Jul 18

Can an Individual Adopt a Separate Solo 401(k) Plan for Another Entity or Business?

One must first determine whether adopting the additional Solo 401(k) would violate the CONTROLLED GROUP RULES set up by the IRS and Department of Labor.

The Controlled Group Rules were created essentially to protect employees from a business owner or executive establishing a separate 401(k) plan for another business and thereby not offering those employees the benefits inherent in participating in a 401(k) qualified retirement plan.

The IRS and Department of Labor were concerned that business owners wanting to establish a qualified retirement plan, but not wanting the burden of having to provide benefits to all eligible employees, would create a new separate business which would have no employees other than the owner or executive and then adopt a solo 401(k) plan for that company. Since the new company would be wholly owned by the business owner and would not have any full-time employees, the business owner could establish his or her own solo 401(k) plan and, thus, enjoy all the benefits of having a qualified retirement plan without having to provide any benefit to the employees from the other company.

WHAT IS A CONTROLLED GROUP OF CORPORATIONS?

As per Internal Revenue Code Section 414, a controlled group is any two or more corporations connected through stock ownership in any of the following ways:

Parent-subsidiary group

  • 80% of stock of each (subsidiary) corporation is owned by another member of the group
  • Parent corporation must own 80% of the stock of at least one of the other members of the group
  • The rules are subject to the stock attribution rules under Internal Revenue Code Section 318

Brother-sister group

  • The same five or fewer individuals own at least 80% of the stock of the corporations
  • “Individual” includes ownership by an estate or trust
  • “Ownership” includes having a controlling interest and effective control of the corporations
  • The rules are subject to the stock attribution rules under Internal Revenue Code Section 318

Combined group

  • Combination of a Parent-subsidiary and a Brother-sister group

Can an Individual Adopt a Separate Solo 401(k) Plan for Another Entity or Business?HOW DOES ONE DETERMINE WHO IS PART OF A CONTROLLED GROUP?

To determine whether one is part of a controlled group, one must take into account the stock attribution rules.

The purpose of the stock attribution rules is to attribute shares, or interest in a company held by certain family members, to the person in question and determine whether that person is part of a controlled group. Internal Revenue Code Section 318 governs the stock attribution rules. Pursuant to Internal Revenue Code Section 318,an individual shall be considered as owning the stock, owned directly or indirectly, by or for –

(i) his/her spouse (other than a spouse who is legally separated from the individual under a decree of divorce or separate maintenance)

(ii) his/her children, grandchildren, parents

CAN THE COMPANIES IN A CONTROLLED GROUP BE TREATED AS SEPARATE COMPANIES?

IRS does have a procedure through which a company can request to be treated as a Separate Line of Business. (see IRC §414(r)) . Following are limitations for these requests:

  • Must have a valid business purposes
  • Must have at least 50 employees within each line of business
  • Restrictions on HCE ratios in each separate line of business
  • Must notify IRS to request their approval

DO ALL MEMBERS OF A CONTROLLED GROUP HAVE TO PARTICIPATE IN ONE PLAN?

No. Members of a controlled group may each have a different plan. Similarly, two or more members of the controlled group may adopt a single plan. In either case, all employees of the controlled group must be taken into account for testing purposes.

For example, if one company is owned by a shareholder with greater than 80% and has no employees, but that same person also has ownership of over 80% in another company with full-time employees, a single plan may be adopted for both companies. However, the adopted plan must provide benefits to the eligible employees from the second company.

In other words, the rules are in place to restrict the owner(s) of a business with full-time employee from establishing a new company with no employees and adopt a Solo 401(k) plan that would exclude the full-time employees from the other company. The IRS and Department of Labor wanted to make sure that all eligible employees of a company that is part of a controlled group receives all available retirement benefits.

Controlled Group Examples:

Example 1: Joe owns 90% of Company A that has 3 employees. Joe wants to adopt a qualified retirement plan, but does not want to offer any benefits to his employees. Joe decides he will establish a new company that has no employees and adopt a Solo 401(k) Plan through that new company. Before proceeding, Joe talks with a tax attorney about his idea. Joe’s tax attorney quickly points out that since Joe would own more than 80% of Company A and the newly established company, both companies would be part of a controlled group. This would prohibit Joe from establishing a plan for the new company without offering the employees from Company A the same plan benefits.

