Jul 31

Self-Directed 401k Rules

This article from The Motley Fool explains the IRS rules for a self-directed 401(k) plan:

The typical workplace 401(k) plan gives you few choices for your investments and limited time frames for making any changes in them. If you’re an avid investor, you’ll want much greater flexibility in your investing.

A self-directed 401(k) plan may be just what you need. It offers something known as a “brokerage window,” through which your employer may allow you to invest part or all of your 401(k) plan as you see fit. Your employer decides whether to offer this feature, as well as the types of investments from which you can choose.

Self-directed 401(k) plans follow the same rules and requirements as other 401(k) plans. If your employer allows self-directed 401(k) plans, make sure you know these Internal Revenue Service rules before you take the wheel.

1. Annual contribution limits
The limit on your elective deferrals — the maximum amount you can have deducted from your taxable income and placed in your 401(k) account — is $17,500 for 2014. The limit is increased regularly for inflation. If you’re age 50 or older at the end of the year, you can make additional elective deferrals of up to $5,500 in 2014. Your employer’s plan may, however, impose a lower limit.

If you work for only one company during the year, you shouldn’t have to worry about going over the limit for your 401(k) plan contributions: Your employer calculates this for you.

If you work for more than one company, however, it’s easy to go over the limit for elective deferrals. One employer doesn’t know how much your other employer already let you contribute to a 401(k) plan.

If your elective deferrals for the year are over the limits, it’s your responsibility to notify your plan administrator and have the excess contribution returned to you before April 15 of the following year. Otherwise, the excess contribution does not reduce your taxable income and you must pay tax on it when you withdraw it — effectively taxing the same income twice. Leaving excess deferrals in your account can also cause the IRS to disqualify your plan.

2. Disqualified investments
If you have a self-directed 401(k) plan through your employer, don’t take the “self-directed” part to extremes. For one thing, your employer can still limit the types of investments you make. Some employers may limit you to mutual funds, for example.

You won’t get away with investing in anything for which you may receive an immediate benefit. If it sounds too good to be true, you’d better check the rules. Forget using your 401(k) to buy collectible automobiles, art, or vacation properties that you expect to use. Nor can you pay yourself to manage your own 401(k) plan investments — that’s already been tried.

If your employer allows it, you can invest in securities, investment real estate, gold, currency, and other investments.

3. Transactions between related parties
Don’t entangle your 401(k) plan with your family members, either. For this purpose, “family members” are your parents, grandparents, children, grandchildren, or spouse’s children or grandchildren.

That means you can’t lend your 401(k) money to any of these relatives, let them live in property owned by your 401(k) plan, invest in the relatives’ businesses, or otherwise cause your family members to benefit from the plan.

4. Distributions
The rules for taking distributions from a self-directed 401(k) plan are the same as those for any other 401(k) plan. Your employer’s 401(k) plan may allow for hardship withdrawals when you have immediate and serious financial needs. If you take such a withdrawal, you may have to pay a 10% penalty to the IRS in addition to income tax, unless you meet an exception. It’s possible to qualify for a hardship withdrawal and not meet an exception to the 10% penalty.

You can roll over the amount from a self-directed 401(k) plan to another qualified retirement plan or IRA, just as you can with any other 401(k) plan.

It’s your money, and you should be able to buy and sell investments as you choose, taking the risks and reaping the rewards. If your employer offers a self-directed 401(k) plan, you can do just that.

A self-directed 401(k) plan lets you invest in just about anything
If you have any questions or don’t have access to a self-directed 401(k) plan through your employer, contact the retirement experts at the IRA Financial Group to learn how you can take control of your retirement investing with checkbook control.  Give them a call at 800.472.0646 today!

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Jul 29

Investing in Coins with Your 401k Plan

The IRS does not list the type of assets or investments that may be purchased with retirement funds, but does indicate which categories of assets or investments are not permitted.

The categories of transactions that are not permitted to be purchased using a Solo 401(k) Plan can be found in Internal Revenue Code Sections 408 & 4975.

