Jan 16

Watch This Short Video About How the Solo 401(k) Plan Works

Watch This Short Video About How the Solo 401(k) Plan Works

Adam Bergman, a partner with the IRA Financial Group, discusses the primary Solo 401(k) Plan features. The video highlights the most popular features of the Solo 401(k) Plan, including high Solo 401(k) Plan contributions, $50,000 loan feature, UDFI exemption, ability to use local bank account and gain checkbook control as trustee.

For more information the Solo 401(k) Plan features, please click here.

IRA Financial Group is the market’s leading Self Directed IRA LLC and Solo 401(k) Facilitator. We have helped thousands of clients take back control over their retirement funds while gaining the ability to invest in almost any type of investment, including domestic or foreign real estate, tax liens, precious metals, peer-to-peer lending, new businesses, stocks, mutual funds, foreign currencies, options and much more. We have close working relationships with all the leading custodians making the set-up process seamless.

For more information, please contact us @ 800.472.0646.

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Jan 11

What You Should Know About Taxation Of Cryptocurrencies

Here’s a recent article, from Forbes.com, talking about the taxation of Bitcoin and other cryptocurrencies –

If you spend or invest in virtual currencies, it is crucial to understand how virtual currency transactions are treated for tax purposes.

IRS Notice 2014-21

The IRS addressed the taxation of virtual currency transactions in Notice 2014-21. According to the Notice, virtual currency is treated as property for federal tax purposes. This means that, depending on the taxpayer’s circumstances, cryptocurrencies, such as Bitcoin, can be classified as business property, investment property, or personal property. General tax principles applicable to property transactions must be applied to exchanges of cryptocurrencies. Hence, Notice 2014-21 holds that taxpayers recognize gain or loss on the exchange of cryptocurrency for other property.  Accordingly, gain or loss is recognized every time that Bitcoin is used to purchase goods or services.

Determining Basis & Gain

When it comes to determining the taxation of cryptocurrency transactions, it is important for cryptocurrency owners to properly track basis. Basis is generally defined as the price the taxpayer paid for the cryptocurrency asset.

For example, on June 1 2017, Jane purchased five Bitcoins for $6,000 ($1,200 each Bitcoin). On November 1, 2017, she used one Bitcoin to purchase $2,000 worth of merchandise via an online retailer. Jane recognized an $800 gain on the transaction ($2,000 amount realized – $1,200 basis in one Bitcoin).

What You Should Know About Taxation Of CryptocurrenciesTreating cryptocurrency, such as Bitcoin, as property creates a potential accounting challenge for taxpayers who use it for everyday purchases because a taxable transaction occurs every time that a cryptocurrency is exchanged for goods or services. For example, if Jane purchased a slice of pizza with one Bitcoin that she purchased on June 1 2017, she would have to determine the basis of the Bitcoin and then subtract that by the cost of the slice of pizza to determine if any gain was recognized. There is currently no “de minimis” exception to this gain or loss recognition. Taxpayers must track their cryptocurrency basis continuously to report the gain or loss recognized on each crypto transaction properly. It is easy to see how this treatment can cause accounting issues with respect to everyday cryptocurrency transactions.

On the other hand, the loss recognition on cryptocurrency transactions is equally complex. A deduction is allowed only for losses incurred in a trade or business or on a transaction entered into for profit. If Jane had recognized a $100 loss on her purchase of merchandise from the online retailer, the loss may not be deductible. If Jane uses Bitcoin for everyday transactions and does not hold it for investment, her loss is a nondeductible personal loss. However, if she holds Bitcoin for investment and cashes out of her investment by using Bitcoin to purchase merchandise, her loss is a deductible investment loss. Whether Bitcoin is held for investment or personal purposes may be difficult to determine, and further guidance by the IRS on this topic is needed.

Cryptocurrency values have been extremely volatile since its inception. As illustrated below, this volatility makes a significant difference in gain or loss recognition.

Jane purchased four Bitcoins on February 2, 2017 for $1,120 per Bitcoin, ten Ethereum coins on March 10, 2017 for $320 per coin, and 65 Litecoins on July 5, 2017 for $65 per coin.  Jane would need to keep track of the basis and sales price for each cryptocurrency transaction in order to properly calculate the gain or loss for each transaction.  In addition, if Jane purchased Bitcoins at different dates and at different prices, at sale, Jane would have to determine whether she would be selling a specific Bitcoin or use the first-in, first-out (FIFO) method to determine any potential gain or loss. The default rule for tracking basis in securities is FIFO. Taxpayers can also determine basis in securities by using the last-in, first out (LIFO), average cost, or specific identification methods. The prevalent thought is that these methods should be available for property that does not qualify as a security, and that taxpayers investing in cryptocurrency should use the method that is most beneficial to them. However, no direct IRS authority supports this position.

In sum, taxpayers must track their cryptocurrency purchases carefully. Each cryptocurrency purchase should be kept in a separate online wallet and appropriate records should be maintained to document when the wallet was established. If a taxpayer uses an account with several different wallet addresses and that account is later combined into a single wallet, it may become difficult to determine the original basis of each cryptocurrency that is used in a subsequent transaction.

The details of all cryptocurrency transactions in a network are stored in a public ledger called a “Blockchain,” which permanently records all transactions to and from online wallet addresses, including date and time. Taxpayers can use this information to determine their basis and holding period. Technology to assist taxpayers in this process is being developed currently and some helpful online tools are now available.

Characterization of Gain or Loss for Cryptocurrency Transactions

The character of gain or loss on a cryptocurrency transaction depends on whether the cryptocurrency is a capital asset in the taxpayer’s hands. Gain on the sale of a cryptocurrency that qualifies as a capital asset is netted with other capital gains and losses. A net long-term capital gain that includes gain on crypto transactions is eligible for the preferential tax rates on long-term capital gains, which is 15% or 20% for high net-worth taxpayers. Cryptocurrency gain constitutes unearned income for purposes of the unearned income Medicare contributions tax introduced as part of the Affordable Care Act. As a result, taxpayers with modified adjusted gross incomes over $200,000 ($250,000 for married taxpayers filing jointly) are subject to an additional 3.8% tax on cryptocurrency gain.

For example, on August 1, 2017, Jen, a sole proprietor, digitally accepts two Bitcoins from Steve as payment for services. On that date, Bitcoins are worth $10,000 each, as listed by Coinbase. Therefore, Jen recognizes $20,000 ($10,000 x 2) of business income. A month later, when Bitcoins are trading for $11,500 on the Coinbase exchange, Jen uses two Bitcoins to purchase supplies for her business. At that time, Jen will recognize $23,000 ($11,500 x 2) in business expense and $3,000 [($11,500 – $10,000) x 2] of gain due to the Bitcoin exchange. Since Jen isn’t in the trade or business of selling Bitcoins, the $3,000 gain is capital in nature.