Example 2. Joe owns 45% of Company A and Joe’s son, Mike, owns the remaining 55% interest. Company A has 5 full-time employees. Joe and Mike want to establish a 401(k) plan so they make tax-deferred contributions, but don’t want to provide the employees with any plan benefits. Joe and Mike come up with the idea of forming a new company that will have no employees other than themselves and adopt a 401(k) plan through the new company. Joe talks this over with his tax attorney and learns that since Joe and Mike are father and son, under Internal Revenue Code Section 318 they will be treated as owning each other’s shares, giving them each over 80% interest in Company A and, thus, triggering the controlled group rules. Hence, Joe and Mike would be limited from opening a 401(k) plan for the new business and not offering plan benefits to the employees from Company A. Joe and Mike could establish a plan for the new company, but the controlled group rules would require that the plan benefits be provided to all eligible employees from both companies.

Example 3. Joe owns 78% of Company A and Tim, his friend, owns the remaining 22%. Company A has 12 full-time employees. Company A does not have a 401(k) Plan. Tim does some consulting on a part-time basis and wants to establish a new corporation for his consulting business as well as establish a Solo 401(k) plan. Tim speaks with his tax attorney to inquire whether he could adopt a Solo 401(k) plan for his new business without being required to offer benefits to the 12 full-time employees with Company A. Tim’s tax attorney told Tim that because he owns less than 80% of Company A, his new consulting company would not be part of a controlled group and, thus, he would not be required to offer 401(k) benefits from his new company to the Company A employees.

Example 4. Joe and Tim each own 50% of Company A, which has 4 full-time employees. Company A currently offers its employees 401(k) plan benefits. Joe and Tim are each over the age of 59 ½ and are interested in using some of their retirement funds to purchase real estate. Unfortunately, Company A’s retirement plan does not allow for non-traditional investments, such as real estate. Joe and Tim decide to establish a new corporation, which they will each own 50% of and then have that new company adopt a new 401(k) plan. Before proceeding, Joe and Tim decided to speak with their tax attorney to make sure this strategy would work. Joe and Tim’s tax attorney advised them that as the new company will be owned by the both of them, just like Company A, the controlled group rules would be triggered since the same five or fewer individuals own at least 80% of the stock of the two corporations. Thus, Jim and Tim would not be able to adopt a new 401(k) plan without offering the same benefits to the employees from Company A.

To learn more about how the controlled group rules as they apply to the establishment of a Solo 401(k) plan, please contact a tax expert at 800-472-0646.

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Jul 14

Contribution Limits for the Solo 401k Make it the Retirement Choice for the Self-Employed

Under the 2017 Solo 401(k) contribution rules, a plan participant under the age of 50 can make a maximum annual employee deferral contribution in the amount of $18,000. That amount can be made in pre-tax, after-tax or Roth. On the profit sharing side, the business can make a 25% (20% in the case of a sole proprietorship or single member LLC) annual profit sharing contribution up to a combined maximum, including the employee deferral, of $54,000, an increase of $1,000 from 2016.

For plan participants over the age of 50, an individual can make a maximum annual employee deferral contribution in the amount of $24,000. That amount can be made in pre-tax, after tax, or Roth. On the profit sharing side, the business can make a 25% (20% in the case of a sole proprietorship or single member LLC) annual profit sharing contribution up to a combined maximum, including the employee deferral, of $60,000, an increase of $1,000 from 2016.

One of the main benefits of a Solo 401(k) Plan is the opportunity to make higher annual contributions in pre-tax, after-tax or Roth.

IRA Financial Group’s Solo 401(k) plan is unique and so popular because it is designed explicitly for small, owner-only business. In addition, to the high annual contribution limitations. There are many features of the IRA Financial Group’s Solo 401(k) plan that make it so appealing for small business owners.

Tax and Penalty Free Loan

Unlike most Solo 401(k) Plans offered by the traditional financial institutions such as Fidelity, 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, 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).

Checkbook Control & No Transaction Fees

The most attractive feature of the IRA Financial Group Solo 401(k) Plan is that it offers the plan participant checkbook control over his or her retirement funds. In the case of a conventional Solo 401(k) Plan offered by most financial institutions, the plan participant is relegated to making traditional investments, such as stocks and or mutual funds. In addition, the Solo 401(k) Plan account is required to be opened at the financial institution. With IRA Financial Group’s Solo 401(k) Plan, the plan account can be opened at any local bank, including Chase, Wells Fargo, and even Fidelity. In addition, with IRA Financial Group’s Solo 401(k) Plan, the plan participant can make almost any traditional as well as non-traditional investments, such as real estate, precious metals, tax liens, and much more. With IRA Financial Group’s Solo 401(k) Plan, the Plan participant has the freedom to make the investments he or she wants while at the same time opening the 401(k) account at any local bank. As trustee of the Solo 401(k) Plan, the Plan Participant (you) can serve as the trustee providing you checkbook control over your retirement funds. With IRA Financial Group’s Solo 401(k) Plan, making a Solo 401(k) Plan investment is as simple as writing a check.