Purchasing Coins with a Solo 401(k) PlanDoes IRC 408 and 4975 Apply to Solo 401(k) Plans?

The Department of Labor (“DOL”) regulations provide that a plan that covers only partners or a sole proprietor is not covered under Title I of ERISA.

The provisions of Title I of ERISA, which are administered by the U.S. Department of Labor, were enacted to address public concern that funds of private pension plans were being mismanaged and abused. ERISA was the culmination of a long line of legislation concerned with the labor and tax aspects of employee benefit plans. The goal of Title I of ERISA is to protect the interests of participants and their beneficiaries in employee benefit plans. Hence, for plans that only cover owners, there is no need for ERISA since there are no non-owner employees to protect. Accordingly, most plan documents state that the rules set forth under Internal Revenue Code Section 408 will apply to Solo 401(k) Plan investments.

Introduction

When it comes to coins or metals, Internal Revenue Code Section 408 is generally the provision that applies. In general, collectibles such as artworks, rugs, stamps, certain coins, beverages and antiques, etc. are not allowed within a Solo 401(k) Plan pursuant to Internal Revenue Code Section 408.

Internal Revenue Code Section 408 is specific as to what defines a collectible. Some notable exceptions are allowed for certain gold (such as American Eagle) and silver coins and any coins issued by a state.

The Law

Internal Revenue Code Section 408(m):

(3) Exception for certain coins and bullion

For purposes of this subsection, the term “collectible” shall not include —

(A) any coin which is —

(i) a gold coin described in paragraph (7), (8), (9), or (10) of section 5112 (a) of title 31, United States Code,

(ii) a silver coin described in section 5112 (e) of title 31, United States Code,

(iii) a platinum coin described in section 5112 (k) of title 31, United States Code, or

(iv) a coin issued under the laws of any State, or

(B) any gold, silver, platinum, or palladium bullion of a fineness equal to or exceeding the minimum fineness that a contract market (as described in section 7 of the Commodity Exchange Act, 7 U.S.C. 7) requires for metals which may be delivered in satisfaction of a regulated futures contract if such bullion is in the physical possession of a trustee described under subsection (a) of this section.

Subsection (a) states:

(a) Individual retirement account

For purposes of this section, the term “individual retirement account” means a trust created or organized in the United States for the exclusive benefit of an individual or his beneficiaries, but only if the written governing instrument creating the trust meets the following requirements:

(1) Except in the case of a rollover contribution described in subsection (d)(3) in section 402 (c), 403 (a)(4), 403 (b)(8), or 457 (e)(16), no contribution will be accepted unless it is in cash, and contributions will not be accepted for the taxable year on behalf of any individual in excess of the amount in effect for such taxable year under section 219 (b)(1)(A).

(2) The trustee is a bank (as defined in subsection (n)) or such other person who demonstrates to the satisfaction of the Secretary that the manner in which such other person will administer the trust will be consistent with the requirements of this section.

(3) No part of the trust funds will be invested in life insurance contracts.

(4) The interest of an individual in the balance in his account is non-forfeitable.

(5) The assets of the trust will not be commingled with other property except in a common trust fund or common investment fund.

(6) Under regulations prescribed by the Secretary, rules similar to the rules of section 401 (a)(9) and the incidental death benefit requirements of section 401 (a) shall apply to the distribution of the entire interest of an individual for whose benefit the trust is maintained.

Hence, it is clear that in the case of physical metals, such as gold, the metals must be held in the physical possession of a U.S. trust (i.e. bank or depository), however, the “physical possession” requirement does not appear to relate to the possession of coins. A more detailed analysis will follow below.

31 U.S.C. 5112 refers to Denominations, specifications and design of coins.

(a) The Secretary of the Treasury may mint and issue only the following coins:

(1) a dollar coin that is 1.043 inches in diameter.

(2) a half dollar coin that is 1.205 inches in diameter and weighs 11.34 grams.