Now let’s assume the same facts as above, except that Jen uses the two Bitcoins to purchase a new car for her personal use. According to the Coinbase exchange, Bitcoins are now trading at $8000. Jen will realize a loss of $4000 [($8000 – $10,000) x 2]. However, this loss is considered a nondeductible capital loss because Jen didn’t use the Bitcoins for investment or business purposes.  It is important to note that a payment using cryptocurrencies are subject to information reporting to the same extent as any other payment made in property. Thus, a person who, in the course of a trade or business, makes a payment using cryptocurrency with a fair market value of $600 or more is required to report the payment to the IRS and the payee’s cryptocurrency payments are subject to backup withholding. This means that persons making reportable payments with cryptocurrency must solicit a Taxpayer Identification Number (TIN) from the payee. If a TIN isn’t obtained prior to payment, or if a notification is received from the IRS that backup withholding is required, the payer must backup withhold from the virtual currency payment.

In summary, if a taxpayer acquires cryptocurrency as an investment and chooses to dispose of it by purchasing merchandise or services, any loss realized will be treated as a deductible investment loss. However, at times, it may be difficult to determine whether cryptocurrency is held for investment or personal purposes.

Employment Taxes and Information Reporting – Cryptocurrency Mining

According to Notice 2014-21, if a taxpayer’s mining of cryptocurrency is a trade or business, and the taxpayer isn’t classified as an employee, the net earnings from self-employment resulting from the activity will be subject to self-employment tax. Cryptocurrency mining is defined as a computationally intensive process that computers comprising a cryptocurrency network complete to verify the transaction record, called the “Blockchain”, and receive digital coins in return.  Cryptocurrency mining is considered a trade or business for tax purposes, in contrast to investing in cryptocurrencies which is considered an investment.  This is a crucial distinction since the taxation of investment gains or losses are subject to the capital gain/loss tax regime, whereas, business income is subject to a different tax regime.  A taxpayer generally realizes ordinary income on the sale or exchange of a cryptocurrency that is not a capital asset in his hands.

Inventory and property held for sale to customers are not capital assets, so income recognized by a miner of, or broker in, cryptocurrency is generally considered ordinary. If a taxpayer’s mining of cryptocurrency constitutes a trade or business, the net earnings from mining (gross income less allowable deductions) are subject to self-employment tax. Similarly, if an independent contractor receives virtual currency for performing services, the fair market value of such currency will be subject to self-employment tax. If cryptocurrency is paid by an employer to an employee as wages, the fair market value of the currency will be subject to federal income tax withholding, FICA and FUTA taxes, and must be reported on Form W-2 (Wage and Tax Statement).

Questions Remain

The IRS’s guidance in Notice 2014-21 clarifies various aspects of the tax treatment of cryptocurrency transactions. However, many questions remain unanswered, such as how cryptocurrencies should be treated for international tax reporting (FBAR & FATCA reporting) and whether cryptocurrencies should be subject to the like-kind exchange rules.

To learn more about using your retirement funds, including a Solo 401(k) Plan, to invest in cryptocurrencies, please contact a retirement expert from the IRA Financial Group @ 800.472.0646.

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Jan 08

How to Establish a Self-Directed 401(k) with Wells Fargo

IRA Financial Group, the leading provider of Self-Directed 401(k) Plans, and Wells Fargo have worked together to allow IRA Financial Group Solo 401(k) clients to establish a Checkbook Control Solo 401(k) Plan account with Wells Fargo with no custodian fees.

IRA Financial Group clients will be able to use IRA Financial Group’s IRS approved Self-Directed 401(k) Plan and open the plan account at Wells Fargo, as well as other partners, such as Charles Schwab, Fidelity, and E-Trade. With IRA Financial Group’s Self-Directed Solo 401(k) Plan at Wells Fargo, you will be able to make traditional investments, such as stocks, as well as alternative asset investments, such as real estate, precious metals, hard money loans, tax liens, private business investments, and much more and incur NO custodian fees. IRA Financial Group’s IRS approved Solo 401(k) Plan is an open architecture trustee directed plan allowing you, as the trustee of the plan, to have Checkbook Control over your plan funds directly from your Wells Fargo account and incur no custodian fees.

How to Establish a Self-Directed 401(k) with Wells Fargo

The IRA Financial Group Difference

By working with IRA Financial Group to establish your Self-Directed 401(k) Plan, you will gain the ability to make high annual 401(k) plan contributions, up to $55,000 ($61,000 if over the age of 50) in pre-tax, Roth, or after-tax, have a loan option, and gain the ability to make traditional as well as alternative asset investments, such as real estate. Whereas, if you adopted a Solo 401(k) Plan sponsored by Wells Fargo you would only be able to make pre-tax contributions, no Roth or after-tax contribution option, there would be no loan feature, and you would be only allowed to make traditional investments offered by Wells Fargo, such as mutual funds, and no real estate or other alternative asset investments would be permitted. So how is this possible?

With a Solo 401(k) Plan, the plan documents set forth the rules governing your Solo 401(k) Plan. IRA Financial Group’s Solo 401(k) Plan documents are open architecture trustee directed and not custodian directed giving you, as the trustee of the plan, Checkbook Control over the plan and its assets. IRA Financial Group would be the Solo 401(k) Plan document sponsor and Wells Fargo would be your 401(k) plan custodian, giving you the power to have Checkbook Control over your plan assets and make traditional as well as alternative asset investments. Using IRA Financial Group’s plan documents will allow you to take advantage of a special type of non-prototype plan account offered by Wells Fargo.

Unlike an IRA where the IRA custodian has specific IRS reporting requirements, with a 401(k) plan the custodian (Wells Fargo) has no IRS reporting requirements, since you as the plan administrator would be responsible for any IRS reporting, such as filing the IRS Form 5500-EZ (if your plan assets are greater than $250,000). This is the reason Wells Fargo will allow you to open your Solo 401(k) Plan account with them and make alternative asset investments using a special type of non-prototype account and not with an IRA, since the 401(k) plan custodian would have no IRS reporting requirements with a trustee directed Solo 401(k) Plan using IRA Financial Group plan documents.

IRA Financial Group has developed a relationship with Wells Fargo in order to allow you to open a Self-Directed Checkbook Control Solo 401(k) Plan with no custodian fees. Your IRA Financial Group assigned retirement tax specialist will assist you in opening your new Self-Directed 401(k) Plan at Wells Fargo or any other financial institution of your choice quickly. Using IRA Financial Group’s plan documents will allow you to take advantage of a special type of non-prototype 401(k) plan account offered by Wells Fargo allowing you to make traditional as well as alternative asset investments, such as real estate, as the trustee of the plan – with full Checkbook Control. The process for establishing a Self-Directed Solo 401(k) Plan with IRA Financial Group and Wells Fargo can be completed in days:

  1.  Complete a short New Client Intake Form allowing us to customize your IRS approved Self-Directed Solo 401(k) Plan to satisfy your retirement, investment, and tax needs.
  2. Within 24 hours, your customized Self-Directed Solo 401(k) Plan will be drafted and sent to you for your review.
  3. Your assigned retirement tax specialist will review the plan documents with you.
  4. We will assist you in establishing your Self-Directed Solo 401(k) Plan with Wells Fargo or any other financial institution of your choice. In addition to Wells Fargo, IRA Financial Group has a relationship with Charles Schwab, Fidelity, and E-Trade.
  5. Once your new Self-Directed Solo 401(k) Plan has been opened, we will assist you in making a contribution or rolling over existing retirement funds into the plan.
  6. You are ready to take advantage of all the benefits your Self-Directed Solo 401(k) Plan has to offer, including making high annual contributions in pre-tax, Roth, or after-tax, borrowing up to $50,000, and making traditional as well as alternative asset investments, such as real estate, by simply writing a check or sending a wire from your new plan account.

