Aug 17

Tips and Tricks for Solo 401(k) Alternate Investments

A Solo 401(k) Plan offers one the ability to use his or her retirement funds to make almost any type of investment on their own without requiring the consent of any custodian or person. The IRS and Department of Labor only describe the types of investments that are prohibited, which are very few.

The foundation of the prohibited transaction rules are based on the premise that investments involving a Solo 401(k) Plan and related parties are handled in a way that benefits the retirement account and not the plan participant. The rules prohibit transactions between the plan participant and certain individuals known as “disqualified persons”. The outline for these rules can be found in Internal Revenue Code Section 4975. In general, 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 Solo 401(k) Plan participant, any ancestors or lineal descendants of the plan participant, and entities in which the plan participant holds a controlling equity or management interest.

Types of Solo 401(k) Alternate Investments:

  • Residential or commercial real estate
  • Domestic of foreign real estate
  • Raw land
  • Foreclosure property
  • Mortgages
  • Mortgage pools
  • Deeds
  • Private loans
  • Tax liens
  • Private businesses
  • Limited Liability Companies
  • Limited Liability Partnerships
  • Private placements
  • Precious metals and certain coins
  • Stocks, bonds, mutual funds
  • Foreign currencies

Real Estate

The IRS permits using a Solo 401(k) to purchase real estate or raw land. Since you are the trustee of the 401(k) Plan, making a real estate investment is as simple as writing a check from your 401(k) Plan bank account. The advantage of purchasing real estate with your Solo 401(k) Plan is that all gains are tax-deferred until a distribution is taken (pre-tax 401(k) distributions are not required until the plan participant turns 70 1/2). In the case of a Roth Solo 401(k) Plan, all gains are tax-free.

Solo 401(k) Alternate Investments For example, if you purchased a piece of property with your Solo 401(k) Plan for $100,000 and you later sold the property for $300,000, the $200,000 of gain appreciation would generally be tax-deferred. Whereas, if you purchased the property using personal funds (non-retirement funds), the gain would be subject to federal income tax and in most cases state income tax.

Helpful Tips :

  • The deposit and purchase price for the real estate property should be paid using Solo 401(k) Plan funds or funds from a non-disqualified third-party
  • No personal funds or funds from a “disqualified person” should be used
  • All expenses, repairs, taxes incurred in connection with the Solo 401(k) Plan real estate investment should be paid using retirement funds – no personal funds should be used
  • If additional funds are required for improvements or other matters involving the real estate investments, all funds should come from the Solo 401(k) Plan or from a non “disqualified person”
  • If financing is needed for a real estate transaction, only nonrecourse financing should be used. A nonrecourse loan is a loan that is not personally guaranteed and whereby the lender’s only recourse is against the property and not against the borrower.
  • With a Solo 401(k) Plan the use of a nonrecourse loan would not be subject to any tax pursuant to Internal Revenue Code Section 514, which is not the case with an IRA. This provides a very exciting investment opportunity.
  • No services should be performed by the Solo 401(k) Plan participant or “disqualified person” in connection with the real estate investment. In general, other then typical trustee type of services (necessary and required tasks in connection with the maintenance of the plan), no active services should be performed by the plan participant or a “disqualified person” with respect to the real estate transaction.
  • Title of the real estate purchased should be in the name of the trustee for the benefit of the plan. For example, if Joe Smith is the trustee of ABC 401K Trust, title to real estate purchased by Joe’s plan would be as follows: Joe Smith as Trustee of the ABC 401K Trust
  • Keep good records of income and expenses generated by the real estate investment
  • All income, gains or losses from a Solo 401(k) Plan real estate investment should be allocated to the Solo 401(K) Plan
  • Make sure you perform adequate diligence on the property you will be purchasing especially if it is in a state you do not live in
  • Make sure you will not be engaging in any self-dealing real estate transaction which would involve buying or selling real estate that will personally benefit you or a “disqualified person”

Tax Liens

The IRS permits the purchase of tax liens and tax deeds with a Solo 401(k) Plan. By using a Solo 401(k) Plan to purchase tax-liens or tax deeds, your profits are tax-deferred back into your retirement account until a distribution is taken (pre-tax 401(k) distributions are not required until the Plan Participant turns 70 1/2). In the case of a Roth Solo 401(k) Plan, all gains are tax-free.

More importantly, with a Solo 401(k) Plan, you, as trustee of the 401(k) Plan, will have “checkbook control” over your retirement funds allowing you to make purchases on the spot without custodian consent. In other words, purchasing a tax-lien or tax deed is as easy as writing a check!

Helpful Tips :

  • The deposit and purchase price for the tax lien should be paid using Solo 401(k) Plan funds or funds from a non-disqualified third-party
  • No personal funds or funds from a “disqualified person” should be used
  • A check from the Solo 401(k) Plan account should be taking to auction or used for the tax lien purchase – no personal check or cash should be used
  • No credit card should be applied for in the name of the Solo 401(k) Plan as that would violate the IRS prohibited transaction rules. A pure debit card is allowable
  • All income, gains or losses from tax lien investments should be allocated to the Solo 401(K) Plan

Loans & Notes

The IRS permits using 401(k) funds to make loans or purchase notes from third parties. By using a Solo 401(k) Plan to make loans or purchase notes from third-parties, all interest payments received would be tax-deferred until a distribution is taken (pre-tax 401(k) distributions are not required until the Plan Participant turns 70 1/2). In the case of a Roth Solo 401(k) Plan, all gains are tax-free.

For example, if you used a Solo 401(k) to loan money to a friend, all interest received would flow back into your 401(k) Plan tax-free. Whereas, if you lent your friend money from personal funds (non-retirement funds), the interest received would be subject to federal and in most cases state income tax.

Helpful Tips :

  • The loan or note amount should be paid using Solo 401(k) Plan funds or funds from a non-disqualified third-party
  • No personal funds or funds from a “disqualified person” should be used in the loan transaction
  • The loan or note should not involve a “disqualified person” directly or indirectly
  • The loan or note should have a stated interest rate of at least Prime as per the Wall Street Journal (4.25% as of 6/23/17)
  • All interest and principal associated with the loan or note should be allocated to the Solo 401(K) Plan
  • It is good practice to have the loan terms documented in a promissory note or loan agreement
  • If you will be acting as the lender, consider securing the loan with an interest or lien in an asset owned by the borrower
  • Make sure you will not be engaging in any self-dealing loan transaction which would involve a loan or note that will personally benefit you or a “disqualified person”

Private Businesses

With a Solo 401(k) you are permitted to purchase an interest in a privately held business. The business to be purchased can be any entity other than an S Corporation (i.e. limited liability company, C Corporation, partnership, etc.). When investing in a private business using 401(k) funds, it is important to keep in mind the “Disqualified Person” and “Prohibited Transaction” rules under IRC 4975 and the Unrelated Business Taxable Income rules under IRC 512.