(3) a quarter dollar coin that is 0.955 inch in diameter and weighs 5.67 grams.

(4) a dime coin that is 0.705 inch in diameter and weighs 2.268 grams.

(5) a 5-cent coin that is 0.835 inch in diameter and weighs 5 grams.

(6) except as provided under subsection (c) of this section, a one-cent coin that is 0.75 inch in diameter and weighs 3.11 grams.

(7) A fifty dollar gold coin that is 32.7 millimeters in diameter, weighs 33.931 grams, and contains one troy ounce of fine gold.

(8) A twenty-five dollar gold coin that is 27.0 millimeters in diameter, weighs 16.966 grams, and contains one-half troy ounce of fine gold.

(9) A ten dollar gold coin that is 22.0 millimeters in diameter, weighs 8.483 grams, and contains one-fourth troy ounce of fine gold.

(10) and contains one-tenth troy ounce of fine gold.

(e) Notwithstanding any other provision of law, the Secretary shall mint and issue, in quantities sufficient to meet public demand, coins which —

(1) are 40.6 millimeters in diameter and weigh 31.103 grams;

(2) contain .999 fine silver;

(3) have a design —

(A) symbolic of Liberty on the obverse side; and

(B) of an eagle on the reverse side;

(k) The Secretary may mint and issue platinum bullion coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time.

How do I hold IRS Approved Coins with a Solo 401(k) Plan?

Now that you have a clear idea of the types of coins that the IRS allows to be purchased using retirement funds, the next question becomes how can the coins be held without violating IRS rules?

Unlike precious metals, the Internal revenue Code and the legislative history does not include a requirement that IRS approved coins be held in the “physical possession of a U.S. trustee.” If so, the requirement would have been so stated in the tax code. Accordingly, it appears that IRS approved coins can be purchased by a Solo 401(k) Plan and not be held at a depository or U.S. Bank. However, based on conversations between IRA Financial Group tax counsel and representatives of the IRS and Department of Labor, we suggest that our clients try to hold IRS approved coins at a bank safe deposit box, depository, or some sort of third-party vault in the name of the Solo 401(k) Plan.  The reason for this is that it is another level of separation between the Solo 401(k) Plan participant – a disqualified person – and the Solo 401(K) Plan’s assets (the coins), which the IRS plan asset rules will attribute to the Solo 401(k) Plan even though the coins will be owned by the Solo 401(k) Plan. Irrespective of the fact that it appears that IRS approved coins are not required to be held in the “physical possession of a U.S. trustee”, holding the coins in the physical possession of a disqualified person puts the onus on the IRS holder, as the disqualified person, to prove that no self-dealing or conflict of interest event occurred in the case of an IRS inquiry.  For IRA Financial Group client that wish to hold IRS approved coins in their physical possession, our retirement tax professionals suggest that an affidavit be drafted stating that the IRS approved coins are being held solely for the benefit of the Solo 401(k) Plan and not for any personal or other benefit.  We also suggest that the affidavit be signed and notarized.

In summary, the “physical possession” threshold seems to only apply to IRS approved precious metals under Internal Revenue Code Section 408(m), although the tax code does not state anywhere that the coins could be held in the possession of a disqualified person.  For this reason, the retirement tax professionals at the IRA Financial Group suggest that individuals seeking to hold IRS approved coins hold the coins at a bank safe deposit box in the name of the Solo 401(k) Plan or some sort of vault or depository. However, holding the coins personally does not appear to violate Internal Revenue Code Section 408.  That being said, for all individuals wishing to hold IRS approved coins personally, the retirement tax professionals at the IRA Financial Group suggest having some sort of affidavit stating that the coins will not be held for any personal benefit and will, thus, not violate any of the Internal Revenue Code Section 4975 self-dealing or prohibited transaction rules.

To learn more about purchasing and holding coins with a Solo 401(k) Plan please contact one our tax professionals at 800-472-0646.

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Jul 28

Why Choose a Solo 401k Over a SIMPLE IRA?