Invest in Real Estate & Much More Tax-Free

With IRA Financial Group’s Self-Directed Solo 401(k) plan, you will be able to invest in almost any type of investment opportunity that you discover, including: real estate, tax liens, precious metals, private notes, hard money loans, private business, etc.; your only limit is your imagination. The income and gains from these investments will flow back into your Solo 401(k) tax-free.

Roth Contributions & Conversion

Unlike a conventional Solo 401(k) Plan offered by most financial institutions, 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, the IRA Financial Group’s Solo 401(k) Plan allows for the conversion of a traditional 401(k) or 403(b) account to a Roth subaccount. However, the Solo 401(k) Plan participant must pay income tax on the amount converted.

Easy Administration

IRA Financial Group’s Solo 401(k) Plan is easy to operate. 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). However, unlike a financial institution, the tax professionals at the IRA Financial Group will assist you in completing this form is require.

To learn more about the advantages of the Solo 401K Plan with Checkbook Control please contact a 401(k) Expert at 800-472-0646.

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Jul 12

New Podcast – Using a Solo 401k to Buy Bitcoins and Cryptocurrency

IRA Financial Group’s Adam Bergman discusses how to use a Solo 401k Plan to buy Bitcoins and Cryptocurrency, as interest in virtual currency continues to increase.

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Click Here to Listen

 

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Jul 07

How to Use a Solo 401k Plan to Invest in Options

When it comes to making investments with a Solo 401(k) Plan, the IRS generally does not tell you what you can invest in, only what you cannot invest in. The types of investments that are not permitted to be made using retirement funds is outlined in Internal Revenue Code Section 408 and 4975. These rules are generally known as the “Prohibited Transaction” rules.

In addition to the Prohibited Transaction rules, the IRS imposes a levy or tax on certain transactions involving IRA funds. In general, when one uses IRA funds to invest in an active business, such as a restaurant, store, factory that is operated through a passthrough entity such as a Limited Liability Company or Partnership or used nonrecourse financing, such as a nonrecourse loan or margin in a stock or trading account, a percentage of net profits or income generated by that activity could be subject to a tax. The tax imposed is often referred to as Unrelated Business Taxable Income or UBIT or UBTI. The UBTI rules are generally outlined in Internal Revenue Code Sections 512-514.

How to Use a Solo 401k Plan to Invest in OptionsThe reason the UBTI tax rules do not impact most retirement investors, is that Internal Revenue Code Section 512(b) provides a general exemption for the following categories of income generated by a retirement account: dividends, interest, royalties, rental income, and capital gain type transaction, As a result, since the majority of retirement investors purchase publicly traded company stock, which is exempted from the UBTI tax pursuant to Internal Revenue Code Section 512, the UBTI tax rules are not widely known.

When it comes to investing in options with a Solo 401(k) Plan the question then becomes whether the investment would trigger the UBTI rules. An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price on or before a certain date. An option, just like a stock or bond, is a security. It is also a binding contract with strictly defined terms and properties.

According to the IRS , any gain from the lapse or termination of options to buy or sell securities is excluded from unrelated business taxable income. Note – the exclusion is not available if the organization is engaged in the trade or business of writing options or the options are held by the organization as inventory or for sale to customers in the ordinary course of a trade or business. Hence, if option trading is not being done as an active trade or business, then using a Solo 401(k) Plan to invest in options would not trigger the UBTI tax rules.

For more information on using a solo 401(k) Plan to invest in options, please contact a tax professional at 800-472-0646.

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Jul 05

How to Borrow from Your Solo 401k Plan

As long as the plan documents allow for it & the proper loan documents are prepared and executed, a participant loan can be made for any reason. The Solo 401k loan is received tax free and penalty free. There are no penalties or taxes due provided loan payments are paid on time. The IRA Financial Group Solo 401(k) Plan documents will allow you to use a loan from your Solo 401(k) for any investment purposes, including real estate, funding your business or a new business, tax liens, private placements, etc.

What is a Solo 401(k) Plan Loan?

