Nov 26

A Few Myths About the Solo 401k

In a recent article from entrepreneur.com, they talk about some myths about the Solo 401(k) Plan:

Solopreneurs may have plans to grow their business and hire employees and perhaps eventually sell it. But in the meantime, an individual 401(k) can help an entrepreneur plan for a  retirement and it offers the potential for tax savings along the way.

When it comes to 401(k) plans for the self-employed, known as solo or individual 401(k)s, confusion often abounds. Many business owners might think their companies are too small for a 401(k) or that starting a plan just for their organization is too pricey. The truth is solopreneurs may have real advantages when it comes to capitalizing on the tax-deferred benefits a 401(k) plan can provide.

Myth #1: Employee participation is needed.

Self-employed entrepreneurs may not realize that Individual 401(k)s are a retirement planning option if they do not have employees. The truth is that the only employee you need to take advantage of a 401(k) plan is yourself. 

In fact, self-employed individuals have some distinct advantages over employees at larger companies. As the IRS put it, “The business owner wears two hats in a [solo] 401(k) plan: employee and employer,” meaning the self-employed have the opportunity to contribute both as an employer and employee — for a total that’s more than double the amount the IRS allows those who are only an employee.  

Most employees are limited to contributing $17,500 tax-free to a 401(k) in 2014 and $18,000 in 2015, with the limit rising to $23,000 in 2014 and $24,000 in 2015 for people 50 and older.

But solopreneurs can also contribute as much as 25 percent of their income for an employer contribution and defer as much as $52,000 (if they’re younger than 50) or $57,500 (if over 50) total each year for both personal and business tax benefits, if they set up their plans correctly.  

While the same holds true in employer plans, company contributions go to all eligible employees so the cost of doing so adds up quicker (versus just paying yourself from company profits). 

Myth # 2: Setting up a plan is confusing and costly. 

Setting up a 401(k) plan is a lot simpler than most people realize. You may be able to do it over a lunch break.

When weighing options of different plan providers, consider the following questions to help you understand if a solo 401(k) is right for you.

What funds are available for investing in?

What fees are involved?

Can a participant in a plan take a loan if need be?

Is there a Roth 401(k) option?

One reason 401(k) plans are often considered confusing is because most are subject to regulations of the 1973 Employee Retirement Income Security Act (known as ERISA).

The good news is that the Department of Labor regulations state that a plan that covers only partners or a sole proprietor is not covered under Title I of ERISA, making them markedly less complex.    

Myth #3: Solo plans only support the entrepreneur.

Just like musicians who make solo albums don’t necessarily play every instrument, a solo 401(k) allows other players —  spouses who derive income from the company or multiple owners — to be included, too. 

But as soon as employees who don’t have a stake in the company are added, a plan designed for employees is required for use. 

Like other types of 401(k) offerings, a solo 401(k) can also hold assets accrued at a former job. Some entrepreneurs may roll over their previous 401(k) funds into their individual plan.

To contribute for 2014, an entrepreneur must set up a solo 401(k) plan by Dec. 31. Once it’s up and running, the individual can make contributions on behalf of the business until the tax deadline, which is April 15, 2015, for most companies and March 15 for those set up as corporations. The deadline for making personal contributions is Dec. 31, 2014.  

Remember, while there may be many things you happily left behind when you went into business for yourself, a 401(k) shouldn’t be one of them.  

For more information about the Solo 401(k) Plan, please contact a retirement expert at the IRA Financial Group @ 800.472.0646 today!

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Nov 24

Why Use the ROBS Solution vs. a SDIRA to Buy a Business

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 purchase a new or existing business with retirement funds and be active in the business without triggering any of the IRS prohibited transaction rules. The ROBS solution qualifies for a special exemption set forth under IRC 4975(d) to certain prohibited transaction rules, which do not apply to a Self-Directed IRA structure.

How Does the ROBS structure work?

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 401(k) Plan funds in the stock of the new C Corporation. The funds are then deposited in the C Corporation bank account and are available for use for business purposes.