A SIMPLE IRA plan is similar to a Solo 401(k) Plan in that it is funded by employee deferrals and additional employer contributions. However, unlike a Solo 401(k) Plan, a SIMPLE IRA plan uses an IRA-type trust to hold contributions for each employee, rather than a single plan trust that is typical of a traditional employer 401(k) Plan. A SIMPLE IRA can be opened with a bank, insurance company or other qualified financial institution. However, unlike a Solo 401(k) Plan, the employee owns and controls the SIMPLE IRA.

SIMPLE IRA

A SIMPLE IRA plan can be established by any employer who has less than 100 employees, who will receive at least $5,000 in compensation from the employer in the proceeding calendar year. The SIMPLE IRA plan has a lower deferral limit than a Solo 401(k) Plan. However, unlike a Solo 401(k) Plan, the SIMPLE IRA plan uses an IRA-style trust to hold SIMPLE IRA contributions for each employee, rather than the a single plan like a 401(k) Plan or other qualified retirement plan.

Why Choose a Solo 401k Over a SIMPLE IRA?Solo 401(k) Plan

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 401(k) Plan covering only one employee.   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 the SEP IRA or SIMPLE 401(k) Plan.

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

1. Higher Contributions: A Solo 401(k) Plan includes both an employee and profit sharing contribution option, whereas, a SIMPLE IRA only offers minimal employee deferral opportunities.

Under the 2014 Solo 401(k) contribution rules, a plan participant under the age of 50 can make a maximum employee deferral contribution in the amount of $17,500. That amount can be made in pre-tax or after-tax (Roth). On the profit sharing side, the business can make a 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to a combined maximum, including the employee deferral, of $52,000, an increase of $1,000 from 2013.

For plan participants over the age of 50, an individual can make a maximum employee deferral contribution in the amount of $23,000. 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 $57,500, an increase of $1,000 from 2013.

Whereas, a SIMPLE IRA has a lower deferral limit of $11,500 for 2014, plus a $2,500 catch-up contribution. In addition, the employer must provide either a dollar-for-dollar contribution of up to three percent of compensation to all who defer or a two percent non-elective contribution to all employees who are eligible to participate in the plan and who have earned $5,000 or more in compensation from the employer during the year.

Hence, a participant in a SIMPLE IRA would be significantly limited in the amount of annual deferrals to be made to the retirement account in comparison to a Solo 401(k) Plan participant.

2. Reduced Catch-Up Contribution amount: With a Solo 401(k) Plan, for 2014, a plan participant who is over the age of 50 is able to make a catch-up contribution of up to $5,500. Whereas, with a SIMPLE IRA, the maximum annual contribution limit for 2014 is just $2,500.

3. No Roth Feature: A Solo 401(k) Plan can be made in pre-tax or Roth (after-tax) format.  Whereas, in the case of a SIMPLE IRA, contributions can only be made in pre-tax format.  In addition, a contribution of $17,500 ($23,00, if the plan participant is over the age of 50) can be made to a Solo 401(k) Roth account.

4. Tax-Free Loan Option: With a Solo 401(k) Plan you can borrow up to $50,000 or 50% of your account value, whichever is less.  The loan can be used for any purpose.  With SIMPLE IRA, the IRA holder is not permitted to borrow even one dollar from the SIMPLE IRA without triggering a prohibited transaction.

5. Use Non-recourse 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 SIMPLE 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 401(k) Plan, the 401k bank account can be opened at any local bank or trust company.  However, in the case of a SIMPLE IRA or a 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 SIMPLE 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 SIMPLE IRA outside of bankruptcy.

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

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

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Jul 25

How Does a Solo 401(k) Plan Work?

With IRA Financial Group, you no longer have to spend $2000 to $5,000 or more to set up your Solo 401(k) Plan or pay excessive administration fees. Work directly with our in-house tax and ERISA professionals to customize your Solo 401(k) Plan based on your investment and retirement goals.