Helpful Tips :

  • The deposit and purchase price for the business should be paid using Solo 401(k) Plan funds or funds from a non-disqualified third-party
  • No personal funds or funds from a “disqualified person” should be used to purchase the business
  • The purchase of the stock or assets of the business should not directly or indirectly benefit the plan participant personally or any “disqualified person”
  • The purchase of a business operated via an LLC or partnership will potentially trigger the Unrelated Business Taxable Income rules under IRC 512 and a corresponding tax of approximately 40% for 2017 would be applied
  • Stock of an S Corporation should not be purchased with retirement funds as the S corporation rules only allow individuals to be S Corporation shareholders
  • The purchase of stock of a C Corporation would not trigger the application of the Unrelated Business Taxable Income rules under IRC 512
  • All income, gains or losses from the purchased business should be allocated to the Solo 401(K) Plan
  • The plan participant or any “disqualified person” should not have any ownership in the business being purchased and should not directly or indirectly personally benefit from the acquisition
  • Make sure to perform adequate diligence on the business you will be purchasing or investing in especially if you will be buying the stock/interests and not the assets
  • Make sure you will not be engaging in any business acquisition transaction which would involve buying or selling a business that will personally benefit you or a “disqualified person”

Precious Metals & Coins

Our Solo 401(k) Plan documents allow for investments into precious metals and certain coins. The advantage of using a Solo 401(k) Plan to purchase precious metals and/or coins is that their values generally keep up with, or exceed, inflation rates better than other investments. In addition, IRS approved metals or coins, as defined under Internal Revenue Code Section 408(m) should be held an an approved depository or U.S. Bank.

Helpful Tips:

  • Only IRS approved metals or coins (bullion) may be purchases as per Internal Revenue Code Section 408(m)
  • The IRS approved precious metals or coins being purchased by the plan should be paid using Solo 401(k) plan funds or funds from a non-disqualified third-party
  • With respect to IRS approved precious metals or coins (bullion), the metals or coins should not be held in the personal possession of any individual
  • With respect to the IRS approved precious metals or coins outlined in Internal Revenue Code Section 408(m), the bullion must be held in the “physical possession” of a U.S. depository or at a U.S. bank
  • An affidavit signed by the trustee of the plan confirming that the IRS approved precious metals or coins are being purchased and being held in the sole interest of the retirement account is good practice
  • All income, gains or losses from the purchased precious metals or coins should be allocated to the Solo 401(k) Plan
  • IRS approved precious metals or coins should not be held at a bank outside the United States
  • Perform adequate diligence on the dealer with which you will be transacting with for the purchase of IRS approved metals or coins

Foreign Currencies

The IRS does not prevent the use of 401(k) funds to purchase foreign currencies, including Iraqi Dinars. In fact, our Solo 401(k) Plan documents permit the purchase of foreign currencies. Many believe that foreign currency investments offer liquidity advantages to the stock market as well as significant investment opportunities.

By using a Solo 401(k) to purchase foreign currencies, such as the Iraqi Dinar, all foreign currency gains generated would be tax-deferred until a distribution is taken (pre-tax 401(k) distributions are not required until the Plan Participant turns 70 1/2). In the case of a Roth Solo 401(k) Plan, all gains are tax-free.

Helpful Tips :

  • Make sure you have a solid background in trading currencies – high volatile and significant risk
  • If you will be investing with a third-party, perform adequate diligence on the individual and make sure the individual has the knowledge to trade foreign currencies and all his/her securities licenses are in good standing.
  • Beware of leverage – it is allowable but it would trigger the application of the Unrelated Business Taxable Income rules under IRC 512 and thereby a corresponding tax
  • No personal guarantee of any leverage or loan obligation is permitted
  • All income, gains or losses from the foreign currency transactions should be allocated to the Solo 401(K) Plan

Stocks, Bonds, Mutual Funds, CDs

In addition to non-traditional investments such as real estate, a Solo 401(k) may purchase stock, bonds, mutual funds, and CDs. The advantage of using a self-directed Solo 401(k) Plan is that you are not limited to just making these types of investments. With a Solo 401(k) Plan with “checkbook control” you can open a stock trading account with any financial institution as well as purchase real estate, buy tax liens, or lend money to a third-party. Your investment opportunities are endless! When purchasing stocks or securities with a Solo 401(k) Plan, all income and gains, including dividends, would flow back to the plan without tax. With a Roth Solo 401(k) Plan, all gains are tax-free. Whereas, if you purchased stocks with personal funds, all income and gains would be subject to federal and in most cases state income tax.

Helpful Tips :

  • If you will be investing with a third-party, perform adequate diligence on the individual and make sure the individual has the knowledge to trade stocks or securities and all his/her securities licenses are in good standing.
  • Beware of promoters who are promising high returns and that do not work at reputable financial institutions – high likelihood of fraud
  • Beware of leverage – it is allowable but it would trigger the application of the Unrelated Business Taxable Income rules under IRC 512 and thereby a corresponding tax
  • No personal guarantee of any leverage or loan obligation is permitted
  • Open up a brokerage account in the name of the Solo 401(k) Plan – not a personal account
  • All income, gains or losses from the stock investments should be allocated to the Solo 401(K) Plan

If you have any questions about whether your specific Solo 401(k) Plan transaction would potentially be in violation of IRS rules, please contact a tax professional at the IRA Financial Group at 800-472-0646.

Aug 14

Why You Should Use a Tax Attorney to Establish a Solo 401(k)

Sales Representatives Who Are Not Trained Tax Attorneys/CPAs Should Not Be Establishing Solo 401(k) Plans

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.  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, while lacking the adequate knowledge or expertise to do so.  They may even tell you that you don’t need a tax attorney to help you establish the plan.  As a result, we have had to, on many occasions, help individuals who worked with a number of these companies who found themselves in some IRS trouble because they have made improper plan contributions or invested in a prohibited transaction as a result of being mislead by a plan provider representative that was not qualified to provide proper tax advice regarding the unique features of the Solo 401(k). Working directly with a 401(k) tax professional that has been specifically trained on the special tax aspects of the Solo 401(k) 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.

Why You Should Use a Tax Attorney to Establish a Solo 401(k)Only Trained Tax Attorneys/CPAs Can Properly Advise You on the Tax Aspects of a Solo 401(k) Plan

Working with trained tax & ERISA attorneys 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) tax & ERISA professionals who have been specifically trained on the special tax aspects of the Solo 401(k) to establish and maintain your Solo 401(k) Plan.

Don’t Trust an Internet Company Who States You Don’t Need to Work With Trained Tax Attorneys to Establish a Solo 401(k) Plan

Just because your Solo 401(k) 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), 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 specialized trained tax attorneys and 401(k) Plan tax professionals and get specialized tax and ERISA advice based on your particular retirement or tax question.  IRA Financial Group feels strongly that the ongoing maintenance of the Solo 401(k) is crucial in making sure your Solo 401(k) remains in IRS compliance and the IRS respects all your plan contributions and investment gains. Working directly with tax & ERISA trained attorneys and our 401(k) tax professionals that have been specifically trained on the special tax aspects of the Solo 401(k) will help keep your Solo 401(k) in full IRS compliance.

Why Work with The IRA Financial Group?