The following is how a typical ROBS structure works:

  • 1. Jim, an entrepreneur or existing business owner, establishes a new C Corporation in the state where the business will be operating. The ROBS structure must involve a C Corporation and not an LLC or S Corporation because the exemption to the IRS prohibited transaction rules under IRC 4975(d) involves the purchase of “Qualifying Employer Securities”, which is defined as stock of a Corporation. Using an LLC would not satisfy this definition and only individuals can be shareholders of an S Corporation and a 401(k) Plan is a trust.
  • 2. The new C Corporation adopts a prototype 401(k) plan that specifically permits the plan participants, including Jim, to direct the investment of their plan accounts into a selection of investments options, including employer stock, also known as “qualifying employer securities”.
  • 3. Jim elects to participate in the new 401(k) plan and, as permitted by the plan, directs a rollover of a prior employer’s 401(k) Plan funds into the newly adopted 401(k) plan.
  • 4. Jim 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 Jim wishes to invest in the new business).
  • 5. Jim also invests personal funds equal to more than 1% of the purchase price so that the structure is not considered an Employee Stock Option Plan (ESOP).
  • 6. The C Corporation utilizes the proceeds from the sale of stock (the amount of rollover funds and personal funds used) to purchase the assets for the new business.
  • 7. Joe would be able to earn a salary from the revenues of the business as well as personally guarantee any business loan.

Why Use the ROBS Solution vs. a SDIRA to Buy a BusinessWhat is the Difference between using a Self-Directed Vs. ROBS structure to buy a business?

In a lot of respects, using a Self-Directed IRA LLC or a 401(k) Plan to purchase stock in a corporation would seem to be subject to the same rules. However, as described above, using 401(k) Plan funds and not IRA funds allows one to take advantage of the prohibited transaction exemption under IRC 4975(d) for “Qualifying Employer Securities.”

The recent U.S. Tax Court case Peek v. Commissioner, 140 T.C. No. 12 (May 9, 2013), highlights the risk and limitations involved when using a Self-Directed IRA to purchase business assets. In the Peek case, the taxpayers used IRA funds to invest in a corporation that ultimately purchased business assets. Because Mr. Peek used an IRA and not a 401(k) Plan to purchase the C Corporation stock, Mr. Peek 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.

The limitation of using a Self-Directed IRA LLC to buy a business is that the individual retirement account business owner would not be able to be actively involved in the business, earn a salary, or even personally guarantee a business loan. Whereas, if the business owner used a ROBS strategy, that individual would be able to be actively involved in the business, earn a salary, as well as personally guarantee a business loan without triggering the IRS prohibited transaction rules.

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

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Nov 21

Administering the Solo 401(k) Plan

In general, the solo 401(k) plan is easy to operate. There is generally no annual filing requirement unless the fair market value of your solo 401(k) plan asset exceeds $250,000, as of December 31 of the previous year. If your solo 401(k) plan assets exceed $250,000 as of 12/31 of the previous year, you will need to file a short information return with the IRS (Form 5500-EZ). 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 and is filed in paper form

IRS FORM 5500-EZ

HOW TO REPORT THE FAIR MARKET VALUE OF ASSETS HELD BY YOUR SOLO 401K PLAN TO THE IRS

The Internal Revenue Service (“IRS”) Form 5500-EZ is an annual information return that is required to be filed by every “One-Participant Plan” (owners and their spouses), also known as a solo 401(k) Plan, with plan asset value in excess of $250,000 as of December 31 of the previous tax year. The purpose of filing and reporting the fair market value (“FMV”) of your solo 401(k) plan’s assets is to inform the IRS of assets over $250,000 annually held in a solo 401(k) Plan. You must file the Form 5500-EZ if a plan meets the requirements alone or combined with any other qualified retirement plan owned greater than 80% by the business owner or a related party (one controlled group) exceeding $250,000.

You do not have to file the form 5500-EZ for a prior plan year for a one-participant plan if the total of the plan’s assets and the assets of all other one-participant plans maintained by the employer at the end of the plan year does not exceed $250,000.00, unless the previous plan is the final plan year of the plan. In other words, if the value of your solo 401(k) plan assets as of 12/31 of the previous year is less than $250,000, you have NO filing requirements with the IRS with respect to your solo 401(k) plan.