We provide the following, all for one low price:

1. Establish your IRS Compliant Solo 401(k) Plan:

  • Free tax consultation with our in-house tax and ERISA professionals
  • Adoption Agreement
  • Basic Plan Document
  • EGTRRA Amendment
  • Summary Plan Description
  • Trust Agreement
  • Appointment of Trustee
  • Beneficiary Designation
  • Loan Procedure
  • Loan Promissory Note
  • Free tax updates
  • Free tax and ERISA support
  • Satisfaction Guaranteed!

How Does a Solo 401(k) Plan Work?2. Tax-Free Transfer of Retirement Funds – Transfer retirement funds (IRA, SEP-IRA, 401(k), 403(b), etc.) tax-free from your current custodian to any financial institution or credit union who can serve as your custodian for no fee. Direct the current custodian to transfer the retirement funds to your new Solo 401(k) Plan bank account. This transfer, also called a direct rollover, is tax-free. The retirement tax professionals at the IRA Financial Group will assist you in completing this task in an expedited and tax-free manner. With a Solo 401(k) Plan with “checkbook control” you no longer have to pay excessive custodian fees based on account value and transaction fees. Instead, with a “checkbook control” Solo 401(k) Plan, you can use any local bank or credit union to serve as your custodian. By using a Solo 401(k) Plan with “checkbook control” you can take advantage of all the benefits of self-directing your retirement assets without incurring excessive custodian fees and custodian created delays.

IRA Financial Group will assist you in completing all the necessary custodian documents so your retirement funds are transferred to a local bank account established in the name of your Solo 401(k) Plan quickly and without any tax.

3. Open Local Trust Bank Account – Open a local bank account for your Solo 401(k) Plan at any bank or credit union of your choice. Our in-house tax and ERISA professionals will guide you through the process.

4. “Checkbook Control” – As the trustee of the Solo 401(k) Plan, you will have the freedom to make all investment decisions for your Solo 401(k) Plan (“Checkbook Control”). 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. As trustee of the Solo 401(k) Plan, you will be able to write a check or wire money from the 401(k) bank account to make an Investment.

5. Tax-Free Investment is Made – The Investment is then made in the name of your Solo 401(k) account. As trustee and administrator of the Solo 401(k) Plan, you will have “checkbook control” to make investments on behalf of your Solo 401(k) Plan.

For more information about the Solo 401(k), please contact one of our retirement experts @ 800.472.0646 or visit our website today!

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Jul 23

IRA Financial Group Adds Features to its Solo 401(k) Plan 5500-EZ Annual Tax Reporting & Consultation Service

IRA Financial Group, the leading provider of self-directed solo 401(k) Plans expands its 5500-EZ tax filing and reporting service.

IRA Financial Group, the leading provider of self-directed solo 401(k) plans, announces the expansion of its annual tax and compliance service to include the completion of the annual IRS information form – 5500-EZ. IRA Financial Group’s solo 401(k), also known as an individual 401(k) plan or self-employed 401(k) plan was designed specifically for sole proprietors, small businesses with no full-time employee 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) or a spouse. The business can be established as a sole proprietorship, LLC, corporation, or partnership. IRA Financial Group offers all its Solo 401(k) plan clients the opportunity to receive annual tax consulting and CPA services, which includes the preparation of the IRS Form 5500-EZ. “We are committed to providing all of our thousands of solo 401(k) clients with the opportunity to have their IRS Form 5500-EZ completed by specialized CPAs, “ stated, Susan Glass, a retirement tax specialist with the IRA Financial Group. “It was important that our solo 401(k) compliance fee to include to completion of the IRS Form 5500EZ, because we wanted our clients to be able to focus on their business why we focus on their solo 401(k) plan, “ stated Ms. Glass.

IRA Financial Group Adds Features to its Solo 401(k) Plan 5500-EZ Annual Tax Reporting & Consultation ServiceThere is generally no annual filing requirement unless the solo 401(k) 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. Now, IRA Financial Group is offering all its Solo 401(k) Plan clients the service of completing the IRS Form 5500-EZ for no additional fee. “We wanted to make sure our solo 401(k) Plan clients that are required to file an IRS Form 5500-EZ are getting the necessary support they need to make sure the form is completed properly, “ stated Ms. Glass.