How to Borrow from Your Solo 401k PlanA Solo 401(k) loan is permitted at any time using the accumulated balance of the Solo 401(k) as collateral for the loan. A Solo 401(k) participant can borrow up to $50,000 or 50% of their account value – whichever is less. This loan has to be repaid over an amortization schedule of 5 years or less with payment frequency no greater than quarterly. The interest rate must be set at a reasonable rate of interest, generally interpreted as prime rate as per the Wall Street Journal. As of 6/23/17 prime rate is 4.25%, which means participant loans may be set at a very reasonable Interest rate. The Interest rate is fixed based on the prime rate at the time of the loan application.

How Can This be Done?

Internal Revenue Code Section 72(p) and the 2001 EGGTRA rules allow a Solo 401(k) Plan participant to borrow money from the plan tax-free and without penalty. As long as the plan documents allow for it and the proper loan documents are prepared and executed, a participant loan can be made for any reason. The solo 401(k) loan is received tax-free and penalty-free. There are no penalties or taxes due provided loan payments are paid on time. The IRA Financial Group Solo 401(k) Plan documents will allow you to use a loan from your Solo 401(k) for any investment purposes, including real estate, funding your business or a new business, tax liens, private placements, etc. Our in-house retirement tax professionals will assist you in completing the Solo 401(k) Plan documents in a timely manner once your Solo 401(k) Plan has been adopted.

When can a Participant Loan be Useful?

As a result of the recent economic meltdown, banks and other financial institutions have severely limited their lending capacity to self-employed business owners, thus, causing grave financial pressure on self-employed business owners. The Solo 401(k) plan is a perfect structure for any self-employed business owner seeking immediate funds for their business or to help pay personal expenses. Solo 401(k) participants can borrow up to $50,000 or 50% of their account value, whichever is less, to help finance or operate their business. For example, an individual can take a Solo 401(k) Plan loan and use those funds to pay off a mortgage, credit card, any personal expense, go on vacation, or start and finance a business.

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

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Jun 28

Cryptocurrencies, Such as Bitcoin, Offer Opportunities for Solo 401k Investors

For a growing number of investors, cryptocurrency is not only the future of money, but also an attractive and potentially profitable investment asset, though highly risky and volatile.  Bitcoin has become the public’s most visible and popular cryptocurrency and it is also among the oldest, having first emerged in 2009.  Over one year, the market capitalization for bitcoin has increased enormously, from around $7.16 billion in May 2016 to $27.9 billion today.  As the price of bitcoin has risen over the last year or so, so has the confidence among investors, including retirement account investors.

Cryptocurrencies, Such as Bitcoin, Offer Opportunities for Solo 401k InvestorsThe process of buying cryptocurrency is still somewhat unclear for a lot of people. It’s not a stock or a traditional investment.  For most people in the U.S., Coinbase would be the easiest option to buy cryptocurrency, such as bitcoin, Ethereum, or Litecoin.  After verifying the account, the investor can add a number of payment methods including credit or debit cards, U.S. bank accounts, or even wire transfers of funds.  Cryptocurrency transactions are not anonymous and the identify of the currency owner can be traced back to a real-world identity.

As a cryptocurrency, bitcoin is generated through the process of “mining”—essentially using your computer’s processing power to solve complex algorithms called “blocks.”  One can buy and sell bitcoin on an exchange, much like a physical currency exchange, converting wealth from bitcoin to US dollars to other national currencies, back to dollars or bitcoin. And that’s how money is made.

Even though bitcoin is labeled as a “cryptocurrency”, from a federal income tax standpoint, bitcoin 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 bitcoin.  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 bitcoin, as a capital asset, 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 and not currency, the IRS is imposing extensive record-keeping rules—and significant taxes—on its use.

The IRS tax treatment of virtual currency has created a favorable tax environment for retirement account investors.  In general, when a retirement account generates income or gains from the purchase and sale of a capital asset, such as stocks, mutual funds, real estate, etc., irrespective of whether the gain was short-term (held less than twelve months) or long-term (held greater than twelve months), the retirement account does not pay any tax on the transaction and any tax would be deferred to the future when the retirement account holder takes a distribution (in the case of a Roth 401(k) plan no tax would be due if the distribution is qualified).  Hence, using retirement funds to invest in cryptocurrencies, such as bitcoin, could allow the investor to defer or even eliminate in the case of a Roth, any tax due from the investment.  Note – retirement account investors interested in mining bitcoins versus trading, could become subject to the unrelated business taxable income tax rules if the “mining” constituted a trade or business.

As I mentioned earlier, cryptocurrency investments, such as bitcoin, are risky and highly volatile.  Any investor interested in learning more about bitcoin should do their due diligence and proceed with caution.