The IRA Financial Group was founded by a group of top law firm tax and ERISA lawyers who have worked at some of the largest law firms in the United States, such as White & Case LLP, Dewey & LeBoeuf LLP, and Thelen LLP. Over the years, we have helped thousands of clients establish self-directed Solo 401(k) Plans. With our work experience at some of the largest law firms in the country, our retirement tax professionals’ tax and ERISA knowledge in this area is unmatched.

To learn more about the advantages of using a Solo 401(k) Plan, please contact one of our Solo 401(k) Plan experts at 800-472-0646 for more information.

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Aug 10

How to Use ROBS to Start a Business with 401k Funds

The Business Acquisition & Compliance Solution Structure (BACSS), also known as the “Rollover Business Start-Up” (ROBS) Solution, is an IRS and ERISA approved structure that allows an individual to use retirement funds, such as an IRA or 401(k), to purchase a new or existing business or franchise tax-free and penalty-free.

The ROBS arrangement typically involves rolling over a prior IRA or 401(k) plan account into a newly established 401(k) plan, which a start-up C Corporation business sponsored, and then investing the rollover funds in the stock of the new C Corporation.

What is the Difference between using a Self-Directed IRA Vs. ROBS structure to buy a business?

At first glance, using a Self-Directed IRA LLC to purchase stock in a corporation would seem to share many similarities with the ROBS structure.

How to Use ROBS to Start a Business with 401k FundsWith IRA Financial Group’s ROBS transactions, the structure typically involves the following sequential steps: (i) an entrepreneur or existing business owner establishes a new C Corporation; (ii) the C Corporation adopts a prototype 401(k) plan that specifically permits plan participants to direct the investment of their plan accounts into a selection of investment options, including employer stock, also known as “qualifying employer securities.”; (iii) the entrepreneur elects to participate in the new 401(k) plan and, as permitted by the plan, directs a rollover or trustee-to-trustee transfer of retirement funds from another qualified retirement plan into the newly adopted 401(k) plan; (iv) the entrepreneur then directs the investment of his or her 401(k) plan account to purchase the C Corporation’s newly issued stock at fair market value (i.e., the amount that the entrepreneur wishes to invest in the new business); and finally (v) the C Corporation utilizes the proceeds from the sale of stock to purchase an existing business or to begin a new venture.

With IRA Financial group’s ROBS strategy, the newly formed business will also be able to borrow from third parties, pay salaries to employees (including shareholders/plan participants), and engage in other routine business transactions with disqualified persons. Commonly, a corporate officer or shareholder will make or guarantee loans to the business.

With a Self-Directed IRA LLC, an entrepreneur could use retirement funds to purchase business assets like with the ROBS strategy. However, that individual would not be able to be actively involved in the business, earn a salary, or even personally guarantee a business loan.

The recent U.S. Tax Court case Ellis v. Comm’r of Internal Revenue, No. 14-1310 (8th Cir. 2015) highlights the risk and limitations involved when using a Self-Directed IRA to purchase business assets. In the Ellis case, the taxpayers used IRA funds to invest in a corporation that ultimately purchased business assets. Because Mr. Ellis used an IRA and not a 401(k) Plan to purchase the C Corporation stock, Mr. Ellis was not able to earn a salary or personally guarantee a business loan, which ultimately was the cause of the IRS prohibited transaction rule violation.

If Mr. Ellis had used IRA Financial Group’s ROBS strategy, he would have been able to purchase business assets with retirement funds, earn a salary from the business, as well as personally guarantee the business loan without triggering the IRS prohibited transaction rules.

Legal Foundation for the ROBS Solution

An individual retirement account investor is able to use retirement funds to invest in an active trade or business with tax or penalty because the ROBS solution qualifies for a special exemption set forth under IRC 4975(d) to certain prohibited transaction rules. The exemption to the prohibited transaction rules under IRC 4975(d) is centered around ERISA Section 408(e). It is IRC Section 4975(d) and ERISA Section 408(e) which shields employers from scrutiny of routine (non-abusive) corporate transactions by the plan sponsor and other “disqualified persons,” which might otherwise constitute technical violations of the prohibited transaction rules (due to the employer-sponsored retirement plan’s ownership of employer securities). If the plan sponsor and other fiduciaries’ routine corporate transactions did not fall within the purview of ERISA Section 408(e), the prohibited transaction rules would needlessly prohibit a myriad of legitimate business transactions and would ultimately nullify the exemption that Congress intended to provide. To accomplish its intended effect, ERISA Section 408(e) must be read to exempt the natural and necessary commercial consequences of owning corporate stock, rather than just the stock purchase or divestiture.

Important tax and economic policy considerations also compel a different result for 401(k) plans than IRAs. Congress specifically intended to encourage 401(k) plans to invest in employer securities, within certain limits. The opportunity to invest in employer securities through retirement plans benefits employers and employees alike by aligning their economic interests.

Outside the context of ROBS arrangements, many 401(k) plans permit participants to invest in employer stock. A number of large 401(k) plans, including plans sponsored by Apple and Pepsi, include substantial allocations of employer stock.

To learn more about the benefits of the ROBS (Rollover Business Startup) strategy, please contact a retirement tax expert at 800-472-0646.

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Aug 08

Solo 401(k) CPA Services for Real Estate Investors

IRA Financial Group is the only full service Solo 401(k) Plan facilitator that offers its clients the ability to consult with our in-house tax accountants and CPAs, in addition, to our tax professions. Our in-house CPAs are specially trained in the taxation of retirement accounts, which allows us to provide our clients with specialized tax advice and offer tax filing and reporting services relating to the use and taxation of 401(k) Plan funds to make investments. Because the Solo 401(k) Plan is governed by a complicated set of IRS and ERISA tax rules, it is crucial to work directly with specially trained tax professionals and CPAs.

Solo 401(k) CPA Services for Real Estate InvestorsThe Taxation of a Solo 401(k) Plan

The one-participant 401(k) plan is not a new type of 401(k) plan. It is a traditional 401(k) plan covering a business owner with no employees, or that person and his or her spouse. These plans have the same rules and requirements as any other 401(k) plan. The Solo 401(k) Plan is a qualified retirement plan that is governed by Internal Revenue Code Section 401. A Solo 401(k) Plan is a tax-exempt qualified retirement plan. In other words, in general, a Solo 401(k) Plan is not subject to any tax earned on any passive income allocated to the Solo 401(k) Plan.

Annual Tax Reporting Requirement – IRS Form 5500-EZ

A Solo 401(k) plan is generally required to file an annual report on IRS Form 5500-EZ if it has $250,000 or more in assets at the end of the year. A one-participant plan with fewer assets may be exempt from the annual filing requirement.