The solo 401(k) Plan, offers one the ability to make annual contributions of up to $52,000 for 2014 ($57,500 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, including real estate, on their own without tax without requiring the consent of any custodian or person and from the comfort of a local bank account. “Our 5500-EZ recordkeeping service is projected to give our solo 401(k) plan clients the piece of mind to know their plan will be maintained in full IRS compliance without any additional fees“ stated Adam Bergman, a tax partner with the IRA Financial Group.

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

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

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

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Jul 21

UBTI Rules When Flipping Homes with a Solo 401k

With a Solo 401K Plan, flipping homes or engaging in a real estate transaction is as simple as writing a check. As trustee of your Solo 401K Plan, also known as an Individual 401(k) or self-directed 401(k) Plan, you will have the authority to make real estate investment decisions on behalf of your 401(k) plan on your own without needing the consent of a custodian. One of the true advantages of a Solo 401(k) Plan is that when you want to purchase a home with your Solo 401K Plan, you can make the purchase, pay for the improvements, and even sell or flip the property on your own without involving the custodian.  And the best part is that all gains generated from the house flipping transaction will flow back to the Solo 401K Plan tax-free!

When engaging in real estate transaction, such as a house flipping transaction, one must keep in mind the Unrelated Business Taxable Income Rules (also known as UBTI or UBIT).

The purpose of the UBTI or UBIT rules is to treat tax-exempt entities, such as charities, IRAs, and 401(k)s as a for-profit business when they engage in active business activities or use leverage.

The UBTI or UBIT rules generally applies to the taxable income of “any unrelated trade or business…regularly carried on” by an organization subject to the tax. The regulations separately treat three aspects of the quoted words—“trade or business,” “regularly carried on,” and “unrelated.”

  • Trade or Business: In defining “unrelated trade or business,” the regulations start with the concept of “trade or business” as used by Internal Revenue Code Section 162, which allows deductions for expenses paid or incurred “in carrying on any trade or business.”
  • Regularly Carried On: The UBIT or UBIT rules generally only applies to income of an unrelated trade or business that is “regularly carried on” by an organization. Whether a trade or business is regularly carried on is determined in light of the underlying objective to reach activities competitive with taxable businesses. The requirement thus is met by activities that “manifest a frequency and continuity, and are pursued in a manner generally similar to comparable commercial activities of nonexempt organizations.” The determination of whether an activity is “regularly carried on” is generally a fact and circumstances test and is based on the particular facts of the transaction or set of transactions during the year.
  • Unrelated: In the case of an IRA or Solo 401(k) Plan, any business activity will be treated as “unrelated” to its exempt purpose.

The UBTI Rules and House Flipping TransactionsIn the case of an IRA or Solo 401(k) plan, a transaction would not trigger the UBTI or UBIT rules if the transaction is deemed not to be considered a trade or business that is regularly carried on. This typically involves passive types of activities that generate capital gains, interest, rental income, royalties, and dividends. The passive income exemptions to the UBTI or UBIT rules are listed in Internal Revenue Code Section 512. However, if the tax-exempt organization engages in an active trade or business, such as a restaurant, store, or manufacturing business, the IRS will tax the income from the business since the activity is an active trade or business that is regularly carried on.

How does the UBTI Rules Apply to Flipping Homes?

The question is then asked, what level of real estate transaction must one cross before triggering the UBTI or UBIT tax.  Unfortunately, there is no clear test as to how many house flipping transactions or the number of real estate transactions one must engage in a given year in order to trigger the UBTI or UBIT tax.  In general, the IRS has a number of factors it will examine to determine whether one has engaged in a high enough volume or real estate transactions, such as home flipping, to trigger the UBTI or UBIT tax.  Firstly, the IRS will examine the frequency of the transactions – how many flipping transactions are done in a year.  Secondly, the IRS will examine the intent of the person – was the person intending to engage in an active trade or business.  Thirdly, the IRS will also look at the scope of other activities of the tax-exempt entity to determine whether the activity is part of a business activity or an investment.