With an IRA Financial Group Solo 401(k) plan, you have an exciting opportunity to invest in cryptocurrencies.  For more information, please contact us @ 800.472.0646.

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Jun 26

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

The Internal Revenue Code and ERISA law require the use of a “C” Corporation for using the Rollover Business Start-up solution (ROBS) to acquire stock in a business. 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.

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

Please contact one of our ROBS Experts at 800-472-0646 for more information.
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Jun 22

IRA Financial Group Announces New Solo 401(k) Plan Annual Services to Include Filing of IRS Form 5500-EZ

Solo 401(k) plan clients of the IRA Financial Group to be offered IRS Form 5500-EZ completion services

IRA Financial Group, the leading provider of self-directed IRA and Solo 401(k) plans, announces a new service for its annual tax and compliance service for Solo 401(k) plan clients to include the completion of the annual IRS information form – 5500-EZ.

“In light of increased demand from our clients, we have decided to expand our annual tax and compliance service to include the completion of the IRS Form 5500-EZ for no additional fee for Solo 401(k) 5500 plan clients with plan assets exceeding $250,000 for the 2016 taxable year,” stated Jen Martin, a self-directed solo 401(k) plan specialist with the IRA Financial Group. “With more and more solo 401(k) plan clients having plan assets exceeding $250,000, offering 5500-EZ filing services became something we had to do,” stated Adam Bergman, a partner with the IRA Financial Group.

 IRA Financial Group Announces New Solo 401(k) Plan Annual Services to Include Filing of IRS Form 5500-EZA Solo 401(k), also known as an individual 401(k) or self-employed 401(k) plan was created specifically for sole proprietors, small businesses and independent contractors such as consultants. A Solo 401(k) Plan can be adopted by any business with no employees other than the owner(s). The business can be established as a sole proprietorship, LLC, corporation, or partnership. With a Solo 401(k) plan, there is generally no annual filing requirement unless the solo 401(k) plan participant’s plan assets exceed $250,000 in assets. In such a case, the Solo 401(k) Plan participant will need to file a short information return with the IRS (Form 5500-EZ). The IRS Form 5500-EZ is due on July 31, 2017 for the 2016 taxable year.

For 2017, the Solo 401(k) Plan, offers one the ability to make annual contributions of up to $54,000 ($60,000 for those over the age of 50), borrow up to $50,000, as well as use his or her retirement funds to make almost any type of investment on their own tax-free and penalty free without requiring the consent of any custodian or person.

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.

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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Jun 20

Does the UBTI Tax on Unrelated Debt Financed Income Apply to Solo 401k Plans?

No. Unlike a Self Directed IRA LLC, when a Solo 401K Plan uses nonrecourse leverage to purchase real estate that is leveraged, it is exempt from paying any Unrelated Business Taxable Income (UBTI) tax on the income or gain generated.

When an IRA buys real estate that is leveraged with mortgage financing, it creates Unrelated Debt Financed Income (a type of Unrelated Business Taxable Income) on which taxes must be paid. A Solo 401(k) plan is exempt from UDFI pursuant to Internal Revenue Code Section 514(c)(9).

With the UBTI tax rates at approximately 40% for 2017, the Solo 401(k) Plan offers real estate investors looking to use nonrecourse leverage in a transaction with a tax efficient solution.

Does the UBTI Tax on Unrelated Debt Financed Income Apply to Solo 401k Plans?“Debt-financed property” refers to borrowing money to purchase the real estate (i.e., a leveraged asset that is held to produce income). In such cases, only the income attributable to the financed portion of the property is taxed; gain on the profit from the sale of the leveraged assets is also UDFI (unless the debt is paid off more than 12 months before the property is sold).

Why does this Exemption Apply to 401(k) Plans and Not IRAs?

When Internal Revenue Code Section 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. The provision brings the history of Internal Revenue Code Section 514 full circle by exempting some organizations, such as 401(k) Qualified Plan, from tax on income from the very sort of leveraged real estate deals that provoked the enactment of the predecessor of Internal Revenue Code Section 514 in 1950. As per the legislative history, 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.”

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

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Jun 17

What Are the Advantages of a Solo 401k Plan vs a Self-Directed IRA?