See the many advantages of establishing a Self-Directed 401(k) Plan with IRA Financial Group and Wells Fargo.

High Annual Contribution Limits

While an IRA only allows a $5,500 contribution limit (with a $1,000 additional “catch up” contribution for those over age 50), the Solo 401(k) annual contribution limit is $55,000 for 2018 with an additional $6,000 catch-up contribution for those over age 50. In addition, if your spouse generates compensation from the business, he or she can also make high contributions to the plan.

Under the 2018 Solo 401(k) contribution rules, a plan participant under the age of 50 can make a maximum employee deferral contribution in the amount of $18,500. That amount can be made in pre-tax or after-tax (Roth). On the profit sharing side, the business can make a 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to a combined maximum, including the employee deferral, of $55,000.

For plan participants over the age of 50, an individual can make a maximum employee deferral contribution in the amount of $24,500. That amount can be made in pre-tax or after-tax (Roth). On the profit sharing side, the business can make a 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to a combined maximum, including the employee deferral, of $61,000.

Calculate Your Solo 401k Plan Maximum Contribution Limit Please click here to calculate your Solo 401(k) Plan Maximum Contribution Limit.

A World of Investment Opportunities

By establishing a Solo 401(k) Plan with IRA Financial Group and opening the plan account with Wells Fargo, you will be able to invest in almost any type of investment opportunity that you discover, including real estate (rentals, foreclosures, raw land, tax liens etc.), private businesses, precious metals, hard money & peer to peer lending as well as stock and mutual funds; your only limit is your imagination. The income and gains from these investments will flow back into your Solo 401(k) Plan tax-free. Making an investment with your Solo 401(k) Plan is as simple as writing a check. As trustee of the Solo 401(k) Plan, you will have total control over your retirement assets to make real estate and other investments tax-free and without custodian consent.

Loan Feature

While an IRA offers no participant loan feature, by establishing a Solo 401(k) Plan with IRA Financial Group and opening the plan account with Wells Fargo, you will gain the ability to borrow up to $50,000 or 50% of the account value (whichever is less) for any purpose at a low interest rate (the lowest interest rate is Prime which is 4.50% as of 12/14/17). This offers a Solo 401(k) Plan participant the ability to access up to $50,000 for use for any purpose, including paying personal debt or funding a business.

“Checkbook Control” and No Custodian Fees

By establishing a Solo 401(k) Plan with IRA Financial Group and opening the plan account with Wells Fargo, you can serve as trustee of the plan giving you “Checkbook Control” over the plan’s funds. To this end, making an investment with your Solo 401(k) Plan is as easy as writing a check. Another significant 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 401k 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. Also, because the Solo 401(k) Plan trust account can be opened at any local bank or credit union (i.e., Chase, Wells Fargo, Citibank, etc.), you will not be required to pay custodian fees for the account as you would in the case of an IRA.

Roth Type Contributions

With IRAs, those who earn high incomes are disallowed from contributing to a Roth IRA or converting their IRA to a Roth IRA. By establishing a Solo 401(k) Plan with IRA Financial Group and opening the plan account with Wells Fargo, your Solo 401(k) Plan contains a built-in Roth sub-account which can be contributed to without any income restrictions. With a Roth Solo 401(k) sub-account, you can make Roth type contributions while having the ability to make significantly greater contributions than with an IRA.

After-Tax Contributions

By establishing a Solo 401(k) Plan with IRA Financial Group and opening the plan account with Wells Fargo, you will be able to make after-tax contributions up to $55,000 (or $61,000 if over the age of 50). Unlike pre-tax employee deferral contributions, after-tax contributions can be made on a dollar-dollar basis and can be immediately converted to Roth without tax.

Cost Effective Administration

In general, the Solo 401(k) Plan is easy to operate. By establishing a Solo 401(k) Plan with IRA Financial Group and opening the plan account with Wells Fargo, there is generally no annual filing requirement unless your Solo 401(k) Plan exceeds $250,000 in assets, in which case you will need to file a short information return with the IRS (Form 5500-EZ).

Exemption from UDFI

When an IRA buys real estate that is leveraged with mortgage financing, it creates Unrelated Debt Financed Income (“UDFI”) – a type of Unrelated Business Taxable Income (also known as “UBTI or UBIT”) on which taxes must be paid. The UBTI tax is approximately 40% for 2018. But, with a Solo 401(k) Plan, you can use leverage without being subject to the UDFI rules and UBTI tax. By establishing a Solo 401(k) Plan with IRA Financial Group and opening the plan account with Wells Fargo, you can buy real estate and use a nonrecourse loan without triggering the UBTI tax. This exemption provides significant tax advantages for using a Solo 401(k) Plan versus an IRA to purchase real estate.

Work with the Leaders

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* Self-Directed IRA and Solo 401K Plan provider. We have helped over 15,500 clients establish IRS compliant Self-Directed IRA and Solo 401k Plans and invest over $4.9 billion in alternative assets, such as real estate.

If you would like to learn more about establishing a Self-Directed 401(k) Plan with IRA Financial Group and opening your plan account with Wells Fargo, please contact a Solo 401(k) Plan specialist at 800-472-0646.

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Jan 03

Everything You Need to Know About the Individual 401(k) for 2018

A Solo 401(k) Plan, also called an Individual 401(k) Plan, offers a self-employed business owner the ability to use their retirement funds to make almost any type of investment tax-free, including real estate on their own without requiring custodian consent. As long as a business exists with no full-time employees other than the owner and his/her spouse, an Individual 401(k) Plan can be established.

Everything You Need to Know About the Individual 401(k) for 2018An Individual 401(k) Plan is perfect for any sole proprietor, consultant, or independent contractor, such as a realtor, doctor, accountant, attorney, dentist, or sales agent. The Individual 401(k) Plan can be adopted by a sole proprietorship, LLC, Partnership, or Corporation.

There are many reasons why the Individual 401(k) Plan is considered the most attractive retirement solution for the self-employed.

High Contributions: Under the 2018 Solo 401(k) contribution rules, a plan participant under the age of 50 can make a maximum employee deferral contribution in the amount of $18,500. That amount can be made in pre-tax or after-tax (Roth). On the profit sharing side, the business can make a 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to a combined maximum, including the employee deferral, of $55,000.