FILING TIPS:

  • The Form 5500-EZ is due every July 31st of the next plan year. Ex: for a plan that was established in the prior year, the IRS Form 5500-EZ is due by July 31 st, of the following plan year. If the filling date falls on a Saturday, Sunday, or legal holiday it may be filed on the next day that is not.
  • The Fomr 5500-EZ is filed for the previous plan year. Hence, if you established your plan in 2013 and your plan assets exceeded $250,000, then you would file the Form 5500-EZ in 2014. Whereas, if you established the solo 401(k) plan in 2014, a filing would not be due until 2015 if your plan assets exceeded $250,000 in value as of 12/31 2014.
  • The Form 5500-EZ must be filed as a hard copy and sent directly to the IRS at the following address:

Department of the Treasury

Internal Revenue Service

Ogden, UT 84201-0020

  • To file the Form 5500-EZ using a private delivery service, you must use the approved IRS Designated providers (PDS) as follows:
  • DHL Express (DHL): Same Day Service.

Federal Express (FedEx): Priority Overnight, Standard Overnight, FedEx 2 Day, FedEx International Priority and FedEx International First.

United Parcel Service (UPS): UPS Next Day Air, UPS Net Day Air Saver, UPS 2 nd Day Air A.M., UPS Worldwide Express Plus, and UPS Worldwide Express.

The Private delivery services should use the following address:

Internal Revenue Service

1973 Rulon White Blvd.

Ogden, UT 84404

  • The Form 5500-EZ cannot be e-filed electronically.
  • The Plan Administrator or employer (owner) must use the official printed paper Form 5500-EZ obtained from the IRS, and use blue or black ink for a wet signature. NO ELECTRONIC SIGNATURE ALLOWED. Print, sign and date before mailing.
  • Do not use a felt tip pen or other inks that bleed through, the other side should be blank.
  • Do not use arrows or make notes on the Form 5500-EZ and only enter information in the specific fields provided. Abbreviate if necessary.
  • Do not include schedules or attachments. However, you should retain them for your records.

PENALTIES:

The Internal Revenue Code imposes a penalty of $25 a day (up to $15,000).

COMPLETING THE IRS FORM 5500-EZ

It is important to work with a tax professional when completing the IRS Form 5500-EZ. When working with the IRA Financial Group, our tax professionals and CPAs will help you complete and file the IRS Form 5500-EZ if your plan has assets valued at $250,000 or above as of December 31 of the previous year.

PART I – Annual Return identification Information:

Enter the beginning date of the plan and then the ending date.

A) Check (1) the first return filed for the plan;

B) Typically, do not check this box unless filed Form 5558 for an extension of time.

C) Typically, do not check this box unless this plan is maintained outside the United States.

PART II – Basic Plan Information:

1a) Enter the name of the plan as it appears on the EIN letter from the IRS: ABC CONSULTING 401K TRUST.

1b) Enter the numbers 001 for this year and every year’s future fillings use the same number. Note – if this plan will be amending an existing solo 401(k) Plan, you will need to include the appropriate 3 digit code (i.e. 002), which can be found in the plan Adoption Agreement.

1c) Enter 01-01-2012 as of the date the plan became effective.

2a) Enter the name of the Adopting Employer:

ABC Consulting LLC

dba or c/o if applicable.

1234 Ginger Street
(P.O. Box ONLY if USPS does no does not deliver).
Family, FL55555.

2b) Enter the Adopting Employer EIN XX-XXXXXXX no SS#. If plan is under a Sole Proprietor, YOU MUST OBTAIN AN EIN FROM THE IRS by completing the online application:

Alternatively, you can acquire an EIN by preparing and faxing the Form SS-4 to the IRS at I-800-829-3676 then call 1-800-829-4933 to receive your EIN by phone. The EIN is issued immediately once the application information is validated.

2c) Enter the Adopting Employer telephone number: 888-888-8888.

2d) Enter the 6 digit applicable code XXXXXX that best describes the nature of the plan sponsors business from the list of principal business activity codes included at the end of these instructions.

3a) Enter the Plan Administrator information OPTIONAL. If preparer is the same as above, enter the same information.

3b) Enter and repeat the same EIN XX-XXXXXXX number as listed in 2b.

3c) Enter the Plan Administrator telephone number: 888-888-8888.

4a) Enter the name of the Trust (this is optional): ABC CONSULTING 401K TRUST.

4b) Enter the EIN number as it appears on the EIN letter from the IRS: XX-XXXXXXX.

5a), 5b) and 5c) is not required if no changes were made to the plan.

6a) Enter the total number of participants at the beginning of the year. If solo 401K plan: Ex: 1 participant. Note – if the plan will include the spouse of a participant or a second business owner, then the appropriate number would need to be included (i.e. 2).