The determination of whether an activity is an active trade or business and will, thus, trigger the UBTI or UBTI tax, which is taxed at a rate of approximately 35%, depends on the facts and circumstances.  Clearly one or two flipping transactions would not be considered an active trade or business and would, thus, not trigger the UBTI or UBIT tax. The question then becomes what happens if you do 3, 4, or even 10 flipping transactions in a year – would that be considered an active trade or business and, hence, trigger the UBTI tax? Again, one must examine all the facts and circumstances surrounding the multiple house flipping transactions in order to determine whether the transactions in the aggregate would constitute an active trade or business. Therefore, it is important to work with a tax professional who can help one evaluate the transaction to determine whether the flipping transaction will trigger the UBTI or UBIT tax.

To learn more about the advantages of using a Solo 401K Plan to purchase real estate and flip homes tax-free, please call a Solo 401k Expert at 800-472-0646 or visit www.irafinancialgroup.com.

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Jul 18

IRA Financial Group Introduces Special Creditor & Asset Protection Plan for Self-Employed Business Owners

Using a Solo 401(k) Plan will allow self-employed individuals to better protect retirement assets from confiscation or seizure inside or outside of bankruptcy

IRA Financial Group, the leading provider of self-directed IRA LLC and Solo 401(k) Plans, introduces a special creditor and asset protection plan for self-employed individuals and business owners with no full-time employees. The special creditor and asset protection plan for self-employed business owners’ offers protection of retirement assets from creditors or in the case of bankruptcy. “By using a solo 401(k) plan as a retirement and investment vehicle, self-employed individuals can generally protect their retirement assets from creditors or bankruptcy, “ stated Adam Bergman, a tax partner with the IRA Financial Group.

In addition to being the most popular plan for the self-employed, the self-employed 401(k) plan, also known as the solo 401(k) plan, offers string asset and creditor protection for retirement holders inside and outside of bankruptcy.

IRA Financial Group Introduces Special Creditor & Asset Protection Plan for Self-Employed Business OwnersAccording to Mr. Bergman, retirement accounts have become many Americans’ most valuable assets. That means it is vital that you have the ability to protect 401(k) assets from creditors, such as people who have won lawsuits against you. In general, the asset/creditor protection strategies available depend on the type of retirement account one has (i.e. Traditional IRA, Roth IRA, or 401(k) qualified plan, etc.), your state residency, and whether the assets are yours or have been inherited. In the case of a personal bankruptcy of a self-employed individual that has solo 401(k) plan assets, the 2005 Federal Bankruptcy Act will protect all retirement assets from creditors. However, in the case of state law insolvency, enforcement, or garnishment proceeding, the determination of whether ones retirement asset are protected from creditors generally depends on state law. “Most states offer strong asset and creditor protection of retirement assets held in a 401(k) qualified retirement plan, such an Individual 401(k) plan, “ stated Mr. Bergman.

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

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

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

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Jul 17

The Advantages of a Solo 401k v. 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 $57,500 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.

The Advantages of a Solo 401k v. a Self-Directed IRAThere 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 2014 Solo 401(k) contribution rules, a plan participant under the age of 50 can make a maximum employee deferral contribution in the amount of $17,500. That amount can be made in pre-tax or after-tax (Roth). On the profit sharing side, the business can make a 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to a combined maximum, including the employee deferral, of $52,000, an increase of $1,000 from 2013.

For plan participants over the age of 50, an individual can make a maximum employee deferral contribution in the amount of $23,000. 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 $57,500, an increase of $1,000 from 2013.