For plan participants over the age of 50, an individual can make a maximum employee deferral contribution in the amount of $24,500. That amount can be made in pre-tax or after-tax (Roth). On the profit sharing side, the business can make a 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to a combined maximum, including the employee deferral, of $61,000.

Calculate Your Solo 401k Plan Maximum Contribution Limit Please click here to calculate your Solo 401(k) Plan Maximum Contribution Limit.

Tax-Free Loan for any Purpose:   With an Individual 401(k) Plan, a plan participant is eligible to borrow up to $50,000 or 50% of their account value (whichever is less) for any purpose, including paying personal expenses such as credit card bills, mortgage payments, personal or business investments, a car, vacation, or anything else. The loan has to be paid back over a five-year period at least quarterly at a minimum prime interest rate (you have the option of selecting a higher interest rate). There is no pre-payment penalty.

True “Checkbook Control”: One of the most popular aspects of the Individual 401(k) Plan is that it does not require the participant to hire a bank or trust company to serve as trustee of the Plan. Unlike an IRA, which requires a financial institution to serve as trustee and custodian of the IRA, in the case of a Individual 401(k) Plan, the plan account can be opened at any local bank or credit union and the plan participant can serve as trustee of the Plan. This flexibility allows the plan participant (you) to gain “checkbook control” over your retirement funds. In essence, all assets of the Individual 401(k) Plan will be under the sole authority of the 401(k) participant.  An Individual 401K 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. With an Individual 401K Plan, making a 401K Plan investment is as simple as writing a check.

Unlocking A World of Investment Opportunity: With an Individual 401(k) , you will be able to invest in almost any type of investment opportunity that you discover, including: Real Estate (rentals, foreclosures, raw land, tax liens etc.), Private Businesses, Cryptocurrencies, Precious Metals, Hard Money & Peer to Peer Lending as well as stock and mutual funds; your only limit is your imagination. The income and gains from these investments will flow back into your Individual 401(k) Plan tax-free!

Use Nonrecourse Leverage Tax-Free:   When an IRA buys real estate that is leveraged with nonrecourse mortgage financing, it creates Unrelated Debt Financed Income (a type of Unrelated Business Taxable Income) on which taxes must be paid pursuant to Internal Revenue Code Section 514. An Individual 401(k) plan is generally exempt from UDFI. In other words, unlike an IRA, Internal Revenue Code Section 514(c)(9), allows an Individual 401(k) plan to use nonrecourse leverage to make a real estate acquisition without tax or penalty.

After-Tax (Roth) Contributions: The Individual 401(k) Plan contains a built in Roth sub-account which can be contributed to without any income restrictions. An Individual 401(k) Plan will allow you to make pre-tax and/or after-tax (Roth) employee deferral contributions to your Plan.

Simple Plan Administration:  The Individual 401(k) Plan is easy to operate and effortless to administer. There is generally no annual filing requirement unless the assets in your Individual 401(k) Plan exceeds $250,000, in which case you will need to file a short information return with the IRS (Form 5500-EZ).

Roth 401(k) Conversion: The Individual 401(k) Plans allows for the conversion of pre-tax 401(k) funds to an after-tax Roth sub-account contained in the Individual 401(k) Plan. However, the Individual 401(k) Plan participant must pay income tax on the amount converted.

Offset the Cost of Your Plan with a Tax Deduction: By paying for your Solo 401(k) with business funds, you would be eligible to claim a deduction for the cost of the plan, including annual maintenance fees. The deduction for the cost associated with the Solo 401(k) Plan and ongoing maintenance will help reduce your business’s income tax liability, which will in-turn offset the cost of adopting a self-directed Solo 401(k) Plan. The retirement tax professionals at the IRA Financial Group will help you take advantage of the available business tax deduction for adopting a Solo 401(k) Plan.

Asset & Creditor Protection: In the case of a bankruptcy, the general exemption found in sec­tion 522 of the Bankruptcy Code, 11 U.S.C. §522, provides an unlimited exemption for retirement assets exempt from taxation for Section 401(a) (tax qualified retirement plans—pen­sions, profit-sharing and section 401(k) plans). Thus, ERISA qualified plans as well as Self-Directed 401(k) plans are afforded full bankruptcy exemption. Outside of bankruptcy, state law will govern whether Individual Solo 401(k) Plan assets are protected from creditors. Most states will provide protection for Individual Solo 401(k) Plan assets from creditors outside of the bankruptcy context.

IRA Financial Group will take care of setting up your entire Individual 401(k) Plan. The whole process can be handled by phone, email, fax, or mail and typically takes between 2-10 days to complete, the timing largely depending on the time it takes your current retirement asset custodian to move the funds to the new Individual 401(k) Plan account. Our tax and ERISA professionals are on-site greatly reducing the setup time and cost. Most importantly, each client of the IRA Financial Group is assigned a retirement tax professional to help with the establishment of the Self-Directed 401(k) Plan.

For additional information on the Individual 401(k) Plan, please contact us at 800-472-0646.

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Dec 29

How to Select the Best Solo 401(k) Provider

Selecting the best Solo 401(k) provider is an important decision that should be researched thoroughly.  Below are several tips to help you select the best Solo 401(k) Plan provider for your self-employed or small business retirement plan.

1. Always Make Sure You Are Working With a Tax & ERISA Professional: There are several companies on the internet that advertise themselves to be solo 401(k) plan providers and experts, however, in most cases, the people that would be involved in drafting your Solo 401(k) plan documents as well as advising you are not tax attorneys or even tax professionals. Working with an experienced tax & ERISA professionals when looking for a Solo 401(k) Plan provider is crucial in ensuring that your plan will be properly setup as well as remain in full IRS compliance. The Solo 401(k) plan is based on the rules found in the Internal Revenue Code, which can be quite complicated to the non-tax attorney. Therefore, it is strongly advisable to work with a Solo 401(k) Plan provider, like the IRA Financial Group or Bergman Law Group, to establish your IRS approved Solo 401(k) Plan. Relying on the advice of a document processor or no-tax professional when it comes to establishing and maintaining your retirement plan puts your retirement future at great risk. Too many times, plan participants have unknowingly violated IRS rules when operating their Solo 401(k) Plan because a plan provider representative that was not qualified to provide relevant tax advice gave them inaccurate and incomplete tax advice or drafted the plan documents incorrectly. Make sure this does not happen to you – work only with qualified 401(k) plan tax & ERISA professionals who have been specifically trained on the special tax aspects of the Solo 401(k) Plan to establish and maintain your Solo 401(k) Plan.