In-House CPA Services

The IRA Financial Group has designed a specialized Solo 401(k) CPA service, which will offer clients the ability to consult with specialized Solo 401(k) Plan trained CPAs on a wide variety of tax & ERISA matters concerning the Solo 401(k) Plan. Below is a list of some of the services offered by our in-house CPAs:

  • Advising clients regarding Federal Income tax matters concerning the establishment, maintenance, and operation of a Solo 401(k) Plan
  • Advising clients regarding ERISA tax matters concerning the establishment, maintenance, and operation of a Solo 401(k) Plan
  • Advising clients regarding state income tax matters concerning the establishment, maintenance, and operation of a Solo 401(k) Plan
  • Assisting clients with the completion and filing of IRS Form 5500-EZ
  • Assisting clients with the completion and filing of any Federal Income tax Partnership returns in connection with the employer which adopted the Solo 401(k) Plan
  • Assisting clients the completion and filing of any state Income tax returns in connection with the employer which adopted the Solo 401(k) Plan
  • Advising clients on the IRS prohibited transaction rules as they pertain to federal and state tax matters concerning using a Solo 401(k) Plan to make investments
  • Advising clients regarding the Unrelated Business Taxable Income (UBTI or UBIT) rules concerning a Solo 401(k) Plan investment
  • Advising clients regarding the Unrelated Debt Finance Income (UDFI) tax rules concerning a Solo 401(k) Plan investment
  • Assisting clients the completion and filing of the IRS Form 990-T in connection with a Solo 401(k) Plan investment that generates UBTI and/or UDFI
  • Assisting clients with the day-to-day accounting and management of the Solo 401(k) plan investments (QuickBooks)
  • Solo 401(k) Plan annual asset valuation services
  • Advising on the federal and state asset & creditor protection rules relating to the use of a Solo 401(k) Plan

Specialized In-House CPA Service for Real Estate Investors

When it comes to engaging in a real estate transaction with a Solo 401(k) Plan there are a number of important IRS and tax rules that must be followed. For example, IRC Section 4975 prohibits an Plan owner to engage in a transaction that directly or indirectly benefits him/or her or any other “disqualified person”. A “disqualified person” is defined in IRC Section 4975 as the Plan owner and any of his or her lineal descendants, which include parents, children, spouse, daughter-in-laws, and son-in-laws. In addition, a “disqualified person” is not permitted to provide any services or receive any personal benefit from the Solo 401(k) Plan investment. Therefore, IRA Financial Group has specially designed a CPA tax service program for Solo 401(k) Plan investors. The specialized CPA service will offer special federal and state tax advice regarding real estate matters as well will cover federal and state tax reporting and filing obligations. Our specially designed Solo 401(k) Plan real estate CPA service will also offer clients that ability to work with our in-house CPAs to develop an internal accounting system that could keep track of all Solo 401(k) Plan related expenses and income in order to be in a position to properly value the Solo 401(k) Plan assets. The Solo 401(k) Plan real estate CPA service is designed to offer a Solo 401(k) Plan retirement investor with a more detailed accounting of the activities of the Solo 401(k) Plan and its investments.

The tax professionals and CPAs at the IRA Financial Group are committed to making sure your Solo 401(k) Plan solution remains in full IRS and ERISA compliance from establishment through investment.

For more information on IRA Financial Group’s in-house CPA services, please contact a Solo 401(k) Plan expert at 800-472-0646.

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Aug 04

The Advantages of the Roth Solo 401(k) Plan

The Roth Solo 401(k) Plan is the ultimate tax-free retirement solution for the self-employed. With federal and state income tax rates expected to increase in the future, gaining the ability to generate tax-free returns from your retirement investments when you retire is the last surviving legal tax shelter. With a Roth Solo 401K you can make almost any investment tax-free, including real estate, tax liens, precious metals, currencies, options, and private business investments.  Once you hit the age of 59 1/2 you will be able to live off your Roth 401K assets without ever paying tax. Imagine if someone told you that if you started making Roth 401K contributions in your forties and by just generating a modest rate of return, you could have over a million dollars tax-free when you retire. With a Roth 401K, live off the Roth 401K investment income tax-free or take a portion of your Roth 401K funds and use it for any purpose without ever paying tax.

The Roth Solo 401(k) Plan Advantages

Power of Tax-Free Investing: One of the main attractions to the self-directed Roth Solo 401(k) plan is based on the fact that qualified distributions of Roth earnings are tax-free. As long as certain conditions are met and the distribution is a qualified distribution, the Roth solo 401(k) plan participant will never pay tax on any Roth distributions received. The advantage of contributing to a Roth solo 401(k) plan is that income and gains generated by the Roth 401(k) investment can be tax-free and penalty-free so long as certain requirements are satisfied. Unlike with a pre-tax solo 401(k) plan contributions, contributions to a Roth solo 401(k) are not tax deductible.

 

The power of tax-free investing can be best illustrated by way of the following examples:

Example 1: Joe, a self-employThe Roth Solo 401(k) Plan is the ultimate tax-free retirement solution for the self-employed.ed consultant began funding a Roth solo 401(k) plan with $3,000 per year at age 20 and would continue on through age 65. At age 65 Joe would wind up with $2.5 million at retirement (assuming they earn the long-run annual compound growth rate in stocks, which was 9.88 percent from 1926 to 2011). Not a bad result for investing only $3,000 a year.

Example 2: Ben, a self-employed real estate agent, who is 30 years began funding a Roth solo 401(k) plan with $8000 and wanted to know how much he would have at age 70 if he continued to make $8000 annual contributions and was able to earn at an 8% rate of return. Ben did some research and was astonished that at age 70 he would have a whopping $ 2,238,248 tax-free which he can then live off or pass to his wife or children tax-free.

Example 3: Mary, a self-employed real estate investor, who is 35 years began funding a Roth solo 401(k) plan with $13000 and wanted to know how much she would have at age 70 if she continued to make $13000 annual contributions and was able to earn at a 10% rate of return, which she felt was possible based off her past real estate investment returns. Mary did some research and was astonished that at age 70 she would have a whopping $ 3,875,649 tax-free which she could then live off or pass to her husband and children tax-free.

I am sure it may be hard for some of you to comprehend that putting away just a few thousand dollars a year in a Roth Solo 401(k) plan can leave you with millions of dollars tax-free. It’s as simple as making annual contributions to your Roth Solo 401(k) Plan and then generating tax-free returns from making real estate or other investments with your solo 401(k) plan.

High Contributions: A Roth Solo 401(k) combines features of the traditional 401(k) with those of the Roth IRA. Like a Solo 401K Plan, the Roth Solo 401K Plan is perfect for any self-employed individual or small business owner with no employees. The Roth Solo 401K Plan contains the same advantages of a Solo 401(k) Plan, but as with a Roth IRA, contributions are made with after-tax dollars. While you don’t get an upfront tax-deduction, the Roth 401K account grows tax-free, and withdrawals taken during retirement aren’t subject to income tax, provided you’re at least 59 1/2 and you’ve held the account for five years or more.

The Roth Solo 401(k) can offer advantages to self-employed individuals who wish to maximize their ability to generate tax-free retirement savings while receiving the ability to invest in real estate, precious metals, private businesses or funds tax-free and without custodian consent.

Unlike a Roth IRA, which limits individual Roth IRA contributions to $5,500 annually ($6,500 if the individual is 50 years or older), in 2017, with a Roth Solo 401(k) account, an individual can make Roth (after-tax) contributions of up to $18,000, or $24,000 for those 50 or older by the end of the year — allowing individuals to stock away thousands of dollars more in tax-free retirement income than they would through a Roth IRA.

A Roth Solo 401(k) is perfect for sole proprietors, small businesses and independent contractors such as consultants. The Roth Solo 401(k) plan is unique and so popular because it is considered the last remaining legal tax shelter available. There are so many features of the Roth Solo 401(k) plan that make it so appealing and popular among self-employed business owners.