Whereas, a Traditional Self-Directed IRA would only allow an individual with earned income during the year to contribute up to $5500, $6500 is 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 2014. If Joe had a Solo 401(k) Plan established for 2014, Joe would be able to defer approximately $48,000 for 2014 (a $23,000 employee deferral, which could be pre-tax or Roth, and 25% of his compensation giving him $48,000 for the year). Whereas, if Joe established a Traditional Self-Directed IRA, Joe would only be able to defer approximately $6,500 for 2014.

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 $17,500 ($23,00, 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 Non-recourse Leverage and Pay No Tax: With a Solo 401(k) Plan, you can make a real estate investment using non-recourse funds without triggering the Unrelated Debt Financed Income Rules and the Unrelated Business Taxable Income (UBTI or UBIT) tax (IRC 514). However, the non-recourse 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 non-recourse 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.

8. Easy Administration: With a Solo 401(k) Plan there is no annual tax filing or information returns for any plan that has less than $250,000 in plan assets. In the case of a Solo 401(k) Plan with greater than $250,000, a simple 2 page IRS Form 5500-EZ is required to be filed. The tax professionals at the IRA Financial Group will help you complete the IRS Form.

9. IRS Approved: The Solo 401(k) Plan is an IRS approved qualified retirement plan. IRA Financial Group’s Solo 401(k) Plan comes with an IRS opinion letter which confirms the validity of the plan and is a safeguard against any potential IRS audit.

10. Open Architecture Plan: IRA Financial Group’s Solo 401(k) Plan is an open architecture, self-directed plan that will allow you to make traditional as well as nontraditional investments, such as real estate by simply writing a check. As trustee of the Solo 401(k) Plan, you will have “checkbook control” over your retirement assets and make the investments you want when you want.

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.  For more information about this plan, please contact a tax expert at the IRA Financial Group @ 800.472.0646 today!

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Jul 15

Using 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.

Using a Solo 401(k) Plan to Invest in OptionsIn 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.

The 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 the IRA Financial Group @ 800-472-0646.

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Jul 14

Be Careful of 401k Beneficiary Mistakes

If you inherit someone’s 401(k) plan, you might think all you need to do is close the account and take the money, however this could cost you.  As with most things, there are rules to take into consideration after receiving a 401(k).  Here’s a brief look at some of the things as detailed at 401khelpcenter.com  you need to be aware of when inheriting someone’s 401(k).

First off, comes tax reporting from the original owner’s trustee to the government.  Once you take control of the 401(k), the decedent is no longer used for tax reporting so you must be sure to report any withdrawals you make from the account.  Generally, you will owe taxes on those amounts, although some plans allow for non-deductible contributions which are not taxed.  Make sure you know how much taxes you owe.

Be Careful of 401k Beneficiary MistakesNext, you shouldn’t close the account immediately upon receiving it unless you have to.  Usually, you can let the money continue to grow tax-deferred.  Plus, if you close the account and withdraw the entire amount, you must pay taxes on it which could bump you into a higher tax bracket, costing you thousands of dollars if the balance was quite high.  If you’re forced to withdraw and you were the spouse of the decedent, you may rollover the amount into an IRA (this option is not available for all other beneficiaries).

As far as distributing from the account, there are different rules for spouses and non-spouses.  In both cases, if the decedent had already begun taking required minimum distributions, or RMDs, you must continue to take those at at least the same rate.  If not, a spouse can wait until the year his or her spouse would have turned 70 1/2 to start taking distributions (or rollover to an IRA).  However, a non-spouse has until December 31 of the year following the year of the original owner’s death to start taking RMDs.  You would use an IRS life expectancy table to figure out the amount each year.  If you fail to adhere to this rule, you must withdraw all funds from the account within five years.

You may be under the incorrect assumption that if you start taking distributions from an inherited 401(k) before age 59 1/2, you will be subject to a 10% early withdrawal penalty.  This is false.  However, if you are a spousal beneficiary and decide to rollover the account into an IRA, you will be subject to early withdrawal rules.

Take a look at this article for more detailed explanations of inherited 401(k) mistakes you may make.  If you have any questions, please contact a tax expert at the IRA Financial Group @ 800.472.0646 for more info!

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