2. Open Architecture Self-Directed Solo 401(k) Plan Is the Way to Go: Not all Solo 401(k) Plans are the same.  Most Solo 401(k) Plans offered by a bank or financial institution are not self-directed.  What that means is that you will be restricted to making the investments offered by the bank or financial institution and will not be permitted to purchase real estate, precious metals, private business investments, option & currency trading, hard money loans, etc.  Once you adopt a Solo 401(k) Plan, you should have a plan that features all the IRS options available for qualified retirement plans, including the ability to make non-traditional investments, such as real estate. IRA Financial Group offers an open architecture Solo 401(k) Plan that allows you to make any IRS approved investment without requiring the consent of a custodian. As trustee of your Self-Directed Solo 401(k) Plan, you will have “checkbook control” over your plan funds and will have total control over plan assets.

How to Select the Best Solo 401(k) Provider

3. Take Advantage of Your Right to Borrow up to $50,000 from Your Plan: Not all Solo 401(k) Plans include a loan feature, which is an IRS approved feature. IRA Financial Group’s Solo 401(k) Plan allows plan participants to borrow up to $50,000 or 50% of their account value (whichever is less) for any purpose, including paying credit card bills, mortgage payments, personal or business investments, a car, vacation, or anything else. The loan has to be paid back over a five-year period at least quarterly at a minimum prime interest rate (you have the option of selecting a higher interest rate).

4. Be Sure You Have a Roth Option: Most Solo 401(k) Plan providers do not allow for Roth (after-tax) contributions. IRA Financial Group’s Solo 401(k) Plan contains a built in Roth sub-account which can be contributed to without any income restrictions.  In addition, most Solo 401(k) plan providers do not allow for in-plan Roth conversions or rollovers.  Whereas, IRA Financial Group’s Solo 401(k) Plan allows for in-plan Roth conversions. However, the Solo 401(k) Plan participant must pay income tax on the amount converted.

5. Ongoing Tax & 401(k) Plan Support is a Must: Just because your Solo 401(k) Plan has been established does not mean that you no longer need any ongoing tax and ERISA support.  Most Solo 401(k) Plan providers are headed for the exit once the plan has been established.  As you begin administering your Solo 401(k) Plan, whether it involves making employee deferral or profit sharing contributions, making a non-traditional investment, taking a plan loan, or considering a Roth conversion, you will want to be able to have the ability to consult with a specialized 401(k) Plan tax professionals and get specialized tax and ERISA advice based on your particular retirement or tax question.  The ongoing maintenance of the Solo 401(k) Plan is crucial in making sure your Solo 401(k) Plan remains in IRS compliance and that the IRS respects all your plan contributions and investment gains. Working directly with a 401(k) plan tax professional that has been specifically trained on the special tax aspects of the Solo 401(k) Plan will help keep your Solo 401(k) plan in full IRS compliance.

6. Take Control of Your Solo 401(k) Plan from the Plan Provider: Most Solo 401(k) Plan providers will require that you hold the plan assets at their institution. With IRA Financial Group’s Self-Directed Solo 401(k) Plan, you can hold the plan assets at the bank of your choosing and gain “checkbook control” over the funds. With IRA Financial Group, making an investment is as easy as writing a check.

7. Stay Away from Plan Providers who Outsource Their Plan Maintenance Services: Most Solo 401(k) Plan providers do not assist or offer advice with respect to the maintenance and administration of a Solo 401(k) Plan, including the completion of the IRS Form 5500-EZ. They generally refer all questions to an outside tax attorney or accountant. IRA Financial Group offers all of its Solo 401(k) Plan clients direct access to its in-house retirement tax professionals and CPAs regarding maintenance or administrative questions concerning the plan. Whether it’s answering a question about a plan feature, investment, an update in the law, or with help completing the IRS Form 5500-EZ, you will work one-on-one with an IRA Financial Group retirement tax professional and CPA who are familiar with your plan and retirement goals.

8. Stay Away from Excessive Annual Fees: Since most Solo 401(k) Plans have less the $250,000 in plan assets, there would be no annual filing requirement for the plan. Hence, why pay excessive annual administration fees to a plan provider who will not be offering you or your plan any value or services. Even if your Solo 401(k) Plan has in excess of $250,000 of plan assets, the IRS Form 5500-EZ is quite simple to complete and should not be too costly.

9. Don’t Take Tax Advice from a Salesperson – Talk Directly with a 401(k) Plan Tax Professional or CPA: Many times a salesperson or representative of a Solo 401(k) Plan provider will offer you tax or ERISA guidance with respect to a 401(k) plan feature or an investment without lacking the adequate knowledge or expertise. Make sure you are only receiving plan related advice or information from a specialized 401(k) plan tax professional. Too many times, plan participants have made improper plan contributions or invested in a prohibited transaction because they were mislead by a plan provider representative that was not qualified to provide proper tax advice regarding the unique features of the Solo 401(k) Plan. Working directly with a 401(k) plan tax professional that has been specifically trained on the special tax aspects of the Solo 401(k) Plan to establish and maintain your Solo 401(k) Plan is the only way you can guarantee your plan will remain in full IRS compliance and that you will not be engaging in any plan activities not approved by the Plan or the IRS.

To learn more about the importance of selecting the right solo 401(k) plan provider, please contact a retirement tax expert at 800-472-0646.

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Dec 27

How to Use an Individual 401(k) Loan to Make Investments

When it comes to using retirement funds, such as a Solo 401K Plan, to make investments, the question arises whether you can take a 401(k) Loan as part of the transaction.

How to Use an Individual 401(k) Loan to Make InvestmentsThe IRS has always allowed a Solo 401K Plan to make traditional as well as non-traditional investments such as real estate. However, the prohibited transaction rules under Internal Revenue Code Section 4975 restrict a Solo 401(k) Plan participant from engaging in certain transactions – prohibited transactions. Under IRC 4975, one of the categories of prohibited transactions involve a disqualified person personally guaranteeing a loan made to a Solo 401K Plan. A Solo 401K plan participant is treated as a disqualified person pursuant to IRC 4975. As a result, a Solo 401K, also known as an Individual 401K or Self Directed 401K Plan, cannot use a recourse loan to purchase property owned by a Plan because a disqualified person (Solo 401K Plan participant) cannot personally guarantee a loan. However, the IRS does allow for the 401K to use a nonrecourse loan to purchase real estate. A nonrecourse loan is a loan that does not require a personal guarantee on the part of the Solo 401K plan participant. In other words, a loan that would limit a lender’s (bank) ability to go after an individual personally for non-payment of the loan. Instead, the lender’s sole remedy would be to look to the underlying property as satisfaction of the loan. Of course, this type of loan is more difficult to acquire and can be more expensive for a borrower.

In general, Internal Revenue Code Section 514(c)(9) permits a few types of exempt organizations to make debt-financed investments in real property without becoming taxable under Code Section 514. Note – the exemption only applies to real estate and not to other types of nonrecourse financing, such as margin on stock.