Unlimited Investment Opportunities: With a Roth 401(k) Plan or Roth 401(k) plan sub-account, you can invest your after-tax Roth 401(k) Plan funds in real estate, precious metals, tax liens, private business investments, and much more tax-free! Unlike with a pre-tax 401(k) Plan, with a Roth 401(k) account, all income and gains would flow back tax-free to your account. As long as you have reached the age of 59 1/2 and have had the Roth 401(k) account opened at least five years, you can take Roth 401(k) Plan distributions tax-free. In other words, you can live off your Roth 401(k) Plan assets or income tax-free. With federal income tax rates expected increase, the ability to have a tax-free source of income upon retirement may be the difference between retiring early or not.

Loan Feature: While an IRA offers no participant loan feature, the Roth Solo 401k allows participants to borrow up to $50,000 or 50% of their account value (whichever is less) for any purpose at a low interest rate (the lowest interest rate is Prime which is 4.25% as of 6/23/17). This offers a Roth Solo 401(k) Plan participant the ability to access up to $50,000 to use for any purpose, including paying personal debt or funding a business.

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.

Cost Effective Administration: In general, the Roth 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).

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 2017. Whereas, with a Roth Solo 401(k) plan, you can use leverage without being subject to the UDFI rules and UBTI tax. This exemption provides significant tax advantages for using a Roth Solo 401(k) Plan versus an IRA to purchase real estate.

To learn more about the Roth Solo 401(k) Plan, please contact a 401(k) expert at 800-472-0646.

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Aug 01

Using a Solo 401(k) to Invest in Bitcoin

Bitcoin is usually described as virtual currency. That’s useful shorthand, but is it really money? And should it be taxed as if it is? Or is it a capital asset? How about a commodity? Or what about a collectible? Most commentators have viewed bitcoins either as a virtual type of currency or capital asset. However, the potential still exists that the IRS could argue that bitcoins do not satisfy the main functions of money and acts more like a stamp or other collectible than a currency.

Using a Btcoin 401k to Invest in virtual currency.In Notice 2014-21, the IRS stated that it would tax digital money such as bitcoin like property, not 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 bitcoins. According to the IRS, “Virtual currency is treated as property for U.S. federal tax purposes,” the notice said. “General tax principles that apply to property transactions apply to transactions using virtual currency.” By treating bitcoins as property and not currency, the IRS is providing a potential boost to investors but it is also imposing extensive record-keeping rules—and significant taxes—on its use. In a notice, the IRS said that it generally would treat bitcoin held by investors much like stock or other intangible property. If the virtual currency is held for investment, any gains would be treated as capital gains, meaning they could be subject to lower tax rates. The top long-term capital gains tax rate is 20%, while the top ordinary income-tax rate is 39.6%, although add-on taxes often make both rates somewhat higher. But as capital investments, loss deductions from bitcoin often would be limited, whereas currency losses can be easier to deduct up front.

The IRS guidance in Notice 2014-21 targets a new crop of digital currencies used by a small number of merchants, consumers and investors. Bitcoin, the best-known of the group, is created using a computer process and can be exchanged for dollars online.

Although IRS Notice 2014-21 did not address whether bitcoins would be considered an approved investment for retirement purposes, the fact that the Notice is treating bitcoins as property, like stock, and not as a collectible, it should be clear bitcoin is an approved investment for IRAs and 401(k) plans and would not violate IRC 408(m).

For many retirement investors, the investment in bitcoins via a Solo 401(k) plan could prove a very tax efficient manner for transacting with bicoins as use of bitcoin in a retail transaction typically would be a taxable “event” for many buyers, requiring them to figure out the gain they had made on the virtual currency—and eventually pay tax on it, whereas, the gains would likely not be subject to tax with retirement funds. However, the IRS stated in the Notice that bitcoin “miners”—including people who use computers to validate bitcoin transactions or maintain transaction ledgers—also would be subject to tax on payments received in bitcoin and that “mining” that constitutes a trade or business would be subject to self-employment taxes. Accordingly, dealers in bitcoin—much like dealers in other types of property—would be subject to different tax principles than individual investors, and their gains generally would be taxed as ordinary income.

Notice 2014-21 is important because it sets forth some clarity by the IRS about the tax treatment of virtual currencies, but it also raised new questions, such as what government body would be in charge of regulation.

With IRA Financial Group’s self-directed retirement plans, retirement account investors have the ability to make traditional as well as alternative asset investments, such as real estate and bitcoins, in a tax-deferred or tax-free basis.

Why Work With the IRA Financial Group?

The IRA Financial Group was founded by a group of top law firm tax and ERISA lawyers who have worked at some of the largest law firms in the United States, such as White & Case LLP, Dewey & LeBoeuf LLP, and Thelen LLP. Over the years, we have helped thousands of clients establish IRS compliant Self-Directed retirement solutions. With our work experience at some of the largest law firms in the country, our retirement tax professionals’ tax and IRA knowledge in this area is unmatched.

To learn more about using a “Checkbook Control” Solo 401(k) to make bitcoin and other investments without tax, please contact one of our 401(k) Experts at 800-472-0646 for more information.

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Jul 31

What The Law Says About UBTI In Non-Real Estate Investments

This article, written by Adam Bergman, about the UBTI rules when making non-real estate investments, first appeared on Forbes.com

For many retirement account investors, understanding how the Unrelated Business Taxable Income Rules work, also known as UBTI, UBIT, or debt-financed income rules, and how they may potentially apply to one’s retirement account investment has been a challenge.  The main reason is that the majority of IRA or 401(k) plan investors invest in traditional types of investments, such as equities, mutual funds, and ETFs, which do not trigger the application of the UBTI tax rules since most passive investments that a retirement account might invest in are exempt from the UBTI rules, such as interest, dividends, and capital gains.

Understanding the potential impact of the UBTI rules is crucial for retirement account investors Understanding the potential impact of the UBTI rules is crucial for retirement account investors seeking to make non-real estate alternative investments in their retirement accounts, including options, stock short sales, and commodity futures contracts.  In general, the UBTI tax rules are triggered in three instances: (i) use of margin to buy stock, (ii) use of a nonrecourse loan to buy real estate, and (iii) investment in a business operated through a flow-through entity, such as an LLC or partnership.  The tax imposed by triggering the UBTI rules is quite steep and can go as high as 40 percent.

When it comes to non-real estate transactions, such as securities and other financial products involving retirement funds, understanding the application of the UBTI or debt-financed income rules have been somewhat difficult. Neither the Code nor the Treasury regulations define “indebtedness” for purposes of the debt-financed income rules. Generally, when a retirement account borrows funds and has a clear obligation to repay the funds, the debt-financed income rules are applicable. However, many financial product type investments that involve “leverage” but not a direct borrowing are not considered debt-financed property and are not subject to UBIT.

Below is a summary of how the UBTI/debt-financed income rules apply to some of the more common type of financial product investments involving retirement funds:

Purchase of Stock or Securities on Margin:  It is well established that the purchase of securities on margin gives rise to unrelated debt-financed income (Elliott Knitwear Profit Sharing Plan v. Commissioner, 614 F.2d 347 (3d Cir. 1980).

