It may seem unfair to some that one would need to satisfy certain rules before gaining access to ones Solo 401(k) plan funds, but that is the way the rules work. When it comes to determining what funds in your Solo 401(k) plan you will have access to, the first thing to do it to look at the Solo 401(k) Basic Plan Document or speak with your plan administrator. That being said, the following is a general overview of the distribution rules most commonly found in standardized Solo 401(k) plan documents in the marketplace today.

Distribution Rules for an Individual 401(k) PlanBefore we get into the taxable ways one can to take funds out of your 401(k) plan, the Solo 401(k) loan feature, which is an option in many Solo 401(k) plan, is essentially the only way one can get tax-free and penalty free use of funds in a Solo 401(k) Plan.

Solo 401(k) Plan Loan Option

If your Solo 401(k) plan offers the Solo 401(k) loan option, a plan participant has the ability to borrow the lesser of $50,000 or 50% of their plan account value. The personal loan can be used for any purpose. The Solo 401(k) plan loan must be paid back over a five-year period, at least quarterly, at a minimum interest rate of Prime as per the Wall Street Journal, which as of 3/15/17 is 4.00%.

The Solo 401(k) Plan loan feature would allow a plan participant to use plan funds for any purpose without having to worry about the plan distribution rules.

In the cases where the Solo 401(k) plan loan feature is not a viable option and the plan participant is need of plan funds, there are several other options for accessing the funds.

Rollovers

In the case of retirement funds that have been rolled into the plan from another retirement account, such as an IRA or 401(k) plan, those funds can generally be rolled out of the plan at any time without the need for any triggering event. A rollover is not a contribution made to the plan by the plan participant or employer, but retirement funds contributed to n IRA or another 401(k) plan that are now being transferred into the plan. Most Solo 401(k) plan documents include a provision that allows rollover funds to be rolled out of the plan and into another retirement account without the need to satisfy any age requirements or plan service rules.

Employee Deferrals

Elective employee deferrals are amounts contributed to a plan by the employer at the employee’s election and which, except to the extent they are designated Roth contributions, are excludable from the employee’s gross income. For 2017, up to $18,000 per year can be contributed by the participant through employee elective deferrals. An additional $6,000 can be contributed for persons over age 50. The contributions can be up to 100% of the participant’s self-employment compensation.

In the case of employee deferrals, most Solo 401(k) plan documents do not allow a plan participant to access employee deferrals unless a plan triggering event has occurred or they can satisfy a hardship distribution criteria.

Plan Triggering Event

In general, distributions from a Solo 401(k) cannot be made until one of the following occurs: · The employee reaches retirement age as defined under the plan, which is typically the age of 59 1/2.
· The employee becomes disabled.
· The employee dies, at which time the beneficiary is eligible for distributions.
· The employee separates from service.
· The plan is terminated and is not replaced by another defined contribution plan.

Therefore, if a plan participant is under the age of 591/2 and continues to be employed by the adopting employer and the plan is not being terminated, other than in the case of a hardship, the plan participant would not be able to access his or her employee deferrals for purposes of taking a distribution from the plan.

Hardship Distributions

The determination of whether your Solo 401(k) plan will allow for hardship distributions is based on the plan documents. Satisfying the hardship distribution rules could allow you to access your funds and would allow you to eliminate paying the 10% early distribution penalty, but it will not allow you to circumvent paying tax on the hardship distribution amount, is applicable.

If a Solo 401(k) plan provides for hardship distributions, it must provide the specific criteria used to make the determination of hardship. Thus, for example, a plan may provide that a distribution can be made only for medical or funeral expenses, but not for the purchase of a principal residence or for payment of tuition and education expenses. In determining the existence of a need and of the amount necessary to meet the need, the plan must specify and apply nondiscriminatory and objective standards. Below are some of the most common criteria found in standard Solo 401(k) plan documents for taking a hardship distribution:

· Medical expenses for you, your spouse or your dependents or expenses that are necessary for these persons to obtain medical care.
· Purchase of your principal residence (excluding mortgage payments). Amount is capped at $10,000.
· Payment of tuition and related educational fees, and room and board expenses for the next 12 months of post-secondary education for you, your spouse or your dependents.
· The need to prevent the eviction from, or mortgage foreclosure of, your principal residence.
· Payment for burial or funeral expenses for your deceased parent, spouse, children or dependents.
· Expenses for the repair of damage to your principal residence that would qualify for the casualty deduction under Code Section 165.

In summary, in the case of employee deferrals, if a plan participant is not able to satisfy any of the plan triggering events or any of the hardship distribution requirements contained in the Solo plan, the plan participant is generally not able to access any employee deferral contributions made to the plan.

Employer Profit Sharing Contributions

In general, most Solo 401(k) plan documents allow the employer to make employer profit sharing contributions, which are based off a percentage of the plan participant’s income amount. For 2017, the employer may make an additional contribution to the plan participant in an amount up to 25% of the participant’s self-employment compensation (20% in the case of a Sole Proprietor or a Schedule C Tax Payer).

Unlike employee deferrals, most Solo 401(k) plan documents allow employer profit sharing contributions to be accessed after a certain amount of time, also known as a vesting period. Most plan documents allow a plan participant to access all employer profits haring contributions after being in the plan for over five years (five-year vesting period). In addition, some Solo 401(k) plan documents allow a plan participant to access some of the employer profit sharing contributions after being in the plan for two years (two-year vesting schedule). Any employer profit sharing contributions taken as a distribution would be subject to tax and penalty, if applicable.

After-Tax Contributions

In general, an after-tax contribution is a contribution made to a Solo 401(k) plan or any other retirement account after taxes has been deducted from an individual’s taxable income. The Solo 401(k) plan documents will determine whether after-tax contributions are permitted to be made to the plan. In the case where after-tax contributions can be made to the plan, most Solo 401(k) plan documents do not impose any rules or restrictions on accessing the after-tax funds for rollover or distribution. In other words, unlike employee deferral and employer profit sharing contributions, no plan-triggering event, hardship criteria, or vesting schedule must be satisfied. The after-tax funds are available at anytime for rollover or distribution. This has contributed to the growing popularity of using after-tax contributions as a means of maximizing ones annual Solo 401(k) contributions as well providing greater access to ones retirement funds when necessary.

For more information on the distribution rules for a Solo 401(k) plan, please contact a retirement tax specialist at 800-472-0646.

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