The Section 514 exemption applies to any “qualified organization,” a term that includes (1) schools, colleges, universities, and their “affiliated support organizations,” (2) qualified pension, profit sharing, and stock bonus trusts, and (3) title holding companies exempt under § 501(c)(25). In general, indebtedness incurred by a qualified organization in acquiring or improving real property is not acquisition indebtedness if the transaction navigates through a long list of prohibitions. In other words, a Solo 401K Plan can use nonrecourse leverage when purchasing real property with Plan assets and not be subject to the Unrelated Debt-Financed Income rules, which in-turn trigger an Unrelated Business Taxable Income (UBTI or UBIT) tax (approximately 40% for 2017). Note – only nonrecourse leverage can be used when acquiring property by a 401K or Solo 401K Plan since, a disqualified person (401(k) plan participant or trustee) cannot personally guarantee the loan (recourse loan) since that would violate the prohibited transaction rules pursuant to Internal Revenue Code Section 4975. It is important to remember that this exemption would not apply to an IRA since an IRA is not a qualified pension, profit sharing, and stock bonus trusts.

To satisfy the exemption under Internal Revenue Code Section 514, the price paid by the organization for the property or improvement must be fixed when the property is acquired or the improvement is completed, neither the amount nor the due date of any payment under the indebtedness can be contingent on the revenue, income, or profits from the property, and the property may not be leased to the person who sold the property to the organization or to any person related to the seller within the meaning of Code Section 267(b) or Code Section 707(b). If the organization is a qualified pension, profit sharing, or stock bonus trust, the property may not be purchased from or leased to the employer of any of the employees covered by the trust or any one of several persons related to the employer. Financing for the property may not be received from the person who sold the property to the organization, a person related to the seller within the meaning of Code Section 267(b) or Code Section 707(b), or, if the organization is a qualified employee trust, an employer or related person who is disqualified from being seller or lessee under the rule described in the preceding sentence. The property must usually be owned directly by the qualified organization, except that an interest in a partnership or other pass-through entity qualifies if all of the partners or other owners are qualified organizations and each partner or other owner is allocated the same distributive share of every item of partnership income, deduction, and credit.

When § 514(c)(9) was enacted in 1980, it applied only to qualified pension, profit sharing, and stock bonus plans, but its scope was broadened in 1984 to include schools, colleges, and universities.

Many people ask why this exemption only applies to 401K Plans and not IRAs. The only reason given in the committee reports for the exemption is that some people wanted it: “Trustees of these plans are desirous of investing in real estate for diversification and to offset inflation. Debt-financing is common in real estate investments.” The provision was originally limited to qualified employee trusts on the theory that the income would eventually be taxed to employees and their beneficiaries.

To learn more about the rules surrounding using a loan with a Solo 401K Plan to make an investment please contact a Solo 401K Expert at 800-472-0646.

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Dec 20

What Type of Corporation Should You Use When Using ROBS to Fund a Business?

The Internal Revenue Code and ERISA law require the use of a “C” Corporation for using retirement funds to acquire stock in a business (ROBS). The reason for this is that Section 407(d)(1) of ERISA defines the term “employer security,” in part, to mean a security issued by an employer of employees by the plan, or by an affiliate of such employer. Under section 407(d)(5) of ERISA, the term “qualifying employer security” includes an employer security, which has been understood to mean stock. The term “stock” is not defined in Title I of ERISA, however, most tax commentators believe this to mean the stock of a corporation and not an interest in a limited liability company or partnership. The use of an S Corporation for this structure is not permitted because a qualified plan cannot be an S Corporation shareholder. Generally, only individuals are permitted to be S Corporation shareholders.

What is a C Corporation?

What Type of Corporation Should You Use When Using ROBS to Fund a Business?A C Corporation is a business term that is used to distinguish this type of entity from others, as its profits are taxed separately from its owners under sub-chapter C of the Internal Revenue Code. A C corporation is owned by shareholders who must elect a board of directors to make business decisions and oversee policies. A C Corporation provides its shareholders with limited liability protection. Thus, the C Corporation’s shareholders would not stand personally liable for debts incurred by the C Corporation. They cannot be sued individually for corporate wrongdoings.

Will I pay more tax if my business is set-up as a C Corporation?

In general, a C corporation can be used to split the corporate profits among the owners and the corporation. This can result in overall tax savings. The tax rate for a corporation is usually less than that for an individual, especially for the first $50,000 of taxable income. In addition, a C Corporation can deduct the cost of business expenses, such as salary, thus, further reducing the company’s taxable income. For example, the operators of the corporation may withdraw reasonable salaries, which are deductible by the corporation. These salaries are therefore free from tax at the corporate level (though the recipients will have to pay income tax, and both recipients and the business will have to pay FICA tax, on them). In some cases, the entire net profit of a C Corporation may be offset by salaries to the shareholders, so that no corporate income tax is due.

Do I need an independent appraisal for the purchase of the new corporation stock?

Yes. Pursuant to ERISA rules, a 401(k) Plan is permitted to acquire “qualified employer security” provided that the acquisition or sale is for adequate consideration. In the October 1, 2008 Memorandum, the IRS stated that an exchange of company stock between the plan and the new company sponsor would be a prohibited transaction, unless the requirements of ERISA Section 408(e) are met. Therefore, valuation of the capitalization of the new company is a relevant issue. Since the company is new, there could be a question of whether it is indeed worth the value of the tax-deferred assets for which it was exchanged. If the transaction has not been for adequate consideration, it would have to be corrected. On August 27, 2010, on the public phone forum, the IRS reaffirmed their position on the need for an independent appraisal to value the purchased corporate stock. The IRA Financial Group will assist you in identifying an independent third-party business appraisal or CPA to help value the stock of the new or existing company.

Please contact one of our ROBS Experts at 800-472-0646 for more information.

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Dec 18

What To Know Before Purchasing Cryptocurrencies With Retirement Funds

The following, written by Adam Bergman, first appeared on Forbes.com:

With the value of Bitcoins and many other cryptocurrencies flying high in 2017, many investors have looked to take advantage of this trend and own cryptocurrencies in tax-advantaged retirement plans, such as a Self-Directed IRA or Solo 401(k) Plan.  This article will explore the main points an investor should know before using retirement funds to buy cryptocurrencies.

What is a Cryptocurrency?

What To Know Before Purchasing Cryptocurrencies With Retirement FundsCryptocurrency refers to a decentralized digital currency that employs principles of cryptography (communication that is secure from view of third parties) to ensure security, privacy, and anonymity. Consequently, the value of a cryptocurrency is not set by anyone other than market participants, who engage in the process of buying and selling on an exchange platform.

Bitcoin has become the leader in shepherding in a wave of cryptocurrencies built on decentralized peer-to-peer network and is the primary standard for cryptocurrencies. The currencies inspired by Bitcoin are collectively called Altcoins and have tried to present themselves as modified or improved versions of Bitcoin.  The five most popular cryptocurrencies are Bitcoins, Ethereum (ETH) & Ethereum Classic, Litecoin, ZCash and Dash.  There are close to 1000 types of cryptocurrencies, so this list can vary over time.

How does the IRS Treat Cryptocurrencies from a Tax Standpoint?