Repurchase Agreements:  In a repurchase agreement, one party (usually a bank) purchases securities from another party (the bank’s customer) and agrees to sell the securities back to the customer at an agreed price. Such transactions are treated as a loan of money secured by the securities and give rise to unrelated debt financed income (Rev. Rul. 74-27, 1974-1)

Securities Lending Transactions: IRC Section 514(c)(8) provides that payments with respect to securities loans are deemed to be derived from the securities loaned, not from collateral security or the investment of collateral security from such loans.

Short Sales of Stock: The IRS has ruled that neither the gain attributable to the decline in the price of the stock sold short nor the income earned on the proceeds of the short sale held as collateral by the broker constituted debt-financed income (Rev. Rul. 95-8, 1995-1)

Options: IRC Section 512(b)(5) excludes from UBTI all gains or losses recognized, in connection with an organization’s investment activities, from the lapse or termination of options to buy or sell securities.

Commodities Futures Transactions: The IRS has concluded that gains and losses from commodity futures contracts are excluded from UBTI under Code section 512(b)(5). The IRS has rules that the purchase of a long futures contract entailed no borrowing of money in the traditional sense.  Likewise, the IRS found a short contract was merely an executory contract because there was no property held by the short seller that produced income and thus there could be no acquisition indebtedness.

Notional Principal Contracts: The IRS has issued regulations providing that all income and gain from notional principal contracts is excluded from UBTI. (Treas. Reg. § 1.512(b)-1(a)(1).)

The Internal Revenue Code permits retirement account investors to make a wide range of financial product investments using retirement funds. While the majority of financial product type investments would not trigger the UBTI or debt-financed income rules, (including mutual funds and options) transactions involving margin, however, would likely trigger the tax.  The burden falls on the retirement account holder to make the determination of whether the financial product type transaction triggered the UBTI rules and, if so, file the IRS Form 990-T. Therefore, it is important to work with a tax professional who can help one evaluate the financial product transaction to determine whether the transaction will trigger the UBTI or debt-financed income rules tax.

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

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Jul 28

Take Control of Your Retirement with a Checkbook Control Solo 401(k)

With a Solo 401(k) Plan, as trustee of the Plan, you no longer have to get each 401(k) Plan investment approved by the custodian of your account. This means that all assets of the 401(k) trust are under the sole authority of the Solo 401k Plan participant (you).  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.

Take Control of Your Retirement with a Checkbook Control Solo 401(k)For example, Mary has established a Solo 401(k) Plan for her business. Mary is appointed the trustee of her business’s Solo 401(k) Plan. Mary has opened her Solo 401(k) Plan bank account at a local bank. Mary wishes to use her 401(k) Plan funds to purchase a home from Ben, an unrelated third-party (non-disqualified person). Ben is anxious to close the transaction as soon as possible. With a Solo 401(k) Plan, Mary, as trustee of the Plan, can simply write a check using the funds from the 401(k) Plan bank account or can wire the funds directly from the account to Ben. Mary, as trustee of the Plan, no longer needs to seek the consent of the custodian or a financial institution before making the real estate purchase. With a Solo 401(k) Plan without “checkbook control”, Mary would likely not be able to make the real estate purchase since seeking custodian approval would have likely taken too much time.

Investment Opportunities

With a Solo 401(k) Plan, 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; you’re only limit is your imagination. The income and gains from these investments will flow back into your 401(k) Plan tax-free.

The following are some examples of types of investments that can be made with your Solo 401(k) Plan:

  • Residential or commercial real estate
  • Domestic or Foreign real estate
  • Raw land
  • Foreclosure property
  • Mortgages
  • Mortgage pools
  • Deeds
  • Private loans
  • Tax liens
  • Private businesses
  • Limited Liability Companies
  • Limited Liability Partnerships
  • Private placements
  • Precious metals and certain coins
  • Stocks, bonds, mutual funds
  • Foreign currencies

Real Estate

The IRS has always permitted a 401(k) Plan to purchase or hold real estate or raw land. Making a real estate investment is as simple as writing a check. Since you are the trustee of your Solo 401(k) Plan, you have the authority to make investment decisions on behalf of your 401(k) Plan. One major advantage of purchasing real estate with a Solo 401(k) Plan is that all gains are tax-deferred until a distribution is taken.

For example, if you purchased a piece of property with your Solo 401(k) Plan for $200,000 and later sold the property for $400,000, the $200,000 of gain would generally be tax-free. Whereas, if you purchased the property using personal funds (non-retirement funds), the gain would be subject to federal income taxes and in most cases state income tax.

Using Leverage to Purchase Real Estate with a Solo 401(k) Plan

Unlike a Self Directed IRA LLC, when a Solo 401(k) Plan buys real estate that is leveraged with mortgage financing it is exempt from paying any Unrelated Business Taxable Income (UBTI or UBIT) tax on the income or gain generated. With the UBTI tax rates at approximately 35%, the Solo 401(k) Plan offers real estate investors looking to use nonrecourse financing in a transaction a tax efficient solution.

Tax Liens

By using a Solo 401(k) Plan to purchase tax-liens or tax deeds, all income and profits are tax-deferred back into your Solo 401(k) Plan until a distribution is taken. More importantly, with a Solo 401(k) Plan, you, as the trustee, will have “checkbook control” over your 401(k) Plan funds allowing you to make purchases on the spot without custodian consent. In other words, purchasing a tax-lien or tax deed is as easy as writing a check!

Loans & Notes

The IRS and ERISA rules permit the use of Solo 401(k) Plan funds to make loans or purchase notes from third parties. By using a Solo 401(k) Plan to make loans or purchase notes from third parties, all interest payments received would be tax-deferred until a distribution is taken.

For example, if you used a Solo 401(k) Plan to loan money to a friend, all interest received would flow back into your Solo 401(k) Plan tax-free. Whereas, if you lent your friend money from personal funds (non-retirement funds), the interest received would be subject to federal and in most cases state income tax.

Private Businesses

With a Solo 401(k) you are permitted to purchase an interest in a privately held business. The business can be established as any entity other than an S Corporation (i.e. limited liability company, C Corporation, partnership, etc.). When investing in a private business using Solo 401(k) Plan funds, it is important to keep in mind the “Disqualified Person” and “Prohibited Transaction” rules under IRC 4975 and the Unrelated Business Taxable Income rules under IRC 512.

Investing in an Active Business – The Unrelated Business Taxable Income Rules

If a Solo 401(k) invests in any business regularly carried on or by a partnership or LLC of which it is a member, all income or gains allocated to the Solo 401(k) will likely be treated as an unrelated business and subject to the Unrelated Business Taxable Income (“UBTI” or “UBIT”) rules pursuant to Section 512 of the Internal Revenue Code. For example, a Solo 401(k) investment into an LLC or partnership that is engaged in an active trade or business such a shoe factory; gas station, retail store or restaurant would likely be treated as an unrelated business and subject to UBTI.