6b) Enter the total number of participants at the end of the plan year. If solo 401K plan: Ex: 1 participant. Note – if the plan will include the spouse of a participant or a second business owner, then the appropriate number would need to be included (i.e. 2).

PART III – Financial Information:

7a(1) Enter the “Total Plan Assets” or the same amount in 7a(2)from last year; if filed Form 5500-EZ previously. Otherwise, this figure includes “Total Plan Assets” as: rollovers, unrealized gains and losses such as appreciation/depreciation in assets. It also includes specific assets held by the plan at any time during the plan year (for example, partnership/joint venture interests, employer real property, real estate (other than employer real property), employer securities, loans (participants and non-participant loans), and tangible personal property). Please do not include the annual contribution amount.

7a(2) Enter end of year “Total Plan Assets” as listed above. Please include annual contribution amounts, if applicable.

7b(1) Enter “Total plan liabilities” to include but are not limited to benefit claims payable, operating payables, acquisition indebtedness (i.e. nonrecourse loan) and other liabilities. Do not include the value of future distributions what will be made to participants.

7b(2) Enter end of year “Total plan liabilities” as listed above.

7c(1) Enter “Net plan assets” which equals the sum of subtracting 7b(1) from 7a(1).

7c(2) Enter end of the year “Net plan assets” sum of by subtracting 7b(2) from 7a (2).

8a) and 8b) Enter total cash contributions received and/or receivable from employer and participants during the plan year.

8c) Enter all contributions including rollovers received from other plans during the plan year valued on the date of contribution.

PART IV – Plan Characteristics:

9) Enter the applicable two-character feature Codes. In most cases, the following codes would be used: 2E, 2J, 3B, 3D. Note, if your plan assets are held in a brokerage account, then you would want to include2R.

PART V – Compliance and Funding Questions:

10) Check YES if any of the participants entered into a loan from the plan and the amount or NO if not applicable.

11) Check NO.

11a) Enter N/A for amount.

DO NOT complete any information for 12a) , 12b) , 12c) , 12d) and 12e). This pertains to a defined benefit plan.

IRA Financial Group offers all of its Solo 401(k) Plan clients the service of completing the IRS Form 5500-EZ for no additional fee. We want 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. All solo 401(k) plan clients required to file the IRS Form 5500-EZ will work our in-house CPAs to help prepare and file the IRS Form 5500-EZ.

For more information, please contact one of our Solo 401(k) Experts @ 800.472.0646.

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Nov 20

What is a Roth Solo 401(k) Plan?

The Roth Solo 401K 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 and 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 401K Plan Advantages

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.

What is a Roth Solo 401(k) Plan?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 2014, with a Roth Solo 401(k) account, an individual can make Roth (after-tax) contributions of up to $17,500, or $23,000 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 3.25% as of February 1, 2014). 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 35%. 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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Nov 18

How to Flip Houses with a Solo 401k

Since the creation of the Solo 401(K) Plan back in the early 1980s, the IRS has always permitted a Solo 401(K) Plan to purchase, hold, or flip real estate.  By using a Solo 401(K) Plan, also known as a self-directed 401(K) Plan or Individual 401(K) Plan, to buy real estate, you will be able to purchase raw land, domestic or foreign real estate, residential or commercial property, flip homes, and much more tax-free and without requiring custodian consent!

Flipping a Home is as Simple as Writing a Check

With a Solo 401(K) Plan, flipping homes or engaging in a real estate transaction is as simple as writing a check. As trustee of your Solo 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 401(K) Plan, you can make the purchase, pay for the improvements, and even sell or flip the property on your own without involving the custodian or any third-party.  In other words, with a Solo 401(K) Plan, you will have the power to flip homes or do multiple real estate transactions on your own without requiring the consent of a custodian. One additional important advantage of purchasing real estate with a Solo 401(K) Plan is that all income and gains are tax-deferred until a distribution is taken (distributions are not required until the 401(K) Plan participant turns 70 1/2). In the case of a Roth Solo 401(K) Plan, all gains are tax-free.

How to Flip Houses with a Solo 401kFlip a Home without Requiring the Consent of a Custodian

A Solo 401(K) Plan is the most efficient and cost effective vehicle for doing house flips with retirement funds.  With a Solo 401(K) Plan, you will be able to use your 401(K) funds to purchase real estate and engage in flipping homes tax-free and without custodian consent.  A traditional 401(K) Plan custodian (financial institution) will not allow you to purchase real estate using your retirement funds.  Therefore, in order to have the ability to engage in house flipping transactions using retirement funds, a Solo 401(K) Plan is the answer.