Even though Bitcoin is labeled as a “cryptocurrency”, from a Federal income tax standpoint, Bitcoins and other cryptocurrency are not considered a “currency.”  On March 25, 2014, the IRS issued Notice 2014-21, which for the first time set forth the IRS position on the taxation of virtual currencies, such as Bitcoins.  According to the IRS Notice, “Virtual currency is treated as property for U.S. federal tax purposes.” The Notice further stated, “General tax principles that apply to property transactions apply to transactions using virtual currency.”  In other words, the IRS is treating the income or gains from the sale of a virtual currency, such as Bitcoins, as a capital asset, such as stocks or real estate, subject to either short-term (ordinary income tax rates) or long-term capital gains tax rates, if the asset is held greater than twelve months (15% or 20% tax rates based on income).  By treating Bitcoins and other virtual currencies as property (capital asset) and not currency, the IRS is requiring the investor to maintain detailed transaction records (i.e. basis, holding period, etc.) in order to determine the amount of tax from the cryptocurrency transaction(s).

Can I purchase Cryptocurrencies with a Retirement Account?

The Internal Revenue Code does not describe what a Self-Directed IRA or Solo 401(k) Plan can invest in, only what it cannot invest in. Internal Revenue Code Sections 408 & 4975 prohibits Disqualified Persons from engaging in certain types of transactions. The foundation of the prohibited transaction rules is based on the premise that investments involving an IRA and related parties are handled in a way that benefits the retirement account and not the IRA owner. The rules prohibit transactions between the IRA and certain individuals known as “disqualified persons.” The definition of a “disqualified person” (Internal Revenue Code Section 4975(e)(2)) extends into a variety of related party scenarios, but generally includes the IRA holder, any ancestors or lineal descendants of the IRA holder, and entities in which the IRA holder holds a controlling equity or management interest.

Because the IRS treats cryptocurrencies, such as Bitcoins, as a capital asset, such as stocks or real estate, a retirement account is permitted to buy, sell, or hold cryptocurrencies, subject to the prohibited transaction rules found under Internal Revenue Code Section 4975(c).

Why use a Retirement Account to Invest in Cryptocurrencies?

When purchasing cryptocurrencies, such as Bitcoins, with a Self-Directed IRA or Solo 401(k) Plan, all income and gains generated by your pre-tax retirement account investment would generally flow back into the retirement account tax-deferred or tax-free in the case of a Roth IRA. Instead of paying tax on the gains of the crypto investment, tax is paid only at a later date or never at all, in the case of a Roth IRA, leaving the crypto investment to grow unhindered without tax.

How to Use Retirement Funds to Buy, Hold, or Sell Cryptocurrencies?

In general, the two most popular ways to purchase cryptocurrencies with retirement funds is through a Self-Directed IRA or Solo 401(k) Plan.  Below is a step-by-step summary of how to purchase cryptocurrencies with a Solo 401(k) Plan:

A Solo 401(k) Plan is a qualified retirement plan that is established by a business with no full-time employees other than the owners or their spouses.

  1. Establish a Self-Directed Solo 401(k) Plan.
  2. Rollover retirement funds, cash or in-kind, tax-free to new Solo 401(k) Plan account.
  3. You, as trustee of the Solo 401(k) Plan, will then have “Checkbook Control” over all the assets/funds in the plan to make the cryptocurrency investment.
  4. A cryptocurrency account could be opened in the name of the Solo 401(k) Plan or a special purpose LLC wholly owned by the Solo 401(k) Plan. Many investors seem to like using an LLC wholly owned by a 401(k) plan as a vehicle to own the cryptos as it generally helps expedite the account opening process at the more popular cryptocurrency exchanges.
  5. You, as trustee of Solo 401(k) Plan or manager of the LLC, if applicable, will then wire the 401(k) funds to the new cryptocurrency account opened at a crypto exchange. The account will be opened in the name of the Solo 401(k) Plan or the LLC, if applicable.
  6. The cryptos can then be held at the exchange or via an online or offline wallet.
  7. Since a 401(k) plan is a tax-exempt qualified retirement plan, all income and gains from the cryptocurrency investment would flow back to the Solo 401(k) Plan tax-deferred or tax-free in the case of a Roth Solo 401(k) account. Whereas, a special purpose LLC wholly owned by a 401(k) plan would be treated as a disregarded entity for tax purposes. No Federal income tax return is required to be filed, although, some states may impose filing or franchise taxes on the LLC. Accordingly, in general, all income and gains from the cryptocurrency investment should flow back to the 401(k) plan without tax. One should consult with their tax advisor to better understand the implications of using a special purpose LLC wholly owned by a 401(k) plan to purchase cryptocurrencies.

Cryptocurrency investments, such as Bitcoins, are risky and highly volatile.  Any retirement account investor interested in using retirement funds to invest in cryptocurrencies should do their diligence and proceed with caution.

For more information about using a Solo 401(k) to invest in cryptocurrencies, please contact us @ 800.472.0646.

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Dec 11

IRA Financial Group Releases Cryptocurrency E-Info Kit for Solo 401(K) Plan Investors

New Bitcoin E-Kit will help investors understand how to purchase cryptocurrencies with 401(k) funds

IRA Financial Group, the leading provider of self-directed IRA LLC and Solo 401(k) Plans, announces the launch of a new Cryptocurrency E-Info Kit. The free cryptocurrency information kit will help retirement account holders looking to purchase cryptocurrencies, such as Bitcoins, with their retirement accounts to better understand what is involved in the process. “The IRA Financial Group Crypto E-Info Kit will help guide retirement account holders looking to use a Solo 401(k) plan to buy cryptocurrencies, such as bitcoins,” stated Adam Bergman, a partner with the IRA Financial Group.

IRA Financial Group’s Crypto 401(k) platform with checkbook control will allow retirement account holders to buy, sell, or hold Bitcoins and other cryptocurrency assets and generate tax-deferred or tax-free gains, in the case of a Roth Solo 401(k). The primary advantage of using a Solo 401(k) to make Bitcoin investments is that all income and gains associated with the 401(k) investment grow tax-deferred.IRA Financial Group Releases Cryptocurrency E-Info Kit for Solo 401(K) Plan Investors

IRA Financial Group is the market’s leading provider of self-directed retirement 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. The IRA Financial Trust Company, a self-directed IRA custodian, was founded by Adam Bergman, a partner with the IRA Financial Group.

IRA Financial Group is the market’s leading provider of self-directed retirement 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.

Adam Bergman, IRA Financial Group partner, has written six books the topic of self-directed retirement plans, including, “The Checkbook IRA”, “Going Solo,” Turning Retirement Funds into Start-Up Dreams, Solo 401(k) Plan in a Nutshell, Self-Directed IRA in a Nutshell, and in God We Trust in Roth We Prosper.

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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Dec 07

The Minimum Distribution Rules (RMD) for Solo 401(k) Plans

What is an RMD?