The UBTI rules were enacted by Congress in the 1950s t o prevent tax-exempt entities, such as charities, from competing unfairly with taxable entities. Since an 401(k) is treated as a tax-exempt entity pursuant to Internal Revenue Code Section 401, the UBTI rules apply to Solo 401(k) investments.

Most 401(k) investments are not subject to the UBTI rules because of the many exceptions available. For example, dividends, interest, annuities, royalties, capital gains, most rentals from real estate, and gains/losses from the sale of real estate are all excluded from the application of the UBTI tax. However, rental income generated from real estate that is “debt financed” loses the exclusion, and that portion of the income becomes subject to UBTI.

A Solo 401(k) subject to UBTI is taxed at the trust tax rate because a 401(k) is considered a trust pursuant to Internal Revenue Code Section 401. For 2011, a Solo 401(k) subject to UBTI is taxed at the following rates:

  • $0 – $2,300 = 15%
  • $2,300 – $5,350 = $345 + 25%
  • $5,350 – $8,200 = $1,107.50 + 28%
  • $8200 – $11,200 = $1,905.50 + 33%
  • Over $11,200 = $2,895.50 + 35%

Precious Metals & Coins

A Solo 401(k) Plan is permitted to invest in certain platinum coins as well as certain gold, silver, platinum, or palladium bullion provided the coins are held in a financial organization.

The advantages of using a Solo 401(k) Plan with “checkbook control” to purchase precious metals and/or coins is that their values generally keep up with, or exceed, inflation rates better than other investments. In addition, the metals and/or coins can be held in the name of the 401(k) Plan at a financial organization (at any local bank) safety deposit box eliminating depository fees.

Foreign Currencies

The IRS does not prevent the use of 401(k) funds to purchase foreign currencies, including Iraqi Dinars. Many believe that foreign currency investments offer liquidity advantages to the stock market as well as significant investment opportunities.

Purchasing foreign currency, such as the Iraqi Dinar, with a Solo 401(k) Plan is as easy as writing a check. As trustee of the Solo 401(k) Plan, you will have “checkbook control” over your 401(k) Plan funds, providing you with the ability to make investments without requiring custodian consent. In addition, the foreign currency notes, including Iraqi Dinars, can be held in the name of the 401(k) Plan at a financial organization (any local bank) safety deposit box eliminating depository fees.

By using a Solo 401(k) Plan to purchase foreign currencies, such as the Iraqi Dinar, all foreign currency gains generated would be tax-deferred until a distribution is taken. In the case of a Solo 401(k) Plan, all foreign currency gains would be tax-free.

Stocks, Bonds, Mutual Funds, CDs

In addition to non-traditional investments such as real estate, a Solo 401(k) Plan may purchase stock, bonds, mutual funds, and CDs. The advantage of using a Solo 401(k) Plan with “checkbook control” is that you are not limited to just making these types of investments. With a Solo 401(k) Plan with “checkbook control” you can open a stock trading account with any financial institution as well as purchase real estate, buy tax liens, or lend money to a third-party. Your investment opportunities are endless!

What Types of Investments are Not Permitted Using a Solo 401(k) Plan?

The Internal Revenue Code does not describe what an IRA can invest in, only what it cannot invest in. Internal Revenue Code Section 4975 prohibits Disqualified Persons from engaging in certain type of transactions. The purpose of these rules is to encourage the use of 401(k) funds for accumulation of retirement savings and to prohibit those in control of retirement funds from taking advantage of the tax benefits for their personal account.

Who is a “Disqualified Person”?

The IRS has restricted certain transactions between the Solo 401(k) Plan and a “disqualified person”. The rationale behind these rules was a congressional assumption that certain transactions between certain parties are inherently suspicious and should be disallowed.

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 401(k) Plan participant, any ancestors or lineal descendants of the 401(k) Plan participant, and entities in which the 401(k) Plan participant holds a controlling equity or management interest. In essence, under Code Section 4975, a “Disqualified Person” means:

  • A fiduciary (e.g., the 401(k) Plan participant, or person having authority over making 401(k) Plan investments),
  • A person providing services to the plan (e.g., the trustee or custodian),
  • An employer, any of whose employees are covered by the 401(k) Plan,
  • An employee organization any of whose members are covered by the 401(k) Plan,
  • A 50 percent owner of C or D above,
  • A family member of A, B, C, or D above (family members include the fiduciary’s spouse, parents, grandparents, children, grandchildren, spouses of the fiduciary’s children and grandchildren (but not parents-in-law),
  • An entity (corporation, partnership, trust or estate) owned or controlled more than 50 percent by A, B, C, D, or E. Whether an entity is a disqualified person is determined by considering the indirect stockholdings/interest which would be taken into account under Code Sec. 267(c), except that members of a fiduciary’s family are the family members under Code Sec. 4975(e)(6) (lineal descendants) for purposes of determining disqualified persons.
  • A 10 percent owner, officer, director, or highly compensated employee of C, D, E, or G,
  • A 10 percent or more partner or joint venturer of a person described in C, D, E, or G.

Note: brothers, sisters, aunts, uncles, cousins, step-brothers, step-sisters, and friends are NOT treated as “Disqualified Persons”.

Prohibited Transactions

Solo 401(k) prohibited transactions are listed in Code Section 4975; prohibited transactions are any direct or indirect:

  • Sale or exchange, or leasing, of any property between a plan and a disqualified person;
  • Lending of money or other extension of credit between a plan and a disqualified person;
  • Furnishing of goods, services, or facilities between a plan and a disqualified person;
  • Transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan;
  • Act by a disqualified person who is a fiduciary whereby he deals with the income or assets of a plan in his own interests or for his own account; or
  • Receipt of any consideration for his own personal account by any disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan.

Examples of Prohibited Transactions

The following are a number of common Solo 401(k) Plan related transactions that are prohibited pursuant to Internal Revenue Code Section 4975:

  • Selling interest in real estate to a Disqualified Person
  • Selling or transferring real estate you own personally to your Solo 401(k) Plan
  • Purchasing real estate with Solo 401(k) funds and leasing to a disqualified person
  • Investing 401(k) funds in a house that is used by the 401(k) owner (or other Disqualified Person)
  • Using the Solo 401(k) Plan as security for a loan
  • Personally guaranteeing a loan to your Solo 401(k) Plan
  • Buying real estate with your Solo 401(k) Plan and making repairs personally or having a “Disqualified Person” make repairs
  • Buying real estate with personal funds and then transferring title to the Solo 401(k)
  • Using personal funds to pay taxes and expenses related to the Solo 401(k) Plan real estate investment
  • Being compensated for any services performed for or on behalf of the Solo 401(k) Plan
  • Contributing personal funds to your 401(k) Plan bank account
  • Acquiring a credit card for your Solo 401(k) Plan bank account
  • Using your retirement funds to make a real estate investment and earning a commission personally from the purchase
  • Making an investment using your 401(k) Plan into a company or fund that will benefit the 401(k) Plan participant or a Disqualified Person personally
  • Making an investment using Solo 401(k) funds to facilitate or protect the 401(k) owner’s investment
  • The Solo 401(k) invests in a business owned by the Solo 401(k) Plan participant who serves as the 401(k) Plan trustee and the 401(k) Plan participant owner generates a salary from the business
  • Solo 401(k) Plan participant, as trustee of the Solo 401(k) Plan, using 401(k) Plan funds to lend money to an entity which he/she has an interest in
  • Engaging in a transaction whereby the Solo 401(k) Plan participant – serving as trustee of the 401(k) Plan – independent judgment is affected
  • Purchasing company stock from the Solo 401(k) Plan participant whereby the purchase helps the Solo 401(k) Plan owner personally
  • Investing in a company owned by the Solo 401(k) Plan participant who is the trustee of the Solo 401(k) Plan whereby the investments benefits the Solo 401(k) Plan participant personally

Tax-Free Gains

With a Solo 401(k) Plan “Checkbook Control” structure, all income and gains from investments will generally flow back to your 401(k) Plan tax-free. Because a 401(k) Plan is treated as a tax-exempt entity pursuant to Internal Revenue Code Section 401, all income and gains generated by the 401(k) Plan will flow-through to the 401(k) Plan account tax-free!