Control the Entire House Flipping Transaction

Unlike a conventional 401(K) Plan which requires custodian consent and requires high custodian fees, a Solo 401(K) Plan will allow you to buy real estate by simply writing a check.  With a traditional custodian controlled Solo 401(K) Plan, you will have total control to make a real estate purchase, pay for improvements, and then sell the property without ever talking to the custodian.  Since all your 401(K) funds will be held at a local bank in the name of the Solo 401(K) Plan, all you would need to do to engage in a house flipping transaction is write a check straight from the Solo 401(K) Plan account or simply wire the funds from the Solo 401(K) Plan bank account.  No longer would you need to ask a custodian for permission or have a custodian sign the real estate transaction documents.  Instead, with a self-directed Solo 401(K) Plan, as trustee of the Solo 401(K) Plan, you will be able to execute the real estate transaction by simply writing a check.

Use a Solo 401(K) Plan and Flip a Home Tax-Free

One major advantage of flipping homes with a Solo 401(K) Plan is that all gains are tax-deferred until a distribution is taken (distributions are not required until the IRA owner turns 70 1/2). In the case of a Roth Solo 401(K) Plan, all gains are tax-free. In other words, all gains attributable to the house flipping transaction will flow back to your Solo 401(K) Plan tax-free!

IRA Financial Group will take care of setting up your entire Solo 401(K) Plan structure. The whole process can be handled by phone, email, fax, or mail and typically takes between 2-10 days to complete, the timing largely depending on the existing custodian holding your retirement funds. Our 401(K) Plan experts and tax and ERISA professionals are onsite greatly reducing the setup time and cost.

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

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

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Nov 17

Can a business or individual adopt a separate Solo 401(k) plan for another entity or business?

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

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

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

WHAT IS A CONTROLLED GROUP OF CORPORATIONS?

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

Parent-subsidiary group

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

Brother-sister group

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

Combined group

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

HOW DOES ONE DETERMINE WHO IS PART OF A CONTROLLED GROUP?

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

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

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

(ii) his/her children, grandchildren, parents

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

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

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

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

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

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

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

Controlled Group Examples:

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

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

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

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

To learn more about how the controlled group rules as they apply to the establishment of a Solo 401(k) plan, please contact a tax expert at 800-472-0646.
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Nov 14

Why Choose a Solo 401k Over a SEP 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 401(k) Plan covering only one employee.  Like a SEP IRA, a Solo 401(k) 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 SEP IRA or 401(k) Plan.

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

1. Reach your Maximum Contribution Amount Quicker: A Solo 401(k) Plan includes both an employee and profit sharing contribution option, whereas, a SEP IRA is purely a profit sharing plan.

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 SEP IRA would only allows for a profit sharing contribution.  Hence, a participant in a SEP IRA would be limited to 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to a combined maximum of $52,000 for 2014. No employee deferral exists for a SEP IRA.

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 SEP IRA, Joe would only be able to defer approximately $25,000 (25% if his compensation) for 2014.

2. No catch-up Contributions: With a Solo 401(k) Plan you can make a contribution of up to $52,000 to the plan each tax year ($57,500 if the participant is over the age of 50).  However, with a SEP IRA, the maximum amount that can be deferred is $52,000 since a SEP IRA does not offer any catch-up contributions.

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 SEP 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 a SEP IRA, the IRA holder is not permitted to borrow even $1 dollar from the 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 SEP IRA to make a real estate investment (Self-Directed Real Estate IRA) involving nonrecourse financing would trigger the UBTI tax.

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

7. 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.

8. Better Creditor Protection: In general, a Solo 401(k) Plan offers greater creditor protection than a SEP 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 SEP IRA outside of bankruptcy.

The Solo 401k 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 SEP IRA, please contact a tax professional at 800-472-0646.

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Nov 13

Leaving a Job? Don’t Forget Your 401(k)!

The average American will have anywhere from six to ten jobs in their lifetime.  Hopefully, you’ve been contributing to your employer’s 401(k) plan, when available.  However, what happens to your 401(k) savings when you switch jobs?  Should you leave it there or take it with you?  Move it to your new employer or into an IRA?  Here are a few things to help with that decision.