A Solo 401(k) Plan is an IRS approved retirement plan, which is suited for business owners who do not have any employees other than themselves and perhaps their spouse. The “one-participant 401(k) Plan” or individual 401(k) Plan is not a new type of plan. It is a traditional 401k Plan covering only one employee.  Unlike a Traditional IRA, which only allows an individual to contribute $5500 annually or $6500 if the individual is over the age of 50, a Solo 401k Plan offers the Plan participant the ability to contribute up to $60,000 each year.  Before the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) became effective in 2002, there was no compelling reason for an owner-only business to establish a Solo 401(k) Plan because the business owner could generally receive the same benefits by adopting a profit sharing plan or a SEP IRA.  After 2002, EGTRRA paved the way for an owner-only business to put more money aside for retirement and to operate a more cost-effective retirement plan than a Traditional IRA or 401(k) Plan.

There are a number of options that are specific to Solo 401k Plans that make the Solo 401k Plan a far more attractive retirement option for a self-employed individual than a Traditional IRA for a self-employed individual.

1. Reach your Maximum Contribution Amount Quicker: A Solo 401(k) Plan includes both an employee and profit sharing contribution option, whereas, a Traditional IRA has a very low annual contribution limit.

Under the 2017 Solo 401(k) contribution rules, a plan participant under the age of 50 can make a maximum employee deferral contribution in the amount of $18,000. 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 $54,000.

What Are the Advantages of a Solo 401k Plan vs a Self-Directed IRA?For plan participants over the age of 50, an individual can make a maximum employee deferral contribution in the amount of $24,000. 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 $60,000.

Whereas, a Traditional Self-Directed IRA would only allow an individual with earned income during the year to contribute up to $5500, $6500 if the individual is over the age of 50.

For example, Joe, who is 60 years old, owns 100% of an S Corporation with no full time employees.  Joe earned $100,000 in self-employment W-2 wages for 2017.  If Joe had a Solo 401(k) Plan established for 2017, Joe would be able to defer approximately $49,000 for 2017 (a $24,000 employee deferral, which could be pre-tax or Roth, and 25% of his compensation giving him $49,000 for the year).   Whereas, if Joe established a Traditional Self-Directed IRA, Joe would only be able to defer approximately $6,500 for 2017.

2. No Roth Feature: A Solo 401k Plan can be made in pre-tax or Roth (after-tax) format.  Whereas, in the case of a Traditional Self-Directed IRA, contributions can only be made in pre-tax format.  In addition, a contribution of $18,000 ($24,00, if the plan participant is over the age of 50) can be made to a Solo 401(k) Roth account.

3. Tax-Free Loan Option: With a Solo 401K Plan, you can borrow up to $50,000 or 50% of your account value, what ever is less.  The loan can be used for any purpose.  With a Traditional Self-Directed IRA, the IRA holder is not permitted to borrow even $1 dollar from the IRA without triggering a prohibited transaction.

4. Use Nonrecourse Leverage and Pay No Tax: With a Solo 401(k) Plan, you can make a real estate investment using nonrecourse funds without triggering the Unrelated Debt Financed Income Rules and the Unrelated Business Taxable Income (UBTI or UBIT) tax (IRC 514).  However, the nonrecourse leverage exception found in IRC 514 is only applicable to 401(k) qualified retirement plans and does not apply to IRAs. In other words, using a Self-Directed SEP IRA to make a real estate investment (Self Directed Real Estate IRA) involving nonrecourse financing would trigger the UBTI tax.

5. Open the Account at Any Local Bank: With a Solo 401k Plan, the 401k bank account can be opened at any local bank or trust company.  However, in the case of a Traditional Self Directed IRA, a special IRA custodian is required to hold the IRA funds.

6. No Need for the Cost of an LLC: With a Solo 401(k) Plan, the plan itself can make real estate and other investments without the need for an LLC, which, depending on the state of formation, could prove costly. Since a 401(k) Plan is a trust, the trustee on behalf of the trust can take title to a real estate asset without the need for an LLC.

7. Better Creditor Protection: In general, a Solo 401(k) Plan offers greater creditor protection than a Traditional IRA.  The 2005 Bankruptcy Act generally protects all 401(k) Plan assets from creditor attack in a bankruptcy proceeding.  In addition, most states offer greater creditor protection to a Solo 401(k) qualified retirement plan than a Traditional Self-Directed IRA outside of bankruptcy.

The Solo 401k plan is unique and so popular because it is designed explicitly for small, owner-only business.  The many features of the Solo 401k plan discussed above is why the Solo 401k Plan or Individual 401k Plan it so appealing and popular among self-employed business owners.

To learn more about the benefits of a Solo 401(k) Plan vs. a Self-Directed IRA, please contact a tax professional at 800-472-0646.

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