For additional information on the advantages of using a Solo 401(k) Plan with “checkbook control” to make investments, please contact one of our 401K Experts at 800-472-0646.

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Jul 26

The Business Acquisition Compliance and Support Structure

With IRA Financial Group’s Business Acquisition & Compliance Solution Structure (BACSS) – you now can:

  • Use your retirement funds to invest in a new business tax-free!
  • Use your retirement funds to purchase a business or franchise tax-free!
  • Use your retirement funds to finance a new or existing business tax-free!
  • Earn a reasonable salary from your new or existing business.
  • Help grow your business.
  • Recapitalize and/or expand your business.
  • Maintain a qualified retirement plan and help save for the future.
  • Diversify your retirement investment portfolio by investing in your own business as well as stocks and mutual funds.
  • Attract and retain quality employees by offering a benefit not commonly found in small business.
  • Take advantage of high contribution limits under a 401(k) Plan.
  • Enjoy tax benefits generated by using a 401(k) Plan.
  • Work directly with our tax and ERISA professionals to establish an IRS and ERISA compliant structure that works best for you and your business.

Business Acquisition Solution

Invest in your future while gaining financial independence tax-free!

Use your retirement funds to start a new business and earn a salary.

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

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

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Jul 24

Setting the Record Straight on Solo 401k Plans

The Solo 401(k) Plan is essentially a regular, plain-old, vanilla 401(k) plan that has one participant, who is a self-employed individual, or that person and his or her spouse. There is some misinformation being disseminated about these plans and we would like to set the record straight. We want to let you know what is fact and what is fiction according to the Internal Revenue Service.

A 401(k) plan for a self-employed individual is a new kind of plan.

Fiction

The “one-participant 401(k) plan” is not a new type of plan. It is a traditional 401(k) plan covering only one employee. The plans have the same rules and requirements as any other 401(k) plan. The surging interest in these plans is a result of the EGTRRA tax law change that became effective in 2002. The law changed how salary deferral contributions are treated when calculating the maximum deduction limits for contributions to a 401(k) plan. This change created an opportunity for some people to put away additional amounts toward their retirement. The Solo 401(k) Plan is best suited for business owners who do not have any employees, other than themselves and perhaps their spouse.

I can make up to $60,000 of contributions to my 401(k) Plan as employee and employer each year.

Fact

The annual Solo 401k contribution consists of 2 parts, an employee salary deferral contribution and an employer profit sharing contribution. In 2017 the total contribution limit for a Solo 401k is $54,000 or $60,000 if age 50 or older. The total allowable contribution limits are combined to get the maximum Solo 401k 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.

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.

Employee Elective Deferrals

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.

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).

Employer Profit Sharing Contributions

Through the role of employer, an additional contribution can be made to the plan in an amount up to 25% of the participant’s K-1 or self-employment compensation (20% in the case of a Sole Proprietor or Schedule C Tax Payer).

Total Limit

In 2017, the maximum solo 401(k) plan contribution limitation is $54,000 and $60,000 for plan participants over the age of 50.

If the business owner’s spouse elects to participate in the Solo 401(k) and earns compensation from the business, the spouse is allowed to make separate and equal contributions increasing the couples’ annual total contribution to $108,000 for 2017 or $120,000 if both spouses over age 50.

Solo 401k contributions are flexible. Both the salary deferral and the profit sharing contributions are optional and can be changed at any time based on business profitability.

A Solo 401k participant can contribute to the plan as an employee and as employer.

As a Trustee of the Solo 401(k) Plan I can make investments in traditional and non-traditional investments, such a real estate.

Fact

A Solo 401(k) offers a self-employed business owner the ability to use their retirement funds to make almost any type of investment on their own, including real estate, tax liens, and precious metals without requiring the consent of any custodian or person.

Unlike an IRA, I can use a nonrecourse loan to purchase real estate with my 401(k) Plan?

Fact

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 Section 514.

I can borrow the lesser of $50,000 or 50% of my 401(k) account value for any purpose?

Fact

A Solo 401k loan is permitted at any time using the accumulated balance of the solo 401k as collateral for the loan. A Solo 401(k) participant can borrow up to either $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 are to 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.

As a self-employed individual I can defer $18,000 in pre-tax deferrals and $18,000 in after-tax deferrals (Roth).

Fiction

The answer is “No.” There is one limit per person for all types of elective deferrals. However, the $18,000 can be split in any ratio between the Roth and the pre-tax elective deferrals.

Employer contributions to a 401(k) Plan are due when the employer’s tax return is due.

Fact

Employer contributions are not required to be made until the due date of the employer’s tax return, plus extensions. So, in the case of a sole proprietor, this is when the 1040 is due – October 15, if an extension was filed.

If I have two jobs, I can contribute the maximum to both company’s plans.

Fiction

The 402(g) limits are by person, not by plan. For example, Steve, aged 40, is employed by Company X, and participates in Company X’s 401(k) plan. Steve defers the most allowed by Code section 402(g) for 2017, $18,000. He also has his own business with a 401(k). He will not be able to defer anything in the self-employed 401(k) for 2017. This is because the Code section 402(g) limit applies to the individual and he has already deferred the maximum allowed for the year.

If I am the only participant and have a 401(k) plan, I don’t have to file any annual Form 5500 returns.

It depends

A Form 5500-EZ (or Form 5500) does not have to be filed for a plan year (other than the final plan year) that begins on or after January 1, 2011, if you have one or more one-participant plans that separately or together had total assets of $250,000 or less at the end of that plan year. In other words, if the assets of the plan or plans exceed $250,000, a Form 5500-EZ is required for a one-participant plan. The IRA-based plans almost never have an annual Form 5500 filing requirement, regardless of the value of the IRA assets.

If additional employees are hired, they don’t have to be covered under a 401(k) plan for self-employed individuals.

Fiction

Just because the plan is called Solo 401(k), it doesn’t mean that if the business is expanded and employees are added, the plan is only for one employee. If the new employee meets the eligibility requirements under the plan, then he or she will be required to enter the plan and be eligible for salary deferrals. Assuming that the new employee is a non-highly compensated employee, the plan is now subject to nondiscrimination testing, known as the ADP and ACP tests.

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

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