Leaving a Job?  Don't Forget Your 401(k)!First off, what choices do you have for your old 401(k) when you leave a job?  You have basically four options: cash it out, leave it where it is, roll it over into your new employer’s plan or roll it over into an IRA.

Option #1: Cash Out – This is, by far, the worst option.  Not only do you lose out on compounded earnings of anything taken from your retirement plan, you’ll likely be hit with an early withdrawal penalty and will have to pay taxes on the amount of the distribution.

Option #2: Leave it – Usually, if you have at least $5,000 in your 401(k), your administrator will let you leave the funds in the plan.  This is only a good idea if it’s a good plan.  It may offer cheaper investments not available elsewhere and have low fees to maintain the plan.  If this is not the case, it’s better to move the funds elsewhere.

Option #3: Take it – Most employers will allow you to rollover your existing 401(k) funds into their plan.  This is not always the case so be sure to know the plan rules when starting a new job.  Again, the investment options and fees associated with the plan is a good determining factor on whether to take your old 401(k) with you.  Side note – it’s still important to contribute to your new plan even if you don’t bring your old one with you, especially if your employer offers a match.

Option #4: Roll it – Your last option is to rollover your old funds into a personal IRA.  This may be your best option and the one most widely used.  You are not limited to the investments your employer offers and fees are generally lower.  Plus, if you have multiple 401(k)’s, they can all be consolidated into one IRA.  Further, you can choose to open a Roth IRA.  You pay the taxes now on the money transferred but all qualified distributions will be tax-free!

Bonus Option #5: Open a Solo 401(k) – If you are leaving a job to become your own boss (whether it’s opening a business or other self-employed work), you can now contribute to a Solo 401(k).  Also known as an Individual 401(k), this is a plan for self-employed individuals and business owners with no employees (other than a spouse).  This plan allows for unlimited investment opportunities (such as real estate and precious metals) that are not restricted by your financial institution.

There are several things to consider when leaving a job, but your retirement plan should be near the top of the list.  If you have any questions about what to do with your old plan, please contact a retirement expert at the IRA Financial Group @ 800.472.0646 today!

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Nov 12

Taking Advantage of a Solo 401(k) Loan

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

Taking Advantage of a Solo 401(k) LoanWhat is a Solo 401(k) Plan Loan?

A Solo 401(k) loan is permitted at any time using the accumulated balance of the Solo 401(k) as collateral for the loan. A Solo 401(k) participant can borrow up to $50,000 or 50% of their account value – whichever is less. This loan has to be repaid over an amortization schedule of 5 years or less with payment frequency no less than quarterly. The interest rate must be set at a reasonable rate of interest, generally interpreted as prime rate + 1%. As of 11/1/14 prime rate is 3.25%, which means participant loans may be set at very reasonable Interest rate. The Interest rate is fixed based on the prime rate at the time of the loan application.

How Can This be Done?

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

When can a Participant Loan be Useful?

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

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

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Nov 11

As a beneficiary of a Solo 401(k) Plan, what are my options for inherited plans?

If you are a beneficiary (rather than the owner) of a qualified plan and receive a distribution as a result of the owner’s death, in general you have the following options:

As a beneficiary of a Solo 401(k) Plan, what are my options for inherited plans?

  • Pay ordinary income tax: If plan assets are distributed to you, then you will have to report the distribution as income on your tax return. However, if you receive a distribution from a plan you inherited, you will not have to pay an early distribution tax, even if you are younger than 591/2. The penalty is waived for inherited plans.
  • Roll over the distribution: If you inherit a qualified plan and you were the spouse of the original owner, you can roll over the distribution into a traditional or Roth IRA. However, if you inherit a retirement plan, such as a 401(k) Plan, and you were not the spouse of the original owner, then you may roll over the plan assets into a traditional IRA only if you follow certain rules. For example, you may not roll over the assets into a plan or IRA that is in your own name (you must establish a new IRA that is titled in the name of the deceased with you as the designated beneficiary).
  • Convert to a Roth IRA: A spouse that inherits a retirement plan is provided virtually all of the distribution options offered to the deceased plan participant. Beginning in 2008, non-spouse beneficiaries also have the options to transfer the assets to a Roth IRA subject to certain rules.
  • Use ten-year averaging.

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

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