Once you reach the age of 70½, you must start to better understand the required minimum distributions (RMD) rules. That’s because, upon reaching this age, the IRS requires you to withdraw at least a minimum amount each year from all your IRAs and retirement plans—except Roth IRAs—and pay ordinary income taxes on the taxable portion of your withdrawal.

The Minimum Distribution Rules (RMD) for Solo 401(k) PlansDuring the April following the calendar year that the owner reaches age 70½ and is no longer employed (this does not apply in the case of a business whether the owner owns more than 10% of the stock), they are legally required to take a Required Minimum Distribution (RMD), also called a Minimum Required Distribution (MRD). Distributions taken late are taxed at the rate of 50%, whereas the account owner can elect the tax withholding rate for RMDs taken on time. RMDs are partial annual payments required by the IRS. The rule is in place to ensure that retirees actually withdraw from retirement accounts rather than using them as a vehicle to pass money to heirs. The RMD amount is based on the preceding December 31 value of the account balance and life expectancy tables.

For any account with an RMD, any distribution from that account during the year will count toward that year’s RMD. You may take more than your RMD in any given year. However, amounts withdrawn in excess of your annual RMD won’t satisfy your RMD requirements in future years.

That’s because the IRS requires each year’s RMD to be calculated using the previous year’s fair market value.

Are RMD Distributions Subject to Withholding?

When you take your RMD, you can have state or federal taxes withheld immediately, or you may be able to wait until you file your taxes.   An RMD distribution is not treated as an eligible rollover. If you request a rollover and an RMD is due for the year, you must satisfy the RMD before rolling over the remainder of your eligible money. In general, since an RMD is not an eligible rollover distribution it is not subject to the 20% withholding tax.  Hence, there is no 20% withholding tax on an RMD, but a 10% federal income tax would be withheld on the taxable portion of your RMD. RMDs may also be subject to state taxes. However, in most cases, you may elect to have no federal or state income tax withheld or to have more than 10% federal tax withheld would apply, although it may be waived.

Satisfying the RMD Rules

The Solo 401(k) plan participant is responsible for satisfying the RMD. The Code does not permit participants to satisfy their RMD from another plan of the same type [e.g., 403(b), 401(k), etc.].  RMDs are to be satisfied from each individual plan subject to that plan’s rules for RMDs.

Calculating the RMD

RMD is calculated by dividing the adjusted market value of the account as of December 31 of the prior year by the applicable life expectancy factor, which is obtained from

the appropriate life expectancy table. The Uniform Lifetime Table is generally used to determine the RMD. If a participant’s spouse is more than 10 years younger and is the sole designated beneficiary, the Joint Life and Last Survivor Expectancy Table is used.

For example, to calculate your RMD you would do the following:

Your RMD amount is determined by applying a life expectancy factor set by the IRS to your account balance at the end of the previous year. To calculate your RMD:

  • Find your age in the IRS Uniform Lifetime Table.
  • Locate the corresponding life expectancy factor.
  • Divide your retirement account balance as of December 31 of the prior year by your life expectancy factor.

How is the RMD calculated Upon death of the Participant – Spousal Beneficiary

Spousal beneficiary refers to the surviving husband or wife who was legally married to the originating participant on the date of the originating participant’s death. The General Board will pay the benefit to the spousal beneficiary if the participant dies before receiving a benefit or a complete distribution from his or her account, unless another beneficiary is entitled to the plan’s benefits.

When is a spousal beneficiary required to begin taking RMDs?

If the participant dies before the required beginning date, and no election was made by the required beginning date prior to the participant’s death, the spousal beneficiary will begin receiving RMDs. The spouse’s required beginning date is December 31 of the year the deceased participant would have reached age 70ó or December 31 of the year following the year of his or her death, whichever is later. Subsequent RMDs must be paid no later than December 31 of every year thereafter.

The RMD is calculated by dividing the adjusted market value of the account as of December 31 of the prior year by the applicable life expectancy factor, which is obtained from the appropriate life expectancy table.

If the participant dies before his or her required beginning date, the spouse’s life expectancy is determined using the Single-Life Table and recalculated each year that an RMD is due. If the participant dies on or after his or her required beginning date, life expectancies are determined using the Single-Life Table. The life expectancy of the participant (using his or her age in the year of death) is compared to the life expectancy of the spouse, and the longer life expectancy is used. If the longer life expectancy is that of the participant, it is reduced each year by one. If the longer life expectancy is that of the spouse, it is recalculated each year. (Recalculation generally will reduce the amount of each RMD, causing the payments to be made over a longer period of time.)

How is the RMD calculated Upon death of the Participant – Non-Spousal Beneficiary

Non-spousal beneficiaries are the persons or entities (such as estates or trusts) to whom the General Board will pay account balances if the participant dies before receiving complete distributions of his or her accounts.

When is a non-spousal beneficiary required to begin taking RMDs?

If the participant dies before the required beginning date, and if no election is made by December 31 following the calendar year of death for a distribution over the life of the non-spousal beneficiar(ies), the non-spousal beneficiar(ies) will receive the entire account balance by December 31 of the fifth year following the participant’s death. If the participant dies on or after his or her required beginning date, the non-spousal beneficiary must continue to receive RMDs. If the non-spousal beneficiary is an estate, trust or other entity, it may elect to receive the remaining benefits in a lump-sum or to defer payment until as late as December 31 of the fifth year following the participant’s death.

What life expectancy table is used to calculate the RMD?

If the participant dies before his or her required beginning date, and if the beneficiary elects to receive distributions over his or her life, the beneficiary’s life expectancy is determined using the Single-Life Table. Each year thereafter, the life expectancy is reduced by one. If more than one beneficiary shares in each RMD, the life expectancy of the oldest beneficiary is used. If the participant dies on/after his or her required beginning date, the beneficiary must continue to receive annual RMDs. The life expectancy of the participant is compared to the life expectancy of the beneficiary, and the longer life expectancy is used. Each year thereafter, the life expectancy is reduced by one.

How to Calculate RMDs with multiple retirement accounts?

If you have more than one retirement plan, you’ll need to calculate the RMD of each plan separately. However, you may add the RMD amounts of all IRAs (including traditional, rollover, SIMPLE, and SEP-IRAs) and withdraw the total amount from any one or more of your IRAs. The same rules apply to 403(b) accounts.

For example, assume that you have three IRAs. Your RMDs are $3,000 from the first IRA; $2,000 from the second IRA; and $2,000 from the third IRA. If you wish, you can take $7,000 from any one or more of your IRAs to satisfy your RMD for the year.

If you have accounts in several 401(k) or other employer-sponsored plans, such as a solo 401(k) Plan, the IRS generally requires you to calculate a separate RMD for each retirement plan in which you participate and withdraw the appropriate distribution from each plan.

Work with the IRA Financial Group

Your assigned tax partner and CPA will work with you to understand and help calculate the annual RMD amounts for your Solo 401(k) plan, if applicable. For additional information on the Solo 401(k) Plan RMD rules, please contact a retirement tax expert at 800-472-0646.

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